The Commonwealth Bank has been in the news recently over allegations it wrongly defaulted and foreclosed over 1,000 for BankWest customers. This should come as no surprise, according to Associate Professor Evan Jones, who writes "...the CBA has been engaged in fraudulent and unconscionable practices perennially over ... [the last] 30 years, which includes (shockingly) a period in which it was still in public ownership." What follows is the first in Professor Jones' eye-opening – and eye-watering – three part exposé on the CommBank and the Australian banking system.
The Commonwealth Bank of Australia has been in the news recently, and not for good reasons. Business customers of BankWest are complaining of criminal fraudulent treatment by the CBA.
The CBA bought BankWest from its struggling British parent bank, HBOS, in October 2008. The offer received rapid approval from the Australian Competition and Consumer Commission and the office of the Labor Government Treasurer, Wayne Swan, and the deal was consummated in December.
The ACCC and Government approval process was, in my opinion, corrupt — as was the ACCC’s approval in August 2008 of Westpac’s takeover of St George, ratified by the Treasurer’s office in October. Indeed, in late 2009, the ACCC’s Graeme Samuel admitted that the approval of both takeovers was probably a mistake. So why did Samuel participate in the charade?
The CBA bought BankWest, at a discount, for $2.1 billion (raising all the capital on the markets), 80 per cent of the then book value. In the 2008-09 financial year, the CBA recorded a $612 million capital gain from the discounted purchase price (saying to the markets, ‘aren’t we smart little chappies’). Yet, at the same time, the CBA claimed that BankWest’s commercial property portfolio was potentially riddled with bad debt scenarios (saying to the markets, ‘we were duped’) — revaluing its charge for BankWest’s impaired loans to $825 million for calendar year 2008 (from $88 million in 2007). This figure was curiously discordant with parent HBOS’s reported lower charges and losses for the latter’s entire Australian division. The CBA then proceeded to claim another $200 million plus off the purchase price from Lloyds, HBOS’ new owner, for the supposedly lower-value property loans portfolio.
Now a phalanx of BankWest customers are complaining bitterly that they have been wrongly defaulted and foreclosed, with claims of over 1,000 businesses involved. The customers claim unconscionability; the CBA/BankWest claims the numbers are exaggerated, that the defaulted customers were unviable (the GFC supposedly lowered the tides and exposed the cracks), and that its personnel is working responsibly with troubled customers. This is familiar language, a time-worn dog-eared script from well-oiled bank spokespersons. Aggrieved customers are pushing for a Senate inquiry through sympathetic National Party Senator John Williams — a push which gained approval on 14 March. BankWest, acting for its parent, was furiously attempting to prevent it happening.
Who to believe? The answer can be found in a brief history of the Commonwealth Bank over the last 30 years, the period following deregulation of the financial sector in Australia. It turns out that the CBA has been engaged in fraudulent and unconscionable practices perennially over the entire 30 years, which includes (shockingly) a period in which it was still in public ownership. Although specific instances have been given publicity, nobody has noticed the continuity of practices over time. In the late 1980s, the National Australia Bank was establishing itself as a prime mover in corrupt practices against its small business and family farmer customers — a record it has maintained to the present. But, with the BankWest imbroglio, the CBA appears to be aiming for the top spot in bank unconscionability in Australia.
The dark side of the CBA first exposed
The dark side of the CBA first gets exposure when Democrat Senator Paul McLean (the unwitting Democrat spokesperson for small business) made his first of many speeches in Parliament on bank malpractice on the 8th (and 15th) December 1988. The speech begins:
“I am obliged to advise the Senate of a very serious allegation of corruption which has been made to me by three constituents and which is the subject of two affidavits and other relevant documents which convince me that there is substance in the allegations that I am about to outline.
“It is alleged that senior officers of the Commonwealth Bank have in the past colluded in a corrupt practice by which businesses receiving funds from the Bank have been deliberately manipulated into bankruptcy and then acquired by other predetermined parties. It is further alleged by these constituents that these allegations have for several years been known to the Australian Federal Police and that the victims of these practices claim that the Federal Police have failed in their duties in these matters.”
