Something’s been eating at us.

We couldn’t really explain what it was. But something didn’t seem right.

We felt like Lieutenant Columbo. There was a small clue we knew we’d stumbled across. A clue that was staring us right in the chops… but we couldn’t figure out what it was, where it was and why it was important.

But then it clicked. As we drove our hip-hop red [Ed note: That’s the manufacturer’s colour description not ours!] Hyundai Getz up the Nepean Highway this morning, a light bulb appeared above our head – “I wonder if… No, surely not. It couldn’t be that obvious.”

I tell you what had crossed our mind. That National Australia Bank [ASX: NAB] may have cooked the books for its 2009 half-year report.

That during the 2009 financial year the NAB may have acted fraudulently. That it presented to shareholders and investors a record of the bank’s finances that wasn’t an accurate reflection of the bank’s true condition.

That’s a big claim right?

Believe me, I don’t say it lightly.

If we refer to our pals at Wikipedia (we really should make a donation seeing as how much we rely on it), which in turn refers to the Collins English Dictionary 10th Edition, fraud is defined as:

“Deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.”

That’s pretty clear. And based on what I’m about to show you there’s no other way to describe the NAB’s actions other than fraud.

Our pals at Wikipedia also provide the nine elements of fraud as determined under common law:

• A representation of an existing fact
• Its materiality
• Its falsity
• The speaker’s knowledge of its falsity
• The speaker’s intent that it shall be acted upon by the plaintiff
• Plaintiff’s ignorance of its falsity
• Plaintiff’s reliance on the truth of the representation
• Plaintiff’s right to rely upon it, and
• Consequent damages suffered by plaintiff

Your editor certainly isn’t Geoffrey Robertson QC. But in our view there’s no doubt the NAB’s actions in the secret loans scandal meets the definition of fraud. And could be convincingly argued on each of the nine points above.

Even with everything we already know, it didn’t seem possible that the biggest offence was right under our nose the whole time.

You see, there was one thing nagging at us.

One of the arguments put to us is the NAB was simply being smart. It was taking advantage of cheap money in the US. But what we have to ask is, why then? Why did the NAB only borrow from the US Federal Reserve between November 2008 and July 2009?

Think of it this way. The secret loan programme – Term Auction Facility (TAF) to give it the proper name – started in December 2007. The last TAF loans were in March 2010.

If the NAB is so smart, so keen to take advantage of cheap borrowing rates, why did it only borrow from the Fed for that nine-month period? Surely if it was after cheap funding costs the NAB would have lined up with Westpac on December 20th 2007 to apply for a loan.

And if it was so smart and keen to maximise profits then wouldn’t they have stood next to the likes of Riverview Community Bank on March 11th last year to take out another loan?

That’s what you do if you spot a bargain. You get in early and keep shopping until you’ve gotten every bargain you can.

After all, taking advantage of cheap money is the precise reason given by the bank apologists for why the NAB did what it did.

But no, the NAB was so smart and so keen to borrow cheap, it only did it over a specific period – November 2008 to July 2009.

That’s what caused the light bulb to appear over your editor’s head on our drive to the office this morning.

What we wondered is whether the dates were just as important as the size of the loans. As it turns out we were spot on.

The significance of the dates is the release of these two documents. The first was on 28th April 2009:

Source: National Australia Bank

A presentation that allowed the bank to claim, “Priority 1. Keep the bank safe – Liquidity and funding positions strong”. It’s a shame they didn’t admit how they kept the bank “safe” and why the funding position was “strong” – secretly borrowing from the US Federal Reserve.

The second document was on 28th May 2009:

Source: National Australia Bank

Coincidence? Or fraud?

If it’s a coincidence then it’s a pretty bloomin’ big one. That’s why it isn’t a coincidence.

At the end of March 2009, the NAB closed off its half-year results and capital report. But it’s clear way before that, probably in September or October 2008, NAB saw something it didn’t like.

The bank disliked it so much that something had to be done about it before the next reporting date.

That’s when the decision was made to secretly borrow from the US Federal Reserve.

There’s no doubt NAB borrowed from the Fed, not because it saw the chance to make a quick buck, but because it needed to. NAB needed to bolster the balance sheet before the half-year report, and the Risk and Capital Report.

That would give the bank some breathing space to get the house in order before the full-year reporting date in September 2009.

By that time we can assume NAB managed to fiddle the books enough so that it no longer needed secret loans from the Fed… our guess is that it instead relied on secret loans from the Reserve Bank of Australia (RBA), just like the other banks.

It makes you think doesn’t it? I mean, if this is the kind of stuff that can be fairly easily deduced, what other dealings are there between the banks and APRA that you don’t know about?

According to The Australian in June 2009 – while NAB was still in hock to the Fed:

“A stress test of Australia’s 20 largest banks under a scenario of a severe economic downturn shows the banking system would remain resilient with no banks failing…

“Conditions envisaged under APRA’s stress test… included a 3 per cent contraction in real gross domestic product, an unemployment rate of 11 per cent and a 25 per cent peak to trough fall in house prices.”

Last October the mainstream press trumpeted the great news that “Banks pass house price stress test”.

According to the Sydney Morning Herald:

“The three scenarios Fitch is testing are mild stress, with mortgage defaults of 2.5 per cent and a 20 per cent drop in home prices; medium stress with 6 per cent defaults and 30 per cent decline in prices; and severe stress with 8 per cent defaults and a 40 per cent price slump.”

It was hot on the heels of a Commonwealth Bank of Australia [ASX: CBA] stress test that concluded:

“Under a “high-stress scenario,” with interest rates at 14 per cent, unemployment at 10 per cent and property values down 30 per cent, it would see losses of $740 million, or 0.2 per cent of its total book, not including additional insured losses.”

We know to take these with a pinch of salt because the facts belie what happened in the real world.

In the real world, Australia’s banks came close to collapse with central bank interest rates at 3%… GDP falling slightly for one quarter… the unemployment rate climbing to around 6%… and house prices falling by just a few percentage points.

