GOLDMAN Sachs in Australia faces a potential $15 million lawsuit by former clients who have claimed the investment bank misrepresented complicated derivatives contracts that forced them to buy bluechip stocks at over-the-market odds.

Law firm Slater & Gordon said yesterday it was investigating allegations of misleading and deceptive conduct against Goldman Sachs JBWere Capital Markets, The Australian reports.

The investigation surrounds the Goldman Sachs-designed “buy below the market” options contract sold to the bank’s wholesale clients in 2007.

Slater & Gordon’s practice group leader, Van Moulis, said clients had approached the law firm and claimed they were sold the contracts as a protection against a sudden downturn in the equities market.

It was claimed the product was marketed as similar to an “American call option”, but Mr Moulis said it was a rolling futures contract. Attempts at mediation with Goldman Sachs had been unsuccessful.

“It’s a derivative-based product that was marketed and described by the bank as an option,” Mr Moulis said.

“But when you read the fine print it’s a futures contract which locks the client into buying the underlying stock at a certain strike price.

“When the market plunged, the clients were told they were obliged to buy the stock at the higher strike price.

“This particular product was marketed widely across the Goldman Sachs client base.

“It was a home-grown product.”

The potential Slater & Gordon case, which has not yet been filed in court, follows similar action against Goldman Sachs that has been taken by the former chief executive of Merrill Lynch in Australia, Greg Bundy.

Goldman Sachs in Australia refused to comment.

Australia’s proposed new tax on mining profits has prompted a fierce struggle between the industry and the government for the extraordinary riches of the Asia-led commodities boom, analysts said.

Prime Minister Kevin Rudd’s plans to impose a 40 percent levy on the so-called “super profits” of resources firms was met with anger from the nation’s most valuable export sector, which warns it will kill investment.

With mining companies’ share prices diving, resources firms hit back, accusing Canberra of essentially nationalising the industry while the opposition said it could “kill the goose which laid Australia’s golden egg”.

“The companies are crying blue, bloody murder but you would expect them to — they’ve had their eggs stolen,” BIS Shrapnel economist Frank Gelber said.

The government hopes to raise billions of dollars with the tax and use the money to “spread the benefits” of the mining boom around the country.

“Provided commodity prices hold up high, we’re taking a lot of money out of the mining sector and we’re giving it to the rest of the economy. Now there is some logic to that,” Gelber told AFP.

“But the other thing is that these guys entered into these mining projects in good faith, with certain rules, and we just shifted the goal posts. Now we’re here, both sides have to take the consequences.”

Major miners have attacked the proposal, with Anglo-Australian giant BHP Billiton saying it placed a shadow over some projects, including expansion at its Olympic Dam uranium and copper mine, and would drive investment offshore.

Rio Tinto said it was reviewing all new Australian capital projects in response to the plans, which it described as “shocking”.

And United States firm Peabody Energy cited the tax as a reason to cut its takeover bid for coal miner Macarthur, while it was also blamed by Anglo-Swiss firm Xstrata for its suspension of a 27 million US dollar copper exploration project.

Rudd has even taken a tumble in polls after announcing the levy, which could also reduce the value of Australians’ retirement savings as they are heavily invested in blue-chip stocks such as BHP.

Rudd, who is expected to call an election this year, defended the Resources Super Profits Tax, saying he had been warned that “you’re going to hear lots of people crying wolf” on the issue.

He said government modelling showed the mining industry would actually grow despite the levy because it taxed profits, not volume.

Soaring commodity prices have seen Australian exports jump significantly since 2000. Coal exports surged 123.9 percent to be worth 54.4 billion dollars (48.65 billion US) in 2008-2009 while iron ore rose 66.9 percent to 34.2 billion dollars.

Bob Gregory, an economist at the Australian National University, said the government appeared confident the mining boom — which the central bank has said could stretch for decades as China and India industrialise — was assured.

And while the tax would hit the share prices of mining firms, he was less certain it would damage the industry, which in 2008-2009 was the nation’s best export sector, earning 127.5 billion Australian dollars.

“I think the Australian government, and us the people, we don’t want to scare off large amounts of investment,” professor Gregory said.

