Malcolm Turnbull (Wentworth, Liberal Party, Leader of the Opposition) Share this | Hansard source

This Ruddbank, known as the Australian Business Investment Partnership Ltd, will be established with five shareholders: the Commonwealth of Australia and the four major banks—ANZ, Commonwealth, National and Westpac. The Commonwealth government will provide a contribution of $2 billion and provide a guarantee for an additional $26 billion of debt to be borrowed by Ruddbank, while the four commercial banks will provide $500 million each. The total capital therefore is potentially $30 billion, with the Commonwealth’s share up to $28 billion. So the Commonwealth has by far the lion’s share of the exposure. The equity is owned in the shares with the four banks having half of the equity and the Commonwealth having the other half.

The board of directors will comprise five persons—a nominee from the Commonwealth government as the chairman and a nominee from each of the four banks. Each director has a right of veto but, as with all directors under the Corporations Act, they are bound to act in the interest of the company—not to represent the institution or the entity that nominated them. The stated primary object of Ruddbank is:

… refinancing for loans relating to commercial property assets in Australia in situations where:

(a) finance relating to the assets is not available from commercial providers other than ABIP Limited; and

(b) the assets would otherwise be financially viable.

That is set out in the legislation.

This is consistent with the Prime Minister’s press release—it actually goes further than the Prime Minister’s press release—of 24 January 2009 where the Prime Minister talked about the concern that foreign banks would withdraw from lending syndicates to Australian property companies. So he said:

The Partnership will focus on completed commercial property investments and partly completed development projects with secured pre-commitments (for example, retail shopping centres, commercial office and industrial property). It will be structured to allow sufficient flexibility to provide financing in other areas of commercial lending, should the need arise and the Government and four major banks jointly agree.

This proposal had its origins in a paper developed by Mr Ahmed Fahour, who was then an executive of the National Australia Bank. Mr Fahour’s contention was that there were a large number of foreign banks lending to the Australian property industry who, because of the global financial crisis, were likely to withdraw their business from Australia and that this funding shortfall would not be able to be addressed by Australian banks. He said that, if that were to be the case, assets would be sold and prices would fall. He said that ‘market analysts are predicting property prices will fall 20 to 30 per cent in 2009’. So the object of the Ruddbank scheme is to stop commercial property prices falling. In other words, it is using taxpayers’ money—tens of billions of dollars of taxpayers’ money—to hold up commercial property prices.

Millions of Australians who have seen their investment in the stock market, in their superannuation funds, decline in value by half in many cases will be wondering why the government is so solicitous, so anxious to intervene, to hold up asset values for one particular asset class. Mr Rudd, characteristically, in January claimed that this was to do with jobs. He said:

Without action, a combination of weak demand … and tight credit conditions … could see up to 50,000 people in this sector lose their jobs, according to Treasury.

He has never provided any evidence of that. There has been no Treasury modelling produced, and it was no doubt a figure literally plucked out of the air.

The fact of the matter is that if a property—a shopping centre, an office building or a warehouse—is sold at a value lower than the value at which it was bought and the owner loses some money, or even if the lender loses some money on their loan, the workers still come to work and the tenant is there. The tenant might actually end up paying a lower rent because the new owner has less capital to service. So the fact of the matter is that, as asset prices go up and down for property, it does not affect employment at all. You could make an argument that it would impact on employment if the funding were designed to fund construction, but the Ruddbank is expressly designed not to take on construction risk. It is designed to refinance existing commercial property projects or projects that are already under construction with completion guarantees and with commitments of tenancies. So there is no construction risk and there are no construction jobs being protected by this exercise at all.

As we know, this venture was originally designed or stated to be for the purpose of stepping into the shoes of foreign banks if they pulled out of lending syndicates to commercial property companies and commercial property projects. The Australian Business Investment Partnership Bill 2009 and the draft shareholders agreement also give the parties to this venture, the shareholders, the four banks and the Commonwealth, the right—and I quote now from clause 7(2) of the bill—‘to provide financing in other areas of commercial lending through financing arrangements of a kind agreed to by the members of ABIP Ltd’.