Yet APRA, Fitch and the CBA expect you to believe in the accuracy of their stress tests. Stress tests based on computer models. Computer models which… that’s right… failed in 2008.

Based on their analysis they truly expect you to believe that in a scenario much worse than the economic climate of 2008, Aussie banks would be fine. Yet as I say, the real world points to the opposite.

The real world showed you how unstable the banks were – government bail-outs and secret central bank loans were needed to prevent disaster.

That proves the stress tests to be complete rubbish.

Make no mistake, there’s absolutely no coincidence about the timing of NAB’s loans from the US Fed.

It reveals that the banks will do anything – even if it means acting fraudulently – to protect their interests. Importantly, it should make you question exactly what APRA knew about the secret loans and how complicit APRA was in keeping it a secret.

Especially as APRA was conducting the bank stress tests while NAB was borrowing from the Fed.

It’s clear that the corrupt banking system has many more skeletons in the closet waiting to be revealed.

Cheers,

Kris Sayce
For Money Morning Australia

Before I get stuck in to today’s Money Morning a quick note on our publishing schedule over the holidays…

This week will continue as normal… as you’d expect. Next week, from 27th December until 31st December each day you’ll get something a bit different.

The editors of the five subscription based newsletters we publish have been asked five questions. Each day next week you’ll get to see what those questions are and how the editors’ answered them.

I probably won’t publish anything on Saturday 1st January and Monday 3rd January. So hopefully you’ll be able to survive without us for a couple of days!

Oh, and assistant editor Shae Smith leaves Money Morning this weekend to head off on maternity leave for a few months. With any luck she’ll be back mid-next year.

And finally, more stonewalling from the chaps at the Australian Securities Exchange (ASX). As you’ll recall, we’ve wanted to know why the ASX hasn’t asked National Australia Bank [ASX: NAB] or Westpac [ASX: WBC] for an explanation on the lack of disclosure about the secret US Federal Reserve loans.

Seeing as its public relations team is now ignoring your editor, we thought we’d send an email to CEO Robert Elstone, CFO Ramy Aziz, and some other bloke called Eric Mayne – we’re not sure what he does.

In typical robot style we received the following response from Ramy Aziz:

“Corporate Relations have already advised you that ASX is aware of the issues you raised but it does not discuss specific supervisory matters.”

We half expected the email to continue with, “Danger Will Robinson, danger!”

But it didn’t.

So, after all our efforts, to date we’re no nearer getting an answer than we were three weeks ago. All we’ve got left to look forward to is the freedom of information request to the RBA.

Anyway, we’ll keep plugging away. If the ASX, RBA and APRA think we’ve been annoying so far, they’ve got no idea how annoying we can be… unless they subscribe to Money Morning of course, then they’d have a pretty good idea.

On with today’s Money Annoying…

The Emperor is Dead… May He Remain So

“Great man… blah, blah… a wonderful servant… yawn, yawn… a gift to the nation… blab, blab… let’s make him Emperor… Oh, he already was… let’s make him a Saint instead. Hurrah!”

Yesterday treasury secretary Ken Henry announced his retirement. He’s to be replaced by another career bureaucratic drone… whose name we’ve already forgotten.

Cue the snivelling tributes:

“I consider myself very fortunate to have been treasurer during his tenure as secretary,” said Wayne Swan.

Swan went further. According to The Age:

“Treasurer Wayne Swan said Dr Henry’s performance during the global financial crisis and his central role in tax reform had made him arguably the finest Australian public servant since HC ”Nugget” Coombs.”

Oh, there’s a fine man to be compared to, and “finest Australian public servant…” [Shudder!]. But more on Coombs later…

Our old pal, Prime Minister Julia Gillard said of Emperor Henry:

“More generally, Dr Henry has made a major contribution to the well-being of Australians and the prosperity of the nation during his more than 25 years at Treasury, during 10 of which he has been secretary.

“He has become one of the greatest of all Treasury secretaries.”

The front page of today’s Australian Financial Review (AFR) captions a photo of the Emperor with the comment:

“Ken Henry, who is stepping down, was said to be frustrated his resources tax was so little understood.”

Ah diddums… vay didunt wike your resources tax, poor thing.

I could go on… no I couldn’t. Is there anything more sickening than public servants patting themselves on the back? Yes, there’s the private sector patting public servants on the back.

We labelled Ken Henry as the Emperor due to his extraordinary power. His power to influence and control government was second to only the fabled ‘Nugget’ Coombs… in our view that’s nothing to be proud of.

Evidence of his power and the power of the bloke to take his place is seen in the brown-nosing from the vested interests who are keen to maintain their favour with the public service.

But quite how the King of Bureaucrats managed to make a “contribution to the well-being of Australians and the prosperity of the nation” is unclear.

I mean, let’s take a look at the man’s major achievements.

The kind folks at Wikipedia have served everything on a plate for us. And spared us a whole bunch of work. Here’s Emperor Ken’s top three top [ahem] achievements:

• Bank deposit guarantee scheme
• Stimulus package
• Resource Super Profits Tax

What a guy. What a performance. What a…

That’s his roll of honour. His major achievements have been to recommend the government forcibly take money from one group of people and give it to another group of people.

Wow, they should bottle that kind of entrepreneurialism, it’s priceless.

But as far as we’re concerned there’s no difference to the violent behaviour of forcibly stealing an individual’s income through taxes, than the violent behaviour of these ticket inspectors caught on tape.

Both are violently manhandling the public to demand payment. In fact, now we think of it, Henry and his gang are worse than the ticket inspectors. At least you’ve got the choice of whether to use a train or not.

If you use a train, buy a ticket. Even though through tax theft you’ve already paid for your ticket anyway. But never mind.

With government the philosophy is, give us your money now and we’ll claim we’re providing you with something in return… whether you want it or not… and whether the government is providing it or not.

Imagine the attitude towards taxation if tax officials knocked people over on the street to swipe the cash in their wallet. Our guess is most would find that behaviour unacceptable. Yet because the tax office swipes the money before it even gets to your wallet, the majority of the population sheepishly accepts it.

