Blue Chip Investments and the Regulators.
Many so-called blue chip investments are now seen for what they really are; Basically N.L. companies (no liability for the youngsters) masquerading as solid blue chippers.How did this happen? Well, the answer is that it has been happening for the last 20 odd years in Australia but has been masked, supported, and protected by sycophantic, challenged or conflicted media, analysts, gravy train passengers, spin doctors, and government policy of both persuasions. To say nothing of compliant courts and judges with a well attuned ear to the 'needs' of the big end of town and their ultimate political masters (just forget the fictional separation of powers - old Joh Bjelke Peterson unwittingly had that right). Now some really big clods have started to hit the air-conditioning and that is just the start.
Like a ship that drifts 5 miles a day off course, no one really notices for quite a while. After a year or twenty or so, and now many thousands of miles off course, the ship is in very hostile waters indeed, without charts.Let's take AMP for an example. Did anyone in the investment community realise that AMP had shifted from predominantly a market based bonus points operation to a defined future cash liability operation, or that Pearl was possibly known as a real problem child as early as 1995, that's 8 years ago? Didn't they notice that the older City Mutual (later Capita) and National Mutual (later AXA) both eventually went bust with 'capital guaranteed' products that defied any rational commercial explanation? If they did, they were all pretty quiet about it.
And where were the much-vaunted analysts? History has shown that many are reborn clueless failures or non-entrants in the real world and their musings should probably be disregarded as being a million miles away from what common sense would suggest to be the case. These are the same analysts that think capital raisings to fund share buy backs are a great idea. Haven't they heard of the giant ponzi schemes of yesteryear or don't they care?And the regulators, APRA and the RBA? The less said the better there, but here's the mail for the boys and girls there. You're sitting on a powder keg but you just don't realise it and you are part of the problem, not the solution unless you change your spots. When, for example, is APRA going to realise, or be told by its political masters, that its primary supervisory mission is investor protection, not protection of its supervisees at the expense of the beneficial investors and electorate at large? But back to the main game. The mantra of 'responsibility' and 'accountabilty' has been held up as the guiding light of the corporate governance bandwagon. Yeah, right. Try liability for a change.
When a hireling running a company is given a swag of shares or options, it is a one way bet. And most of the time, in Australia until recently, with a market force fed by half a trillion dollars and counting of forcibly extracted money from the mums and dads (they don't even have punter status), it was a one way bet. The boards and management recipients of this largesse had nothing to lose and everything to gain. Some gained in spades, or more likely, truck loads.
Not for them the risk of mortgaging their house to pay for their shares at say dividend reinvestment prices, or putting their equity stakes at risk, like the much-derided true wealth building entrepreneurs need to do. Why on earth take entrepreneurial risk to get the entrepreneurial benefits if one can organise massive risk free rewards at the ultimate expense of the shareholder beneficiaries. The result is that misconceived, misguided or just plain incompetent efforts of boards and directors are rewarded nonetheless, as we have seen with handsome agreements that underwrite failure, not success.But what about the owners of the companies and institutions. Why wouldn't they act, like turfing the driver and support team and retooling?.
Well, the answer is seemingly quite simple. The majority owners these days are, you might have guessed it, organised just like the companies they invest in. They have absolutely nothing to risk and everything to gain. And with some notable owner-driver exceptions, who have done rather better for their investors, they have invested no equity and have no investment liability attaching to their efforts, to say nothing of their poor or catastrophic results.
The real owners, the end investors in the pooled funds, simply have no real say. They are just there to underwrite the risk and fuel the game with their money. Out of sight, out of mind. Fodder.
And in the tiny, concentrated and incestuous business community that is Australia's, the fortunes of the professional investors and investees are inextricably linked. One feeds on the other. Neither bearing any investment liability. Talk about a vertically one-sided integrated recipe for destruction of shareholder wealth. The wonder is that anyone should be surprised.
And if anyone doubts that we have seen the last of the shareholder disasters, think about this? The structure and the many of the key people in it are still there!Look at the AMP and the NAB, for example. NAB Chairman Rayner and CEO Cicutto were reportedly secretly pressing $21 an AMP share (or possibly NAB share equivalent) into AMP shareholders hands. And some people actually think AMP shareholders would have been better off? Well, they might have been if they had been able to take cash, but howabout NAB shares in paper-based deals?
If a $4 billion hit on Homeside rocked NAB, what do people think a $14 billion hit would have done to NAB and erstwhile AMP shareholders, with AMP's continued exposure to the UK of say, oh, another bill or two or three? Probably put NAB right out of business, that's what. Gives new meaning to a dual-listed structure, doesn't it?
And the seemingly accident prone people at NAB who 'supervised' Homeside and thought that an AMP adventure was a good idea are still mostly there. Ponder that one and feel afraid!
So Treasurer Costello and his policy makers have some policy thinking to do, because in large measure, whether they like it or not, government policy, both Labour and Liberal, has been fundamentally responsible for the systemic structure that has spawned the current string of disasters and wealth destruction, with more to come.
In fact, as this gradually dawns on the electorate, and it will, this is probably the biggest impediment that Peter Costello faces in becoming PM. Electoral wrath by the suckers who paid for it all and will pay for it well into their crimped superannuated futures. When Labor finally wakes up that domestic issues will prevail over all others in the end, Messrs Howard and Costello might not have to count birthdays for much longer. The voting suckers might have been cut out of the gravy train loop, but they darn sure can still vote and there are a lot of affected voters, like the owners of the half a trillion dollar superannuation milch cow for a start.The business mates and other establishment office holders? There aren't many votes there and a decent haircut amongst those ranks may be just the electoral ticket. A million miles might be too close for electoral comfort, so if the banks and few other big end of town survivors are expecting the tradtional political protection, they might need to take a Bex, have a good lie down and just forget it.
The issues? Does Australia really want to underwrite the current system with a superannuation scheme that puts a trillion or two in the hands of essentially index hugging (less fees of course) administrators instead of the true owners and beneficiaries, who are the contributing real investors in the first instance?
Does Australia really want to quarantine its pool of risk and retirement capital in this way?
Do we really want banks being exposed to lending risk as well as massive equity market liabilities? Can Australia really defend, let alone need, a system that not only richly rewards people who take no equity risk but squeezes out the true wealth creating entrepreneurs that are needed in spades in the future to allow Australia's current standard of living to be supported?And can we afford to comfortably insulate companies with a layer of 'professional' administrators masquerading as professional investors at a fee cost of about $15 billion (that's right, BILLION) a year and who, like the managements of the companies they invest in, have none of their own money at stake, only Other Peoples Money?
Source: www. crikey.com.au March 03, 2003