By chance, the story is elaborated on in a document accessible on the web, dated 30 January 1989, and written by lawyer James Renton (who was subsequently a collaborator with McLean on bank malpractice). The AFP closed down an impending television current affairs program on the affair and apparently closed down the entire investigation, so that the activities were never exposed to the light of day. The Renton document highlights elements of the scam — almost all of which happen to be still in use today.
Over the years 1988-91, Paul McLean had complaints from 600 aggrieved bank customers and he tabled details of over 80 cases of bank malpractice before his resignation from the Senate in August 1991. But there were three cases with which McLean began his exposé and which were central to his arguments thereafter. All involved the CBA. They were: Tony Rigg, metal fabricator of Nowra NSW; Donna Batiste, would-be Huon Valley mineral water processor in Tasmania; and Wilfred Taylor, of Cambewarra NSW, manufacture of microwave cookware. Their cases are summarised by McLean in the Senate on 23 August, 1990, the speech reproduced in McLean & Renton’s 1992 book, Bankers and Bastards. For hardy souls, the three cases are pursued in minute detail in a 340 page submission (Vol.13) to the 1991 Martin Banking Inquiry.
The cases disclose not merely corruption amongst bank officers in the instigation of malpractice against these customers but added corruption in the bank’s cold-blooded attempted destruction of said customers and the obtaining of uncritical support for their actions from officialdom. The then National Party Senator John Stone denigrated McLean’s efforts and attempted to sully his integrity, tabling letters under the signature of then CBA CEO Don Sanders as statements of indubitable truth (5 April, 1989). As McLean noted, these letters did not accord with the contents of what bank documents the customers had managed to extract from the bank. Stone, as Secretary of the Federal Treasury, had been an ex-officio member of the CBA Board for 5 ½ years – I know the bank intimately, implied Stone, and McLean is an ignorant mouthpiece for ne’er-do-wells and dangerous crackpots. However, it is entirely natural that bank Board members would be oblivious of instances of malpractice, or of the culture that generates them, as these matters were kept from Board member’s attention. That’s still the case. The typical bank Board member is there for a free meal and a pay cheque and the lines on their CV. They have no idea what goes on inside the business — and it would be counterproductive for them to bother.
The foreign currency loan scandal
Behind these specific cases was the contemporary large-scale foreign currency loan debacle. With Westpac and the ANZ, the CBA raced into unknown territory, marketing loans to small businesspeople and farmers denominated in foreign currencies (typically the Swiss franc, but also the US dollar), with the carrot of lower interest rates. Bank staff had no experience in foreign currencies (the dollar was deregulated in December 1983), and the result was a fiasco. A customer borrowing $1 million in 1984 (a representative loan) would by 1986 owe a principal of over $2 million, against which a lower interest rate was irrelevant. Thousands of businesses were destroyed, families torn apart. (The farming family of current National Party Senator John Williams was a CBA victim.)
The banks, but especially the CBA and Westpac, set on an aggressive course of blaming the victims, in the process managing to win most cases that came to court, with a succession of bank counsel displaying unscrupulous bastardry and of learned judges exposing their prejudices and ignorance of banking practices. The CBA was more successful than Westpac, save for the celebrated and instructive appeal of Quade against an adverse Trial judgement (FCA, 14 February 1991). There the three judges, atypically, had actually read samples of CBA documents (titled the ‘G’ documents) which implicated the bank. More, Burchett J had previously seen the whites of the CBA’s beady eyes in litigation involving Donna Batiste, as above.
Pertinent was G 170, written by long-time employee Max Dodd, May 1989. In pressing his bosses to attempt at all costs to save the borrowers from ongoing calamities, he noted:
‘In carrying out this task we should keep in mind our litigation experience but acknowledge privately that all of the problems we are experiencing are essentially of our own making. Broadly speaking they stem from …’
In March 1998, in support of a CBA borrower in litigation, Dodd wrote an affidavit excoriating the bank for its corrupt denial of responsibility. But by that time the offending banks were home free.