They even praise it. And only a public servant – only ever a receiver of tax, never a payer of tax – could ever have said:

“Taxes are what we pay for civilised society.”

The quote is from Oliver Wendell Holmes, Jr., US Supreme Court Justice.

We couldn’t disagree more. There’s nothing civilised about theft. Theft is theft whether it’s done by a private individual or by a coercive government.

Taxation is just an excuse to fund a government. Because without taxation there would be no government. Or certainly not the massively grotesque centralised government’s plaguing the world today:

“The power of taxing people and their property is essential to the very existence of government.” – James Madison, 4th US President.

But back to Henry. We were amused by the comment that he’s “the finest Australian public servant since HC ‘Nugget’ Coombs”.

In the world of the public service that’s undoubtedly an honour. To the rest of the population it should be seen as a dirty insult.

Who is or was HC ‘Nugget’ Coombs?

He was the first governor of the Reserve Bank of Australia (RBA). But he’s dead now.

He claim to fame is that he appears to be the mould for later generations of megalomaniacal, power-crazed public servants.

If this is a man to idolise for his achievements you may as well idolise Jack the Ripper for his services to the sharp knife industry, and Bernie Madoff for his services to the finance industry.

But read Coombs’ obituary and you’re left with an impression of a brave saintly man. A man who only thought about doing well for Australia:

“As a young rural teacher from Teachers Training College he began his university studies by correspondence…

“In 1934 Nugget was awarded a doctorate at the London School of Economics for his thesis on central banking, The Dominions’ Exchanges…

“The student [Coombs] who used to dine with Keynes on the other side of Piccadilly from Green Park now regularly met the Keynesian economists from the Commonwealth Bank and the Bank of New South Wales in Repin’s coffee shops…

“During and after the War Nugget was engaged in the Keynesian Crusade… It involved various organisations and places – FAO, GATT, IMF and World Bank…

“In Australia Nugget arranged many meetings for Whitlam with Torres Strait Islanders and Aborigines… He drafted the words with which Whitlam ceremoniously poured some soil into Vincent Lingiari’s hands.

“He argued passionately for the welfare of Aborigines and for their right to be different…”

He also had a “splendid art collection [which] was exhibited at the Reserve Bank in Martin Place in 1992.”

An art collection funded by the tax payer. How else would Saint Nugget have paid for his art collection if it wasn’t for the taxes paid by private individuals? Taxes that paid Saint Nugget’s wages.

The original ‘Champagne Socialist’ perhaps.

The danger of characters like Coombs is they wrap themselves in the image of being do-gooders for society. That all they want to do is help people. Help the poor. Help indigenous Australians… oh, and tax the rich.

While at the same time feathering their nest at the expense of the taxpayer.

So while Coombs does sound like a noble man. And while you could be forgiven for thinking he was a saintly man. The reality is that Coombs was no different to any other power-crazed public sector servant.

That is the belief that they and government knows best. That they and government know best how to spend your income.

The end result is that the problems the public servant laments are problems actually caused by the government’s interference.

For instance, in Coombs’ book The Return of Scarcity he writes:

“Tax concessions to upper and corporate incomes are often reflected in conspicuous extravagance or in bidding up the price of existing properties, rather than in higher levels of productive investment.”

We wouldn’t argue with that. The Australian obsession of investing in ever-increasing house prices is an example of unproductive investment.

But what Nugget ignored was that its government which creates tax breaks. Tax breaks provide a reward to one group of people at the expense of another group. Tax breaks and incentives which encourage unproductive investment and discourage productive investment.

You only have to look at the lop-sided shape of the Australian economy to see that – a burgeoning resources and services sector… and, well, that’s about it.

A banking sector which relies on the resources sector in order to increase credit. A consumer which relies on the banks and the resources sector in order to borrow money to feed the services sector. And a services sector which relies on the consumer and the banks and the resources sector in order to sell its services and goods.

In a tax-free economy, there are no taxes and there are no tax breaks. You earn your money and shock-horror, you get to keep it. And save it and spend it as you see fit.

But that’s not the way central planners like things. They like to meddle. They like to plan an economy. Such as Coombs’ solution for Australia.

If you read The Return of Scarcity you can see the birth of compulsory superannuation, and the origin of the Resource Super Profits Tax. For the latter we no doubt have the source of Emperor Henry’s thoughts on taxing resources.

Coombs wrote in 1990:

“[A] special capital asset replacement royalty or resources tax on the export of exhaustible resources should be imposed, and the proceeds allocated to a special fund for investment in sustainable enterprises. A rebate of this royalty or tax could be granted for payments by the corporation concerned into a trust fund under its own control, for investment in Australia for sustainable production, or grants to an approved institution for the conduct of scientific and technological research.”

The interventionist may think that sounds reasonable. After all, shouldn’t businesses be encouraged to re-invest in Australia?

Again, the problem is that the interference of government makes it difficult for businesses to invest and re-invest in Australia. Because again it relies on businesses investing in the industries the government approves of – mostly in clean service industries.

Those it approves of will be granted a tax break. Those it doesn’t will be punished by not having a tax break.

Besides, governments much prefer having control over the cash themselves. Hence why over 40 cents of every dollar earned in Australia goes to government.

But as you’d expect with any interventionist they reveal their ultimate goal. Coombs also wrote:

“Where necessary re-establish, the public ownership of the natural resources of the continent, its minerals, forests, seas, soils, vegetation and wildlife;

“Vest title in these resources in an authority independent of corporate and political control;

“Empower that authority to grant licences for the use of these resources only on terms which will ensure their conservations, regeneration and sustainable development…”

Nugget must have worn a huge pair of rose-tinted glasses to think that an economy can function with the state ownership of property. Do we really need to list the economies where that’s been tried and failed? Thought not.

And the very idea that an “independent” authority could be free of corporate and political control, while at the same time having the monopoly power to grant licences to corporations is childlike thinking at its best… or worst.

Any authority which is created by government is by its nature influenced by it. Just as any authority set up to regulate the private sector will always be influenced by the most powerful corporations it regulates.

Our dealings with the RBA, ASX and APRA over the non-disclosure by NAB and Westpac are perfect examples of this.