This means that this Ruddbank can be used to provide commercial finance to any commercial project. Indeed, the government are asking the parliament not only to agree to put $28 billion of taxpayers’ money at risk here for the purpose of propping up commercial property prices—a poor enough objective in itself—but to give these four banks plus the Rudd government a blank cheque to enable Ruddbank to head off into any commercial lending venture that it sees fit. This is nothing short of a new government bank, which the parliament has no ability to supervise or to scrutinise. There is no accountability whatsoever. They have literally written themselves a blank cheque.

At the very core of this project is a fatal and fundamental flaw. It is flawed because it has been put together by people who have very little understanding and, in some cases, absolutely no experience of the way in which lending syndicates operate in difficult economic times. The reality is that when you get into a recession or into a bad or slow economic period, when property values decline or tenants go out of business and landlords are not getting their rent—when all of those bad things happen in the property sector—lending syndicates will come under pressure. Often you will find that covenants relating to interest cover or coverage of the loan itself or various other conditions in the loan will become breached, and the lenders will have an opportunity to declare it an event of default and ask for their money back. What often happens in syndicates—and I have seen this many times in my own business life—is that the smaller participants, particularly those that do not have a longstanding relationship with the borrower, will try to stand over the larger lenders and persuade them to take them out. They will say: ‘Just get us out of here. Give us our money back.’ They put pressure on the larger lenders, who have a greater commitment to the project or to the borrower, who might be a client of the bank and so forth, to take them out.

What stops them being taken out, of course, is the risk that, if they push too hard, there may be a sale and they may lose some money. That is the tension. It is the risk that if they force a sale, call the event of default, put pressure on the lender, they may end up losing quite a lot of money through a sale at a value that does not enable them to be repaid in full. That is the tension that keeps the lenders together. As long as the tenants are there, as long as rent is being paid, as long as the project is financially viable—and I might add that, in terms of the objects of this company, it is designed to be only advancing money to projects which are financially viable—then common sense dictates that the lenders will stay in.

However, if you have Ruddbank sitting over there on the side with a bag of taxpayers’ money—a very large bag, in this case—and the preparedness to take out any financial institution that wants to get out, there is going to be enormous incentive for those lenders to kick up a fuss, to put as much pressure on the situation as they can, in order that they will be paid out in full. In other words, this Ruddbank is calculated to encourage the very circumstance that its authors claim to be concerned about. It is the most counterproductive piece of legislation I have ever seen. It will literally exacerbate the alleged problem.

That brings me to the second big flaw in Ruddbank: the colossal conflict of interest. Under the Ruddbank scheme, the big four banks have to maintain their pro rata share in a syndicate which Ruddbank is stepping into. So if, for argument’s sake, Westpac and the National Australia Bank each had 25 per cent of a syndicate, and two other banks—say, Suncorp Metway and perhaps a foreign bank like HSBC—had 25 per cent each, and the two non-big-four banks, Suncorp and HSBC, wanted to bail out, Ruddbank would be able to replace them but it would not be able to replace either of the big four banks because they have got to keep their proportion.

The way the world works with ‘mark to market’—and, obviously, with the scrutiny of banks’ balance sheets, particularly in this environment—is as follows. If a lender in a property syndicate exits for a price that is less than face value, less than 100c in the dollar—if he sells his loan for, say, 80c in the dollar—the other lenders will be compelled to mark their loans down to that level. They will have to mark them to market. So, in the hypothetical example that I have given, the last thing that Westpac or NAB would want is for the two other banks, Suncorp and HSBC, to be taken out for less than 100c in the dollar, because that would have an impact on the big four Australian banks’ balance sheets. The big four banks will clearly have enormous influence in this arrangement because they will be the bulk of the board and they have the banking expertise; there is nobody working for the government or in the Treasury who has any experience in commercial lending. So they will have an absolutely vested interest in encouraging the government to agree to taking out the exiting banks at full value even though the real value of their loan may be, on an arms-length basis, less than 100c in the dollar. This motive is disclosed by Mr Fahour. On the second page of his paper, he said:

Eventually, what was a funding shortfall becomes a credit problem and then liquidation and forced closures occur. A number of vulture funds are being formed with significant capital to take advantage.