“Even though mining investment poses all sorts of problems — by making us more reliant on China and that sort of stuff — you don’t want to take the risk of scaring off too much investment.”

Gelber said the tax was unlikely to impact those mines already producing but it was understandable the sector was “squirming on the hook” given that mining was a high-risk activity.

“Now prices are so high, all the current round of projects that are about to start or have just started, they are going to proceed,” he said.

“But what it could affect are projects when the prices are lower because the profits are lower. It’s an awfully profitable activity at these prices. But the real question is, will these prices last forever?”

James Wilson, a Perth-based research analyst for DJ Carmichael, said many companies may now be examining projects in different countries including Canada, which is reducing its corporate taxes.

“A lot of people will be looking at whether projects are better value off-shore,” he said.

But in the US and the UK therehave been gains of 4-5%, while
even the Japanese Nikkei hasrisen by 2%.

We forecast significant medium and long-term order book growth and margin expansion acrossthe sector. As the Australian economy shifts gear post the pause in construction and mining during the GFC, CBA expects:revenue growth via a five year commodity boom, and margin growth, driven by demand outstripping supply, and labour and equipment shortages, shifting the balance of power back to contractors.

The general view is that the US dollar will lift later in 2010
when rates start rising. And in Australia investors are spoilt for choice with term deposits, property and shares all providing good returns.

Todays australian market wrap up

TALK OF A TAKEOVER BID FOR SANTOS - Sydney Morning Herald says there are strong rumours circulating that Woodside (WPL) is set to launch a $15bn bid forSantos(STO). STO up 3.41% to 1486c. WPL down 46c to 4696c.

Australian banks charged a total of $11.6 billion in fees during 2008. Exception fees accounted for $1.16 billion (10 per cent) of banks’ total fee income. Banks raked in approximately $960 million in penalty fees from households and $200 million from business customers.

Exception fees are typically charged by a financial institution when a consumer makes a late payment, overdraws an account or exceeds a credit limit. Most of these fees are pure profit for the banks. Analysis conducted by Deutsche Bank has revealed that 87 cents in every dollar a big bank takes from a customer in penalty fees is pure profit.

Bank fees can be very confusing. With several banking products available in the market, and with different terminologies used to describe the nature of the fees charged on these accounts, it is no wonder consumers often get confused or lose track of the fees they are paying. A simple understanding of when and where you get charged fees can help significantly reduce your fees by minimising the situations giving rise to fees.

Australian banks charged a total of $11.6 billion in fees during 2008. Exception fees accounted for $1.16 billion (10 per cent) of banks’ total fee income. Banks raked in approximately $960 million in penalty fees from households and $200 million from business customers.

Exception fees are typically charged by a financial institution when a consumer makes a late payment, overdraws an account or exceeds a credit limit. Most of these fees are pure profit for the banks. Analysis conducted by Deutsche Bank has revealed that 87 cents in every dollar a big bank takes from a customer in penalty fees is pure profit.

Key changes for exception fees:

ANZ

Currently customers are charged a flat rate of $35 for all honour, dishonour and periodical payment non-payment fees. Overdrawn, over-limit and late payment fees are also charged at $35. However ANZ Access Basic account customers (students and concession card holders) are charged $10 for these Exception Fees.

Commonwealth Bank

• Dishonour Fees will reduce from $35 to $5 on all personal and business transaction accounts. 

   

• Overdrawn Approval Fees will reduce from $30 to $10 on all personal and business transaction accounts 

   

• Late Payment Fees will reduce from $45 to $25 on all home, investment and personal loans

NAB

• Account Overdrawn Fees will be abolished from $30 to $0 on personal transaction and savings accounts

Westpac

• Account Overdrawn Fees will reduce from $40 to $9 on all personal and business accounts 

   

• Outward Dishonour Fees will reduce from $35/$50 to $9 on all personal and business accounts 

   

• Periodical Payment Not Made Fees will reduce from $35/$50 to $9 on all personal and business accounts 

   

• Missed Payment Fees will reduce from $35 to $9 on all credit cards and personal loans 

   

• Over-Limit Fees will reduce from $35 to $9 on all credit cards and personal loans

If Telstra doesn’t agree to separate its businesses, amended telecommunications laws to be introduced into Parliament later Tuesday will allow Canberra to force a “strong functional separation” on the group.