The CBA heavies, with the other guilty parties, were having none of this contrition stuff from the odd whistleblower. On the contrary. The then Labor Government duly obliged. In October 1990, the Treasurer, Paul Keating, instigated a Parliamentary Inquiry into the banking system. The objective was to bury Senator McLean’s incessant claims of dysfunctionality and corruption — and this the Inquiry and the subsequent Report proceeded to do. Lacking panache, it achieved its unsavoury objective by wearing everybody out. CBA staffer appearances before the Inquiry (22 May 1991) and submissions (especially Vol.10, May 1991) played their prescribed part and dissembled mightily. The banks were simultaneously in Canberra, lobbying furiously. The Report was a whitewash. It gave the green light to the banks (essentially the Big Four), and the banks read the wind. Since that time, the banks have been able to get away with almost anything.
A banking ombudsman with a very restricted brief and a Banking Code of Practice, to be honoured thereafter in the breach, was the whole system’s concession to ‘reform’.
Privatisation, David Murray, and the elevation of profit over customer service
Simultaneously, after having extinguished the Light on the Hill and having bludgeoned the True Believers into submission, Treasurer Keating set about privatising the Commonwealth Bank, in three tranches in 1990-1, 1993 and 1995-6.
Insider David Murray, who joined the bank as a teenager, was Keating’s chosen successor, becoming CEO in June 2002. Murray’s Wikipedia entry has Murray as a financial wunderkind, but the truth is more pedestrian. Murray got the bank cheaply and inherited a cash cow, sourced from the deposits and savings of thousands of low income earners, kiddies, members of the armed forces, and social security recipients. He acquired the goodwill of the Commonwealth Bank for nothing. (Previously, privatised entities were denied the use of the word ‘Commonwealth’ – thus the Commonwealth Handling Equipment Pool became Brambles’ CHEP; the Commonwealth Serum Laboratories became CSL.) In the ensuing decade, Murray would sack 15,000 staff and close 600 branches (many in low income suburbs, many of which, like Erskineville NSW, have since been gentrified and lack a bank). Upon acquiring Colonial Limited in 2000, Murray immediately closed 250 Colonial Bank branches. No financial genius here.
A measure of the calibre of the man is that he dismantled the bank’s library at Martin Place, because the embodied historical intelligence wasn’t worth the ‘true’ value of the floor space. Murray also owned a property near Wee Jasper. He apparently bought the general store in 1998 and the store’s role as a community focal point was alienated. There is no such thing as community, a Thatcherite axiom Murray must have picked up from his latterly acquired degrees in business administration. More, Murray’s general pronouncements on the economy, diligently reported by a reverential media, have usually been rubbish.
Of substantial significance, Murray’s early priority was to dismantle the CBA’s small business/farmer specialist lender, the Commonwealth Development Bank. The CDB was created by the Country Party in government in 1960, formed from an amalgamation of a rural lender (Mortgage Bank Department) and an industrial lender (Industrial Finance Department) created by Curtin/Chifley Labor in 1943/45. The CDB regularly made a profit (albeit, like all banks, it was hit by the early 1990s ‘recession we had to have’), but because it was a public service entity with specialist staff and elaborate customer support procedures it didn’t return the profit rates beloved of commercial bankers. In 1992/3, Murray started either defaulting CDB customers or bringing them onto CBA contracts on stiffer terms. One victim that subsequently acquired a high profile was the couple Bruce Ford and Wendy Murray, NSW horticulturalists. Their pursuit of bank records on their case exposed the bank’s use in default of a parallel accounting system, the ‘shadow ledger’ accounts, for which there was no accountability. Another CDB customer victim was Port Macquarie developer Claude Cassegrain. The bank promised Cassegrain superior facilities if he were to move his loans to the parent bank. But the bank, on a Friday, ordered Cassegain’s overdraft repayable on the Monday, making refinancing impossible. The bank then immediately defaulted Cassegain on his term loan.
In the meantime, Murray’s CDB, in supposed bad straits following the late 1980s boom and bust, found the resources to lend several millions to a piggery co-owned by Treasurer Keating, complementing a sum already lent to the piggery by the parent bank. Also in the meantime, now Prime Minister Keating oversaw the granting of capital injection of $30 million and an annual government subsidy of $20 million to Murray’s bank to underpin CDB operations. Immediately following the full privatisation of the CBA in mid 1996, the CDB was abolished. The now moribund ex-Country Party National Party sat on its hands, enjoying the perks of power. Small business and family farmers now had nowhere to go but the private banks.
Evan Jones eye-opening exposé on the Commonwealth Bank and dodgy Australian banking practices continues tomorrow in IA.
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