What Mr Fahour means by a ‘vulture fund’ is simply any entity that wants to buy bank loans for less than 100c in the dollar.

So you can see that the Commonwealth not only has got itself into the absurd situation of trying to hold up asset values in one asset class as opposed to any other but has done so in a way that will encourage non-big-four Australian lenders and foreign lenders to exit. It will give them a real incentive by taking away the tension that they might lose money, which exists at the moment. In addition to that, this is structured in such a way that there is a massive conflict of interest, because the big four banks will want Ruddbank to refinance any exiting lender at full face value. So, needless to say, we do not support this flawed legislation. It is fatally flawed. It is very poor public policy and it offends all of the principles of good public and corporate governance.

The Rudd government already has plans to borrow $200 billion. That legislation has gone through the parliament. We did not vote for it, I am pleased to say; in fact, we voted against it. It is a very bad move. In addition, another $26 billion is to be borrowed by Ruddbank and guaranteed by the Commonwealth. So the Commonwealth, with just one seat out of five on the board, has $28 billion of the $30 billion exposure to Ruddbank. This is indeed a government that is addicted to debt. Robert Palmer might have sung, ‘You might as well face it; you’re addicted to debt,’ as a tribute to the Prime Minister.

The government is not helping small business, which might benefit from lower rents. It is seeking to hold up commercial property prices, at the behest of one of the big four banks, in order to prop up their balance sheets. This is at a time when every balance sheet around the country is under pressure and when there is no support being given to self-funded retirees, who have seen their superannuation funds crash in value, and when no help is being given to mining companies, who have seen their commodity prices fall. This is a selective action to hold up prices in one sector. The history of governments trying to prop up prices in a falling market has always been self-defeating and catastrophic and has resulted in the governments concerned losing a huge amount of money.

The involvement of the four major banks is clearly nothing less than a cartel. These are the four biggest banks, who are meant to compete with each other ruthlessly and strenuously, working together in a cartel with the government. But that is addressed in the legislation: clause 16 of the bill explicitly and expressly exempts the Ruddbank from the operation of part IV of the Trade Practices Act 1974. Clearly this would otherwise be a collusion by the four major banks. It is ironic that there is currently legislation before the parliament that criminalises cartel conduct, allowing for penalties of up to 10 years jail. The government, at the same time as it is putting that legislation before the parliament, is actually establishing the largest cartel in our history and itself becoming a participant in that cartel.

The involvement therefore of the four major banks creates a cartel working against the interests of every other financial institution in the country. The four major banks will be partners with the government, with its unlimited resources, and will be collaborating together in a position to undermine the competitive position of every other lender in the country. There are inherent and dangerous conflicts of interest here, and the taxpayer is at risk. We are informed that the Commonwealth nominee—this one person out of five—will ensure that taxpayers are protected. That puts a lot of faith in one person who might be the only barrier to prevent the loss of $28 billion in government debt.

Our own history is replete with failures of this kind. We do not know who the Commonwealth nominee will be, but we can expect that the banks’ representatives will have an absolutely compelling incentive to transfer risk to the taxpayer. That is what this is all about. It is about shifting risk to the taxpayer, for the benefit of the big four banks, while disadvantaging Australians and their hard-earned taxes, which this government should be determined to protect.