The arm-in-arm actions taken by the government and the RBA during the global financial meltdown is more proof of the influence government has over a supposedly independent body.

The interventionist and central planner are the enemies of freedom. And if HC ‘Nugget’ Coombs is the finest example of an Australian public servant, then he’s also the finest example of the coercive government interference with freedom.

But when it comes down to it, ‘Nugget’ Coombs only has himself to blame for what he saw as the unfair distribution of wealth.

As governor of the Reserve Bank of Australia (RBA) Coombs laid the groundwork for all the central bankers that followed. A central banking system that has resulted in the gradual devaluation of money.

A central banking system that has created the inequalities in wealth that Coombs complains about.

A central banking system that has helped politicise money by allowing governments to borrow at will in the name of the taxpayer, and a central banking system that abetted the government by allowing the taxpayer to be placed on the hook for trillions of dollars of bank liabilities.

It’s fair to say that in our opinion neither Emperor Henry nor Saint Nugget are people to be praised. They are central planners who should be despised.

Regards,

Kris Sayce
For Money Morning Australia

If you haven’t found the time to read the transcripts from the Senate economics select committee I suggest you find the time.

Simply because comments from two National Australia Bank [ASX: NAB] executives confirm – that’s right, confirm – everything we’ve written about NAB’s secret bailouts in 2008 and 2009.

You can download the transcript by clicking here.

We told you the banks need the loans because they faced a massive liquidity and solvency problem.

Our critics said we were talking rubbish. That we had finally lost our marbles.

They tried to say NAB was just being cheeky. That is was snaffling Federal Reserve loans on the cheap. They said NAB did what any back should do, take the opportunity to borrow low and lend high.

We countered the argument by explaining how bank borrowing works. How banks have to roll over debt on a regular basis. If there’s a problem with rolling the debt over, then, well, it can leave a bank in the lurch.

We showed you how NAB and Westpac [ASX: WBC] had stood hunched shoulder to hunched shoulder with other troubled banks. Banks such as Royal Bank of Scotland, LloydsTSB, Citibank and ABN Amro.

Believe me, the admission I’ll show you in a moment is dynamite. It’s an admission straight from the horses’ mouths. That the Australian banking system was in dire trouble in late 2008.

Yet where is the Australian mainstream press on this story?

Good question. Nowhere. The mainstream press conspired with the banks and regulators to sweep the secret loans scandal under the carpet. And now they’ve done the same with the Senate committee statements.

To be honest, the incompetence of the mainstream press doesn’t surprise us. We’d waited a couple of days for the transcripts to be posted to the Hansard website (Hansard is the official record of parliamentary debate).

Until then, like you, we had to rely on what the mainstream press had reported. And what did they focus on? Of course, they focused on the easy stuff… banks’ interest margins, bank fees, executive pay levels… the sort of stuff that’s easy for the journalism cadets to get their teeth into.

I mean, the bombshell I’ll reveal to you today isn’t the sort of thing the seasoned finance hack would touch with a bargepole. Why? Because the seasoned finance hack doesn’t want to ruin his chances of an invite to the next banking dinner party.

Or the chance to interview a top banking executive. That’s more important to them than uncovering a story that proves the fragility of the banking system.

Although to be fair, even if they did want to report on it, chances are their editor would exercise a veto and cut out all the juicy stuff.

So, when we read the transcript, guess the first thing your editor did. Go on, guess.

What’s that, you can’t? Think harder. Think how annoying we can be… that’s right, we fired off another email to our pals at the ASX. I won’t reprint it here, instead I’ll expand on what I wrote to them.

Remember some of the previous banter we had with the ASX folks. They told us the ASX didn’t have the power to request information from a company. Not unless there was an unexplained price movement.

We told them their version of ASX Rule 3.1 was wrong. The ASX did have the power to request additional information from the banks. Not only did they have the power, but that they should do so immediately.

Funnily enough, two weeks since the US Federal Reserve released the extraordinary details of NAB and Westpac’s secret loans and the ASX is still sitting on it.

The ASX continues to conspire with NAB and Westpac to keep the market uninformed about secret loans that prevented two of Australia’s banks from going bust. I don’t know about you but I’d think that was something the ASX would want an explanation on.

Yes, I’ve been criticised for my comments on the seriousness of these loans. I’ve been told on more than four occasions (five I think… maybe six) that Australia’s banks were nowhere near going bust.

Well, it turns out your editor was right. But don’t just take my word for it. In a moment I’ll show you what two top execs at NAB – one of them the top dog – told the Senate committee about the financial condition of the banks in 2008 and 2009.

But first, Money Morning reader Paul sent us this timely reminder of the spin put out by the banking industries puppet mouthpiece, the Australian Bankers’ Association (ABA) in October 2008:

“The Australian Bankers’ Association (ABA) is concerned that recent announcements by the Federal Government to guarantee deposits and wholesale funding are being characterised as the Australian banks having been ‘bailed out’.

“This is false

“No bank deposits have been at risk. Bank deposits are safe – with or without the government’s guarantee.

“Australian banks and the regulatory framework have been successful. Unlike in the UK, Europe and the USA, no taxpayer’s money has been allocated to support an Australian bank. Australian banks are very strongly capitalised and continue to hold assets that are of good credit quality.”

It’s interesting the ABA would say that, because one year prior to that statement Westpac had grovelled to the US Federal Reserve for USD$1 billion. And one month later NAB would need to raise billions of dollars on the Australian Securities Exchange.

As NAB director of finance Mark Joiner told the Senate committee:

“There were two periods during the crisis when our credit rating was on negative watch. If we dropped out of the AA status, then the cost of funds and our access to funds internationally would have been severely altered.”

Despite that, the ABA claimed Australia’s banks were “strongly capitalised”. So “strongly capitalised” that the NAB had to raise $6 billion on the market plus another USD$4.5 billion in secret from the US Fed.

That doesn’t sound very strong to me.

But right there, in Mr. Joiner’s statement is the precise reason why the NAB grabbed the secret loan money from the US Federal Reserve. Not because it was trying to make a few extra bucks, but because the bank was on a negative credit watch.

