The dark side of the Commonwealth Bank – Part ThreeRead Part One here.
Read Part Two here.
Shakedown at the BankWest Saloon
After a long diversion into pertinent background, we return to the current BankWest imbroglio. A case study provides representative details on the CBA strategy.
Ken and Noelene Winton, through their company Paoli P/L, have been developers active on the NSW north coast. Ken Winton was no fly-by-night operator, having been President of his local Chamber of Commerce, member of Local Government committees and a Federal Government committee, and perennial media interviewee. The Wintons (hereafter Winton) obtained BankWest loans totalling almost $4 million for two apartment blocks in Nambucca Heads, one in September 2005 and one in March 2007. Partial security was on the family home, with the loan balance (as is typical) to be reduced with apartment sales.
The CBA bought BankWest on 8 October 2008 (though of course not finalised until December following ACCC/government approval). Soon after, Winton received a call from their branch manager at Coffs Harbour (who had approved the loans), Mr Jim Williams, applying pressure to effect property sales. Winton already had a marketing strategy in place. Unbeknown to Winton, Williams had sought a valuation of Winton properties from Coffs Harbour firm, Magann O’Rourke Property Consultants. The valuation was received on 19 November. The next day (note: the next day) Winton was issued with a default and demand notice from Middletons Solicitors acting for BankWest. Middletons describes itself as a ‘progressive and innovative national commercial law firm’. Progressive and innovative indeed. Middletons refused to answer the stunned Winton’s calls. From that point, effective intelligent communication with BankWest officials ceased. The valuation process was improper; the valuation itself was inaccurate, flawed, corrupt. The new valuation triggered the Loan to Valuation limit, and draconian penalty interest rates (as per usual, not in the contract) were applied to the loan balance.
Bizarrely, Winton received a letter from BankWest head office on 19 December informing them that the CBA had purchased BankWest and that “There will be no disruption to your service” and “there will be no changes to your relationship manager”! On 28 January 2009, ‘relationship manager’ Williams ‘resigned’ and was replaced by one Philip Alcock. This is standard fare for banks when a manager is in the hot seat — sack them or move them out of reach of a potentially litigious defaulted customer. Williams had also approved the second 2007 loan, even though there had been then no sales from the 2005 development and no pre-sales on the 2007 proposal. If the Williams approval was formally loose, it was nevertheless an adherence to the cultural guidelines (not merely at BankWest but sector-wide) — Williams noted to Winton that he was receiving bonuses for generating loans and had to meet a target each month to receive the bonus. Williams was merely doing his duty both in getting Winton’s business and then in destroying Winton’s business; but having done his duty it was time for him to be moved out.
In September 2009, Alcock ordered Winton to sell their house immediately, and it was sold under value for $750,000. Immediately afterwards, the bank sent in an administrator, Rodgers Reidy. The reason for the timing is that BankWest would not have been able to touch the house (in the Wintons’ names) once the administrators had been sent into the company. At the time the administrators were installed, debt had been reduced to $1.8 million, and remaining units to be sold included high end attractive properties. There was no problem.
In the 18 months before they were removed, Rodgers Reidy principals managed to range across the various unconscionable practices that characterise the rogue administrator — refusal of any consultation with Winton as owners; excessive fees; vastly inaccurate figures submitted to ASIC; neglected responsibilities to the Tax Office; vehicle for sale of properties under value (facilitated by a flawed building report); etc. Winton sought action from ASIC on grounds of unconscionable conduct and breaches of the Corporations Act (also pointing out that ASIC had previously found against this same firm in 2007 for comparable practices), but ASIC declined to pursue the matter.
At the end of this farce, Winton belatedly discovered bank figures for debt owing to be $790,000. The sum of $900,000 had been debited to the Winton account for penalty interest owed and fees. Ergo, in spite of the residual Paoli developments being sold under value, subtract the fraudulent rip-offs and Paoli P/L ended up in the black. How many of the other 1,000 plus BankWest defaults are in this category?
It is highly relevant that Winton’s attempt to engage with the CBA has met with a response through the Customer Experience Specialist (sic) in the bank’s Customer Relations section of Group Sales and Service Support. The Customer Experience Specialist has instructed Winton that his case is a matter for BankWest and that he should he should direct his attention to that entity. Ah, it’s déjà vu, all over again. The CBA is directing proceedings, but attempts to deflect the string-pulling to the puppet. All power and no responsibility.