We are told that initially the Ruddbank would only lend for commercial property purposes. Of course, lending is not restricted to that purpose, and it is in a position to lend for any other area that it may agree to. So we could see Ruddbank used to bail out failed state Labor governments. There is absolutely no barrier to it getting involved in other forms of lending. It could rescue state governments from failed projects. It literally has a blank cheque. All the government has to do to ensure that Ruddbank moves into a new field is to get the four Australian banks to agree. It only has $2 billion at risk and, in circumstances where the additional $26 billion affects the amount of regulatory capital that the big four banks have to carry in respect of their investment in Ruddbank, the additional capital borrowed by Ruddbank and guaranteed by the government will actually rank behind the contributions of the big four banks. This has not been widely reported at all but it is dealt with in clause 4.4C(iii) of the shareholders agreement. I will read a passage from it:

If the shareholders agree that an adverse capital consequence would result from the issue of further debt funding, the priority of a proportion of the relevant further debt funding will be subordinated so that it ranks in priority behind the initial debt funding.

In other words, there are circumstances where the money that Ruddbank borrows, guaranteed by the Commonwealth, will rank behind the money advanced to Ruddbank by the four big banks. So much for a government that is standing up for taxpayers!

The primary justification given for this legislation is that there is a pending withdrawal of foreign banks from the Australian market. In our briefing with the Treasury recently we were advised that no foreign bank has indicated that it will withdraw from Australia, except the Royal Bank of Scotland. That is consistent with feedback that we have received from the financial sector. The Reserve Bank’s February 2009 Statement on monetary policy states:

Over recent months there has been some speculation that many foreign-owned banks will withdraw from the Australian market and that this will create a significant funding shortfall for businesses. While there is a risk that some foreign lenders will scale back their Australian operations, particularly if offshore financial markets deteriorate further, at this stage there is little sign of this, with most of the large foreign-owned banks planning to maintain their lending activities in the Australian market.

Yet the parliament is being asked to agree to the establishment of an unprecedented organisation with wide powers to address a problem that according to the Reserve Bank and, indeed, the Treasury has not appeared on the horizon. The legislation will, as I said, encourage banks to leave Australia. It will encourage every bank which cannot exit from these syndicates—other than the big four, of course—to go. So it is counterproductive.

There has been no regulatory impact statement. Once again, the government has failed to provide any evidence to support its rash policy. This is what the highly respected economist Henry Ergas said in an article on 27 January:

In the short run, the scheme seems likely to induce developers to play off their existing foreign lenders against the safety net the scheme provides. This could accelerate the very withdrawal of foreign lenders the scheme is intended to guard against, while allowing developers to secure some free kicks on the basis of what amounts to taxpayer-funded insurance.

It does not matter how you rationalise or analyse it, this is bad policy.

If our concerns seem unreasonable to those on the government side, let us just remember the record of previous state Labor governments. The State Bank of Victoria, a great triumph of democratic socialist finance, lost around $3 billion, mainly through its subsidiary Tricontinental. The State Bank of South Australia, another democratic socialist experiment, had to be bailed out by the state government, with a final cost to taxpayers of around $2.2 billion. That does not even take into account the enormously expensive consequences of the government getting involved in money matters with the corporate sector and supporting corporate players and corporate participants in Western Australia. That, of course, ended up in a shocking collapse, the WA Inc. scandal and a consequent royal commission.

The reality is that Kevin Rudd, the Prime Minister, is the Rebecca Bloomwood of Australian politics. He is addicted to maxing out the nation’s credit card. He is a shopaholic. He happily goes around the world giving other nations financial and economic advice while handing out cash splashes in Australia and running up $200 billion in debt plus a $26 billion debt for Ruddbank. He is so addicted to spending that he has even started his own bank, Ruddbank, using other people’s money to fuel his addiction. This is bad policy. It is counterproductive, it is self-defeating, it will exacerbate the problem its authors claim to be seeking to address and it will put billions of dollars of Australian taxpayers’ money at risk for a misconceived venture. The government should abandon it, and we intend to oppose it both here and in the Senate.

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