The bank execs knew that if the market knew just how tight the bank’s balance sheet was, the bank would have lost its AA credit rating. Here are Mr. Joiner’s comments to the Senate committee:

“There were two periods during the crisis when our credit rating was on negative watch. If we dropped out of the AA status, then the cost of funds and our access to funds internationally would have been severely altered. Then our ability to support the economy in the ways we described before—staying open for business and predictable for customers—would also have gone. We would have had to freeze our balance sheet growth and the like. While you probably do not want obscene amounts of profitability out of your banking system, it is good for everybody to have a strong banking system that supports a degree of economic self-determination and flexibility.”

See, without these bailouts Mr. Joiner admits it would have been hard for the bank to stay open for business.

Yet just like the secret loans, you didn’t hear about this statement in the mainstream press. They didn’t seem to think it was important enough.

But that wasn’t all, NAB CEO Cameron Clyne backed up his finance director. Here’s what Mr. Clyne told the committee:

“As we went to the crisis, we were in a situation where obviously, quite appropriately, investors and prudential regulators were seeking us to hold greater capital. We had to go to the markets. We went to the markets in November 2008 and in July 2009 and raised about $6 billion in equity. We effectively had to absorb that and suffer the drop in return on equity. Had we tried to maintain the same return on equity on the additional $6 billion in capital, prices would have been substantially higher. I do contest the fact that we maintained return on equity. We most certainly did not.”

There you have it. Australia’s banks were on the edge. It needed the capital raised on the market, plus US Federal Reserve secret loans in order to make it.

Think about it. Think about the other bailouts the banks received – the first homebuyers grants, the wholesale guarantee, the deposit guarantee… but still it wasn’t enough to prop up NAB and Westpac.

They needed more. These two “strongly capitalised” banks needed the secret Fed loans. Plus top-up loans from the Reserve Bank of Australian (RBA), which itself received USD$53.5 billion from the US Fed.

Yet all the while the ABA yapped that “Australian banks are very strongly capitalised and continue to hold assets that are of good credit quality.”

We now know that to be false. A strongly capitalised banking system doesn’t need a raft of government and central bank bailouts. It certainly doesn’t need secret loans from a foreign central bank.

But even now, the regulators are spinning the same yarn. We printed this comment on Wednesday by RBA assistant governor Guy Debelle:

“The RBA participated in the swap line [with the US Federal Reserve] to help distribute US dollars into this time zone… It did not reflect any issue with the Australian banking system’s own need for US dollars. The funds provided under the swap line were cheaper than the extremely wide market price at the time. As a result, Australian based banks availed themselves of this and in a number of cases on-lent the funds to banks in other jurisdictions.”

We thought about his statement some more after we sent it to you. The way Debelle carries on he’s making out that America and Australia were playing doctor and nurse to the sick global banking system…

That Australia was fine. Our banks were simply being good doctors by helping out others.

He’s making the RBA and the banks out to be the Dr. John Forrest and Matron Grace Scott of the banking world. In reality they’re no more than the Dennis Jamieson and Ada Simmons of banking.

But considering the magnitude of the admission, how did the good Senators’ respond?

Following Mr. Clyne’s reply, Senator Hurley continued:

“All right. Let us talk about the most recent rate rise above the RBA cash rate.”

What?! Handed on a plate an admission that Australia’s banks were in dire trouble in 2008 and 2009, and the hapless Senator blabs on about the latest interest rate decision.

That’s another reason we didn’t take up the offer to put questions to government ministers. If members of the Senate economics can’t recognise a bombshell when they see one, there’s not much point in us wasting our time giving them more ammo… they’d probably only blow themselves up with it anyway!

But all this aside, two weeks after the secret loans were revealed, Australia’s regulators refuse to inform investors of the banks’ deception.

As far as the RBA, APRA and ASX are concerned it’s a non-issue. We can only draw the conclusion they don’t want to ask NAB or Westpac any questions. That’s because they know the answers will be embarrassing.

Not only that but they’re clearly embarrassed at having talked up the stability of the Australian banking system while behind closed doors the banks were secretly receiving multi-billion dollar bailouts.

Based on everything we’ve read so far, it’s clear that Australia’s banks were much closer to going bust than even we thought. And that if it wasn’t for secret loans from the RBA and the US Federal Reserve the Australian banking system would have collapsed.

We’ve got a lot more digging to do on this issue. It wouldn’t surprise us if the Aussie banks had further secrets they’d prefer locked away in the closet.

Cheers.

Kris Sayce
For Money Morning Australia

More annoying banter from your editor to the ASX:

“So when can we expect the ASX to make an announcement on this?

“I’m sorry, but this is a no-brainer. As I say, the ASX’s own website states: Timely disclosure must be made of information which may affect security values or influence investment decisions, and information in which security holders, investors and ASX have a legitimate interest.

“It’s no excuse to say that there wasn’t any price action therefore the ASX can’t investigate. You can’t know if the news will impact the price until after the news has been released. Under ASX rules the news must be released under the reasonable person test. If a reasonable person expects that it could impact the share price then the news must be released. There’s little doubt that if this information had been made public at the time it would have impacted the price and therefore it should have been made public. Or is the ASX’s view that it’s OK to keep some information secret because it may adversely impact the share price?

“The ASX is doing itself a major disservice by not immediately asking NAB and Westpac to explain their actions. More importantly, the ASX is doing investors a major disservice. We can only wonder what other information the ASX is conspiring to keep secret from investors!”

It’s no wonder your editor receives so few invitations to dinner parties. Considering how annoying we can be!

And thanks to Money Morning reader Dean for bringing our attention to this story, “Law Firm to Launch Class Action Against Aust Miner Oz Minerals”

According to the news report:

“Slater & Gordon practice group leader Van Moulis alleged OZ Minerals failed to release important financial information between February 29, 2008 and December 1.

“‘The market relies on being fully informed and with OZ Minerals, we believe, shareholders were sadly let down,’ Mr Moulis claimed in a statement

“Investors have alleged OZ Minerals breached its continuous disclosure obligations and understated its liabilities by about A$300 million.”

