One Rule for Banks and another for their Mortgage Clients

Australian Banks seemed to have been the big winners in the financial crisis. Despite their share price falling 40-50% they appear to be in good shape.

I say appear to be because they have had to be dragged kicking and screaming into revealing their subprime exposure, their bad debt exposure and their dubious deals with various brokers and highly leveraged companies.

They have been given a get out of jail card by the Australian Government included a guarantee which they have been using to raise cash and replenish their coffers.

I don’t necessarily disagree with some of this as we need a sound financial system.

Now they are talking with the government to help them if they have to finance $70Bn of corporate debt due to be re-financed. Much of this debt was provide by overseas banks and it is believed re-financing from the same sources may be difficult if not impossible in the current climate.

I would have said this is a business opportunity and they just have to do their numbers to ensure they take the proper stance on risk. This would be good practice since they appear to have failed to do this during the last boom. Instead they have provided millions of dollars to highly leveraged companies for little or no collateral rather than miss out on the “dubious” business.

If the Aussie Banks cannot re-finance these loans why doesn’t the Australian government set up their own bank and do it with money the banks are asking to borrow and get guarantees against defaults. That way the tax payer will benefits and we may even end up with  a fifth bank if it is privatised like the Commonwealth Bank was, when times are better. Wouldn’t that be good for competition.

I can’t help but feel the big four banks see this as an opportunity to grow using public money and government guarantees and become fully fledged international banks. Then they may decide Australia is too small and move their “real” head-quarters off shore like Rio Tinto, BHP and James Hardie.

I wonder if our banking licensing laws have considered this?

The point of this post though is that whilst the banks are getting all this help they are failing to pass some of it on to deserving people, not speculators or irresponsible borrowers. I’m not in favour of handouts but I am in favour of fairness and balance.

Right now about 43,000 mortgages in Australia fixed their mortgage interest rates when the Reserve Bank aggressively raised interest rates and was subsequently found to have been too aggressive.

The banks went ahead and locked in these mortgages at the higher rate than variable as it was good business.

Normally interest rate movement can take years to move from 9% down to 5% giving people some chance to make the right decision on their mortgage. But the credit crisis, fear the Reserve had overdone the rates and government pressure all sent interest rates into free fall in just a few months – not years.

The poor mortgagee who responsibly fixed their rates was caught out.

The banks have benefited from massive inflows of deposits from the public. They have benefited from being able to use the Australian Government Guarantee to stem potential runs on their deposits from frightened depositors. They have been able to issue shares at a discount and get them fully subscribed and been able to sell government backed bonds. They have been able to borrow from overseas at better rates because they were government backed, indeed they were able to borrow period.

They are awash with windfall cash which may turn out to be windfall profits.

The mortgagees who have been paying their mortgages regularly and have excellent credit ratings should get the same consideration. Many of them chose to fix rates at a time it was consider the right and responsible thing to do. They often did this after consulting their bank for advice.

Whilst I believe banks should have seen the sub prime and credit crisis coming, the mortgagees didn’t stand a chance. According to the ABC News article 43,000 mortgagees would have to pay the banks about $18K each in break fees. That’s a mere $774 Million according to my calculator which would be a windfall for the banks if everyone did it. But it is doubtful if many will so let’s say $100 Million might be made by the banks breaking the fixed rate contracts. This is chicken feed with what they are writing off.

The other problem is that if the economy gets really bad, these fixed rate mortgage holders could cause serious downward pressure on house prices if they are forced to sell. This could lead to many other people being forced to sell too. This will only come back and hurt the banks.

The banks should re-negotiate the loans now and convert them to variable rates for reasonable fees. If they don’t then the government should make further assistance to them conditional on helping responsible mortgagees who just got caught in the financial rip.

Telling the Banks to forgo some future mortgage payments in return for an opportunity to finance $70 Billion worth of corporate loans with government guarantees is a no-brainer to me.

Come on Aussie Banks this is the land of the fair go.

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