Communications Minister Stephen Conroy said the new measures “will finally correct the mistakes of the past” that have allowed Telstra to use its ownership of the country’s copper wire network to dominate its rivals, including Singapore Telecommunications Ltd.’s (Z74.SG) Australian arm Optus.

So-called functional separation has proved effective in other jurisdictions – including in the U.K. with BT Group Plc (BT) and with Telecom Corp. of New Zealand Ltd. (TEL.NZ) – in “addressing the underlying incentives for the incumbent to favor its own retail business over its wholesale customers”, Conroy told reporters.

Telstra is currently one of the most highly integrated telecommunications companies in the world across the fixed-line copper, cable and mobile platforms, Conroy said.

Competition watchdog the Australian Competition and Consumer Commission, and some of Telstra’s rivals, had argued that the government should force an even tougher structural split on Telstra – requiring a legal separation of Telstra’s assets and activities into separate corporate entities with entirely separate owners and shareholders – to allow the ambitious new open-access network to compete on equal footing.

Under the new measures unveiled on Tuesday, Telstra would have to conduct its network operations and wholesale functions at arm’s length from the rest of the group, and provide equivalent price and non-price terms to its rivals.

Telstra must submit an enforceable undertaking to the ACCC if it chooses to structurally separate.

And, in a move likely designed to force Telstra to cooperate, Canberra will prevent Telstra from taking up any further wireless spectrum while it still holds its 50% stake in the Foxtel pay television business or owns its hybrid fiber coaxial cable network. Those requirements could be wound back if Telstra agrees to a structural separation.

“It’s so-called voluntary separation but it’s volunteering with a gun to the head,” said BBY analyst Mark McDonnell.

“It is untenable for Telstra to be denied access to spectrum without introducing a major distortion to the competition that exists in the mobile industry.

“Quite clearly, the government is moving in this way because it is afraid of compensation claims were it to seek to legislate directly,” McDonnell said.

Telstra shares fell sharply on the news, and were trading down 4.0%, or 13 cents, at A$3.12, at 0112 GMT.

Telstra said it is looking over the government plans and will update the market as appropriate.

The planned changes come as the government prepares to roll out a new A$43 billion fiber-to-the-home network, which will likely leave large parts of Telstra’s fixed line network redundant.

Conroy told reporters that Canberra is having constructive conversations with Telstra on the planned network. Many analysts expect that Telstra will sell large parts of its existing fixed line network into the new high speed network.

One possible setback to the government plan is the fact that the amended telecommunications legislation will need to clear a potentially hostile upper house Senate.

Australia’s center-left Labor government has a majority in the lower House of Representatives. But it needs the Senate support of either the main conservative Liberal-National coalition, or all seven minor party Senators, to pass any new laws.

The conservative coalition has so far been critical of the government’s approach, particularly its ambitious broadband plan, which will be operated as a public-private partnership, with the government providing up to A$22 billion of the estimated project cost over the next eight years.

27/07/2009 

Alan Kohler Australia’s top business and finance commentator is starting a weekly column for ninemsn Money.

Starting Wednesday August 5, Alan will file weekly for Money giving his expert take on the markets, the economy and business.

About Alan Kohler

One of Australia’s most experienced commentators and journalists. Former editor of the Australian Financial Review and The Age, former business and economics editor of the 7.30 Report, former Chanticleer columnist for the Australian Financial Review and a former columnist for The Age and theSydney Morning Herald. In addition to Eureka Report and its sister publication Business Spectator, Alan is also the finance presenter on ABC News and host of Inside Business on ABC TV each Sunday

Join Alan every week on Money and make his insight part of your knowledge portfolio.

Bank stocks are still in turmoil as a result of capital raisings, with the Commonwealth Bank announcing this morning that it was issuing $750 million in new shares. When trading in the bank’s shares resumed after a halt this morning, they fell 61 cents, or 2%, to $29.39.

Westpac, which came out of a halt this morning, was punished for yesterday’s $2.5 billion capital raising – its shares plunged $1.48, or 8.3%, to $16.40, taking them closer to the $16 issue price of the new shares.

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