Dodgy devaluations of customer assets, penalty interest rates, foreclosure. It’s as simple as falling off a log; so simple that banks have become habituated to its practice. It gives new meaning to the concept, much loved by libertarian defenders of the free market system, of the sanctity of contract. Unfortunately for the victims, however, the bulk of the learned judiciary thinks that the world operates according to the textbook. It’s a racket, but because it is perpetrated by suits, it is a racket granted de facto legitimisation. It is in this context that the Commonwealth Bank top brass could endorse the cleaning out of myriad BankWest customers as banking best practice. In God’s name, what is all the fuss about?
The valuation industryHere are bank customers claiming that valuers, at bank behest, are providing corrupt assessments of the market value of their assets. Outrageous? The desperate ploy of failing businesses seeking scapegoats? For perspective, here is an excerpt from finance sector newsletter The Sheet, 18 February 2008. The context was industry concern about improper valuations arising from banks attempting to cut costs in assessment of residential property values by using ‘Automated Valuation Techniques’ (bypassing inspection of the relevant particular property) or ‘drive-by’ valuations. In the process, another dimension of the bank-valuer relationship was given a rare airing. The Sheet:
‘When evaluating the methods of house valuation, the general consensus with market participants from valuers to banks to software vendors is that a full valuation by an experienced and qualified valuer will yield the most accurate result, but a systemic risk still remains on the upside. Full valuation property valuers are routinely pressured by lenders to inflate the value of the property to aid in the bank approving the loan. The property valuer does not profit from the transaction, except potentially from the higher levels of business generated.‘Full valuation property valuers are routinely pressured by lenders to inflate the value of the property to aid in the bank approving the loan.’ What? Though presumably this unsavoury practice does not occur on the down side. And pigs might fly.
‘Brendon Hulcombe, CEO of Herron Todd & White, agrees “Yes there are, of course”, when asked if any of his valuers are pressured. “Valuers are pressured quite routinely. The lender has sales targets to meet, (the individual person), and their bonuses are based on those sales targets and so it is in their interest to not necessarily look at the creditworthiness of the loan application, but more so to get the deal through. The easiest way to get the deal through is to get a higher valuation.”
‘So when pricing a residential mortgage backed securitisation for risk by valuing the underlying asset and loan quality, the process essentially is flawed. At times electronic values use questionable data, although the canvassers will tell you another story, and the most accurate technique of full valuations is fundamentally flawed as individual lenders chase bonuses, or the property valuation is dated, yet compared to the current loan value.’
HTW would know all about the issue. HTW, with the other major players, would be on bank panels as priority firms for valuations. Professionalism is inevitably compromised given that valuers need bank business. For example, HTW was the valuer when Queensland farmer Lynton Freeman was taken down by the NAB in 2000. Freeman’s property was valued (in NAB’s books) at $2 million in 1992; it was devalued to $1.75 million in 1996, then to $1.4 million in 1998. This latter lower value provided the ‘base’ for bank insiders to arbitrarily knock off another $600,000, add foreclosure costs, and facilitate the bank selling Freeman’s property for a contrived $770,000 to a selected buyer (with higher bidders ignored). Freeman ends up, by design, with a residual debt, and is forced into bankruptcy to inhibit litigation against the bank. The Queensland courts approved the sleight of hand. Ambrose J opined that that one could hardly countenance Freeman’s claims against ‘bank officers of their experience and holding the offices that they did’ (NAB v Freeman, QSC 295, 11 October 2000).
Banks have their corrupt practices. Many cognate professions rely on banks for the bulk of their incomes; some hardy souls amongst these professions might rely on advising disgruntled bank customers for their incomes. As I have written elsewhere (‘Banks: still the untouchables’, Canberra Times, 13 December 2011):
‘The banks buy or warn off law firms and others. Bank corruption thus poisons the cognate professions — the law, receivers, valuers, real estate agents, bankruptcy trustees, etc. In particular, the courts are the banks' best friend.’
No profession dealing with banks is immune from being corrupted.
The rise and fall of the Commonwealth Bank of AustraliaThe Commonwealth Bank is exactly 100 years old. It was created under the Commonwealth Bank Act 1911 by some visionaries to complement existing State government publically-owned banks in filling the void left by the private banks. The CBA website proselytises the bank’s glorious history.
The bank, affectionately known at ‘the People’s Bank’, performing both central banking and commercial banking functions, was gradually taken over by private banking interests to be run in the interests of establishment banking circles. The bank’s acquiescence to establishment verities with the onset of the Great Depression exposed its mindset. Labor MP Ben Chifley, sometime locomotive driver, got particularly steamed up about this state of affairs and, by force of personality, improbably became Prime Minister in 1945. His government’s two-pronged Banking Act and Commonwealth Bank Act aimed to recover the People’s Bank for the people.