It makes you wonder if short-sellers in Australia’s banks could launch a class action against NAB and Westpac for non-disclosure of the Fed secret loans. I mean, there’s little doubt that if investors had been aware of these loans it would have had a further negative effect on the share price.

Short-sellers could have made a killing if NAB and Westpac had fully disclosed the secret loans.

In fact, non-disclosure of the loans could have resulted in many short-sellers losing a lot of money as bank share prices rallied. As investors were led to believe Australia’s banks were strong and secure.

As I’ve said before, I’m no legal eagle, but we’re sure investor protection goes both ways. If OZ Minerals can be sued for non-disclosure of negative information, why shouldn’t NAB and Westpac?

In both cases investors have been harmed. We’re struggling to see the difference. Perhaps if you’re a lawyer you could drop us a line to let us know.

On that subject we notice Reserve Bank of Australia (RBA) assistant governor Guy Debelle has made a half-baked attempt to justify the bailouts.

As you’d expect, he doesn’t mention NAB and Westpac specifically. In a speech to the 23rd Australasian Finance and Banking Conference, Mr. Debelle said:

“The RBA participated in the swap line [with the US Federal Reserve] to help distribute US dollars into this time zone… It did not reflect any issue with the Australian banking system’s own need for US dollars. The funds provided under the swap line were cheaper than the extremely wide market price at the time. As a result, Australian based banks availed themselves of this and in a number of cases on-lent the funds to banks in other jurisdictions.”

What utter nonsense.

You’d think an RBA assistant governor would understand how these things work.

On any given day a bank may need to roll over millions or billions of dollars’ worth of debt. If – as was the case in 2008 and 2009 – credit markets seize up, the bank still has to repay the loan. In normal circumstances it would simply take out a new loan to pay for it. But at that time it was much harder.

Mr. Debelle’s own chart proves that:

In a nutshell, it shows that debt became more expensive. It became more expensive for two reasons – first was the risk premium demanded by investors. And second was the drop in the supply of debt buyers.

It’s for these two reasons why the Aussie banks had to crawl to the US Federal Reserve and the RBA for emergency funding.

This whole idea that the Aussie banks were sitting back and licking their lips at getting hold of some cheap funding in order to earn a few dollars profit is just ridiculous. But, it’s the kind of excuse that the mainstream press will fall for.

Just remember what thin capital margins the banks run on. Failure to roll-over even a small amount of funding means that the banks’ capital levels slump.

The article of page 45 of today’s Australian Financial Review (AFR) shows you that. The margins are so tight that according to the AFR:

“If ANZ was forced to lift its risk weighting [on some corporate debt] from 65 per cent to 100 per cent, it would need to find enough capital to support an additional $50 billion of loans.”

In other words, according to analysis from Axiome Equities, ANZ is claiming certain assets on its books are less risky than they really are… just so the bank can hold less capital on its books.

Incidentally, we like the closing paragraph at the end of the article, “A spokesman for APRA declined to comment citing provisions under the APRA Act.”

That would be the Section 56 secrecy provisions of course. Since when was secrecy an investor’s best friend? We’ll ask ASX that question the next time we pester them…

Anyway, yesterday it was Commonwealth Bank of Australia’s [ASX: CBA] turn to have a [ahem!] so-called computer glitch.

Don’t panic, the bank said. Everything is under control. Today’s AFR quotes from the CBA media release, “At most, up to 5 per cent of CBA accounts were impacted.”

Well that’s alright then.

Computer glitch indeed. The fact is, it’s another sign of the systemic failure of the modern banking system. And even scarier is the fact that so few people are aware of it. In no small part thanks to the incompetent mainstream press.

As you know, they’ve been almost deathly silent on the National Australian Bank [ASX: NAB] and Westpac [ASX: WBC] Federal Reserve Bailouts. Aside from a half-baked article in the Fairfax papers – although bizarrely, not in the Australian Financial Review which didn’t cover it at all – and an even more bizarre attack on your editor by the same organisation’s CBD column.

Why the CBD column didn’t report the actual bailout instead of ridiculing your editor is something only it knows.

So ignorant (and we mean that kindly, not meanly) are most people about the secret loans that we noticed this comment by MrBungle in the comments section of an article in yesterday’s The Age about the Commonwealth Bank “glitch”:

“‘Are people aware that during the global financial crisis that two of our major banks borrowed $5b from the US Federal Reserve and the RBA borrowed $53b from the US Federal Reserve?’

“Ok, now that I’ve stopped laughing (after about 10 minutes) I’ll ask you this George…

Point me to some evidence of this mate, otherwise you’re obviously not wearing your tin-foil hat tightly enough…

“That is, they’ve got at you ! ;-D Seriously tho, a link to evidence of this would be appreciated…”

MrBungle – if that’s his real name – was having a pop at another reader who had mentioned the secret loans.

It gives you some insight into how uninformed the majority of the population is. Most people have been trained to believe everything they read in the mainstream press. And they’ve been trained to believe that the current banking system is normal.

That it’s the result of progress in banking. And that today’s system is obviously so much better than how things used to be because, well, it’s modern and we know better than all those clowns who used to carry gold and silver around in their pockets.

But take a look at the other news stories to fill page 45 of today’s AFR:

“ANZ slated for ‘inadequate’ capital holdings”

“CommBank abused franking credits, says ATO”

“Mortgages not retired”

The last story states, “Almost half of Australians won’t pay off their mortgages before they retire…”

So much for the dream of retiring at fifty and then playing golf non-stop for forty years.

And then look at this story from The Age:

“Property chiefs warn on units glut”

Don’t tell me there’s an oversupply of housing already. What happened to the “chronic housing shortage” the property spruikers have been banging on about for years?

I tell you what happened to it… it never existed.

It was just a beat-up by the vested interests. It was one of the many fraudulent excuses they used to cajole young and old into paying ever greater amounts for houses.

But as we’ve been writing for the past two years, the numbers never really stacked up.

Take these numbers as a perfect example of the joke that is the so-called housing shortage. According to the Australian Bureau of Statistics (ABS) in 1998 there were 7,015,200 occupied private dwellings.

At the same time, according to the World Bank, Australia had a population of 18,700,000.

That gives you an average of 2.66 people per private occupied dwelling.

Fast forward a few years to 2010, the ABS reckons there are 8,395,000 occupied private dwellings. And the ABS population clock claims there are 22,557,247 people living in Australia.

Now, remember that Australia has a “chronic housing shortage.” That there has been a massive underbuild of housing, especially over the past five years. All that said, what’s the average number of people per private occupied dwelling?

It’s, erm… 2.68.

We’re no statistician, but we’re pretty sure that at two decimal points your statistical chaps would call that a rounding error. The fact is, the number of people per dwelling hasn’t changed in twelve years.

Where’s the shortage of housing?

Yet somehow, despite that startling revelation, the mainstream press has been hoodwinked into believing the property spruiking spin – that Australia has a chronic housing shortage. When in reality it has nothing of the sort.

In fact, if we believe the property developers quoted in The Age, we’ve got the opposite of a shortage. We’ve got a glut.

But look, we’ll take The Age article with a grain of salt. It’s based on what two property developers are saying. They are clearly not impartial observers and likely have some reason for pointing out the lack of a shortage.

Besides, you don’t need to listen to them anyway. The numbers speak for themselves.

More shocking is the fact that more people are approaching retirement and old age still mired in debt.

And other numbers from the ABS show you what a difference it can make to an economy. And why it’s no surprise retailers are feeling the pinch. According to the ABS, in 2008 the mean weekly housing costs for a person without a mortgage was just $33.

That’s right, $33.

But for a person with a mortgage, the mean weekly housing costs were $384.

If more people are stitched up with a mortgage for longer, there’s no doubt that it means more money spent on servicing mortgages, and less money going towards savings or consumption.

And not only that, but thanks to the suckering in of first home buyers in recent years, they’ll have even less disposable income than if they’d remained in a rental property.

Occupiers of rental housing only have a mean weekly housing cost of $267 in 2008. That’s significantly less than the person with a mortgage.

As we see it, the poor sales and profits figures from retailers in recent months are set to continue into 2011. And the idea that Australia’s miracle economy will continue to prosper is likely to flounder in a sea of massive personal debt.

Oh, and as for the idea that Australia’s savings rate has increased. Take that with a grain of salt too… the ABS certainly does. The mainstream has lauded the 10.1% national savings rate as being a sign of lower debt.

This is what the ABS has to say about it’s own statistic:

“Household saving in not measured directly. It is calculated as a residual item by deducting Household final consumption expenditure from Household net disposable income. As the difference between the two aggregates is relatively small, caution should be exercised in interpreting the Household saving ratio in recent years, because major components of household income and expenditure may be subject to significant revisions.”

We’re wary about ABS data at the best of times. But when they tell us to be cautious about it themselves then that’s exactly what we do.

Cheers.

Kris Sayce
For Money Morning Australia

“We’re not printing money,” said Dr Ben Bernanke in his 60 Minutes interview last Sunday.

“What we’re doing is lowering interest’s rates by buying Treasury securities. And by lowering interests, we hope to stimulate the economy to grow faster.”

With statements like that, you wonder why only half of the U.S. wants the Fed ‘…curbed or abolished.’

The latest study was coincidentally released just after Bernanke completed his recent interview. It has shown half of Americans would be more than happy if the Federal Reserve Bank was altogether dumped or put under ‘tighter political control’.

And you’d be right in thinking we’re in full support of dumping the Fed… rather than spending any more money on regulating it.

But, there may be hope after all.

The Fed, which since 1913 has been able to shroud itself in secrecy, might finally come undone.

It started with the recently approved Dodd-Frank Act. You know how Kris has gone to great lengths to explain how Westpac [ASX: WBC] and National Australian Bank [ASX: NAB] accepted loans from the Fed without it being disclosed.

Well, if it wasn’t for this legislation, we would never have known about the loans.

But that’s not the only good thing to happen. Now you’ve got Ron Paul. He’s just been elected to chair the Domestic Monetary Policy Subcommittee. This is the committee that will oversee the Fed.

A long time campaigner against what Mr. Paul has called the ‘Biggest Counterfeiting Machine in the World’, his new position should see him put some real pressure on the Fed.

During the financial crisis the Fed told the public and politicians it was acting in America’s best interests. But there was no watchful eye. No inspections of any of the financial transactions or movements that took place during the financial turmoil.

But the biggest achievement for Mr. Paul would be a full audit of the Fed’s transactions.

The push to audit the Fed began in the first half of this year. It led to only a brief onetime assessment of the massive lending that took place during the crisis.

Mr. Paul was disappointed at the outcome at the time. But now he’s in the driver’s seat to the push for a full and complete audit.

Think about it, why shouldn’t the Fed have to undergo a full audit?

Every other corporation in America is obliged to open their books for the Internal Revenue Service (IRS). Not only that, but each year millions of Americans must disclose their entire personal lives to the same government body. And that’s under the threat of heavy fines and jail time if they don’t tell the truth.

During the crisis trillions and trillions of dollars in loans were handed out to banks. Yet not one single person or body had the power to step in and make the Fed accountable for its actions.

However dodgy the dealings are at the Federal Reserve, there are some sure facts.

Way back at the birth of the Fed, American national debt was about USD$2.6 billion. That’s billion with a ‘b’.

Fast forward nearly one hundred years and the national debt is now at USD$13 trillion. That’s trillion with a ‘t’. With all the stimulus money and bail outs, the word trillion has suddenly become more popular.

Think about it this way, in the one hundred years since the Federal Reserve Act was passed, the national debt level is now 5,000 times higher.

And if you need another reason to agree that there’s something fishy going on with the Fed, you have the fact the purchasing power of the U.S. dollar has shrank by 95% since 1913.