After David Murray had affirmed his control of the CBA by the late 1990s, he and Les Taylor (Chief Solicitor and General Counsel, and majordomo in screwing foreign currency loan and general customers from the late 1980s) funded an in-house biography of post-War bank executive Alfred Norman Armstrong. Armstrong, then little known, was put in charge of the bank’s war-time capital issues control section which rationed the credit advances of the trading banks, thus facilitating the acquisition (as the government approval of his appointment puts it) of a ‘wide knowledge of industrial matters’. In 1945, Armstrong was thus installed as head of the newly created Industrial Finance Department, the nascent small business bank. He put the IFD on the map, and was thus promoted to head the Commonwealth Trading Bank when the Commonwealth Bank complex was refashioned in 1953. The Commonwealth Bank was for the first time liberated to compete for business, and this Armstrong did with relish. So much so that the private banking cartel took umbrage at being aroused from its clubby ways (the cartel had been institutionalised in the formation of the Australian Bankers Association in the late 1940s to fight Chifley’s bank nationalisation Bill) and it lobbied the Coalition government incessantly to separate the commercial from the central banking activities in the Commonwealth Bank, which combination the club opined was giving the Commonwealth Trading Bank unfair advantages (it wasn’t). Thus the Reserve Bank, pretty much as we know it today, was hived off and created in 1959, a phenomenon for which Armstrong could inadvertently take some responsibility.
This seemingly irrelevant diversion into Alfred Norman Armstrong is desirable because Murray and Taylor saw in Armstrong the genesis of their own era, in which a vibrant and innovative commercial orientation had seen off public service stodginess. Not quite. Armstrong was a man about town, but he was straight up and down. The genesis of the new era is to be found in financial deregulation, fostered by the 1979 establishment of the Campbell Committee Inquiry into the ‘Australian Financial System’ and its 1981 Report. That inquiry was presided over by a private sector cabal and an ideologically-driven Secretariat. Financial regulation had to be re-fashioned but, for this crowd, the past was a foreign country. There is no history in the Campbell Report; the Australian financial system was to be re-built from the bottom up on a clean slate. The very first paragraph of the report reads:
‘The Committee starts from the view that the most efficient way to organise economic activity is through a competitive market system which is subject to a minimum of regulation and government intervention.’Holy moley — a crystallised encapsulation of self-interest draped in ignorance. There is no point examining the rest of the report’s 838 pages because the first paragraph contains, a priori, all one needs to know. The whole point of deregulation, always obscured, was not ‘greater competition’ but to facilitate a resurgence to dominance of the private trading banks in the Australian financial sector — and what a brilliant success.
Thus began the rapid transformation of banking culture in which the rapid and rabid pursuit of market share and the bottom line saw the embedding of incompetence and corrupt practices right across the banking sector, and including the soon-to-be privatised Commonwealth Bank. Herein lies the roots of the CBA’s current large-scale takedown of BankWest customers.
The scale of the loss of a one hundred year heritage has yet to be comprehended. The current Commonwealth Bank colossus contains a panoply of previously independent publicly-owned banking institutions. In the early days, the bank absorbed the state savings bank of Tasmania (1912), the state savings bank of Queensland (1920), the savings bank business of the Savings Bank of NSW and the State Savings Bank of WA (1931). Post-deregulation, the bank absorbed the separate Commonwealth Development Bank as a subsidiary (late 1980s?) which it then subsequently destroyed. It absorbed the hallowed State Savings Bank of Victoria (dating from 1842), it having been debilitated by deregulation (1992). It absorbed the Rural Bank of NSW (takeover of Colonial which took over the State Bank of NSW, the Rural Bank’s later incarnation)(2000). Finally, it absorbed the WA Rural & Industries Bank, via its privatised incarnation as BankWest (2008).
The bank has embodied, catered to, then vanquished the hopes of those who wanted a public institution that served the broader public purpose and which accommodated commercial imperatives to an extent, but transcended private sector constraints (or what the pundits quaintly call ‘market failure’). The Commonwealth Bank is not an institution committed to the commonweal, and its name is a flagrant misnomer.
Apparently the Commonwealth Bank has recently pursued an enlightened hiring agenda for revitalising its senior management ranks. It has taken to employing personnel sourced globally, and with formal tertiary education across the spectrum rather than purely with business/financial degrees. Well and good. But the bank has developed over the years a heavily centralised culture in which feedback from below is impossible. And the appetite for corrupt practices is in the upholstery. As with the NAB, senior management come and go, but the dysfunctional dimensions of the bank’s corporate culture get reproduced across the generations regardless.
The Commonwealth Bank, and its siblings amongst the Big Four, now dictates policy to governments and regulators, rather than the other way around.
The outcome of BankWest’s victims’ struggle for justice against this integrity-free elephant is of enormous significance to the prospects of a functioning financial system in Australia in the immediate future.
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