As retiring Senator Jim Bunning recently commented:

“Public awareness of what the Fed is doing is increasing while public opinion of the Fed is falling. Congress must act to rein in Chairman Bernanke and the Fed before they destroy our currency and permanently damage our economy and the financial system.”

We’d argue that it’s too late. The damage is done.

The people of America are aware of what’s happening to their country and their currency. And foreigners are aware of it too. They no longer believe that one unregulated body can push, pull and shape the economy.

Hopefully, it’s time for Ron Paul to fulfill the title of his book, ‘End the Fed’.

Shae Smith

Assistant Editor
Money Morning

Most important story of the week…

Because of the outrage from our readers over the Westpac Bank and National Australia Bank bailout, we’ve created this 8 minute video that you can share with your friends! Click on the link and hear more about the lie behind Australia’s latest banking scandal that the main stream press don’t seem to want to talk about…Click here for more…

Monday: Believe me, it’s a big deal. When your main business is looking after money for people and you’re faced with a situation where if you can’t get an emergency loan then you won’t be able to honour requests for depositors to withdraw their cash, that’s a big deal. Click here for more…

Tuesday: And don’t think there are any Australian politicians who are keen to expose the bankers. Unfortunately Australia doesn’t have an equivalent of Ron Paul in Federal Parliament. Someone who’s prepared to stick up for sound money. Click here for more…

Wednesday: And when there’s bad economic news they say that’s also good for the market. But why? How can bad news be good news? And how can it be possible for stock markets to rise in both cases? Click here for more…

Thursday: So you can argue that leading up to early November when the US Fed announced its money-printing programme, investors were positioning themselves for what they thought the Fed would do. They thought the Fed would print a certain amount of new money… Click here for more…

Friday: The Federal Reserve has announced that it will pump another $600bn into the US economy by the end of June next year to try to boost the fragile recovery. That’s $75bn a month – much more than most analysts expected. In this free ‘QE2 Tutorial’, Kris Sayce lays out a battle-plan for Australian investors to profit as some of this keyboard-produced cash floods the ASX in 2011. Click here for more…

Today’s Money Morning contains a special surprise for you…

With the help of one of my colleagues I’ve produced a short cartoon video. It’s based on our revelations surrounding the Aussie banking bail outs.

Hopefully you’ll like it. And if you really like it perhaps you’ll forward it to your friends. Then they can find out what the mainstream press are too afraid to tell them.

But, before you watch the short video you’ll be pleased to know that the final piece of regulatory incompetence is in place. As you’ll remember we sent the following email to the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), and the Australian Securities Exchange (ASX):

“1. When did the RBA/APRA/ASX become aware of Westpac and NAB’s loans under the US Federal Reserve TAF programme?

“2. If the RBA/APRA/ASX was not aware of the loans under the TAF programme please explain why.

“3. If the RBA/APRA/ASX was aware of the loans please explain why this wasn’t considered to be important enough to inform the market?”

Before I run through the answers again with you I’ll mention one quick thing. We’ve received a number of notes from Money Morning readers in New Zealand. They suggest things are just as ropey there. Don’t forget that the Kiwi banking system is almost completely dominated by the big Aussie banks.

It’s clearly something we’ll need to look further into.

Anyway, the first responder to our questions was the RBA:

“The Bank does not comment on commercial institutions’ business dealings or transactions.”

Right…

Next came the reply from APRA (paraphrased from our notes of the telephone conversation):

“APRA is never in a position to discuss the institutions that we regulate.”

Er, thanks…

And finally, on Wednesday afternoon we received the following from the ASX:

“ASX does not discuss specific supervisory action it may be taking.

“Speaking generally, the obligation is on the listed entity to inform the market immediately that they are aware of any developments that may have a material effect on the price or value of their securities. It is not for ASX to ascertain if an issue is material. That is for each company to determine.”

Good grief. As Money Morning reader Ian described the regulators to us in a letter this morning. It’s like a “wall of silence.”

Anyway, after getting the reply from the ASX we shot back a quick question and comment for them – Gosh, your editor can be annoying!:

“I don’t understand. If that’s true, why does the ASX issue “speeding tickets” to listed companies? This is clearly a precedent of the ASX asking for a listed company to provide information to the market.”

We haven’t received a reply to that one yet.

But in just a handful of sentences you have the entire case for why regulations don’t provide protection for investors or consumers.

Simply because it’s generally not in the regulators’ interests. I know that sounds funny and counterintuitive, but it’s true.

It’s like the Stockholm Syndrome. In this case the banks are the hostage takers and the regulators are the hostages. They become reliant, dependent and dare we say it, friendly with each other. So much that the regulators begin to defend the actions of the organisations they’re supposed to be monitoring.

Why? Because should anyone point out misbehaviour by a firm it questions the effectiveness of the regulator. Why didn’t the regulator know about something? What did they do to stop it? And so on…

So, in order to avoid answering those embarrassing questions the regulators simply say, in the words of Sargeant Schultz, “I know nothing… NOTHING!”

And claim that everything is a secret. It’s best you don’t know.

But because we’ve drawn a blank with the hopeless regulators we’ve decided to go straight to the horses mouths. We’ve dropped a line to NAB and Westpac asking them when they notified the regulators about their Federal Reserve emergency loans.

Let’s see how they reply. Or whether that’s top secret too…

Look, let me make this clear. Don’t think we’re in favour of increased regulations, because we’re not. We believe the free market is best placed to regulate business activity not power-crazed bureaucrats.

The fact is, if it wasn’t for the government and central bank created fiat (paper) money system, banks wouldn’t have gotten themselves into the situations they did.

Banks wouldn’t have the legal authority to create money from thin air. And if they did it illegally by counterfeiting then depositors would eventually get wind of it and withdraw their savings. Effectively causing a run on the bank and sending it out of business.

Therefore banks would have a commercial interest in not creating money from thin air. If they did they would be aware of the consequences. And with no chance of a government or central bank bailout, only the foolhardy, corrupt and criminally minded banker would dare to produce counterfeit money.

Unfortunately, under the current banking system the foolhardy, corrupt and criminally minded banker is free to counterfeit. In fact, they are encouraged to do so by the politicians. You’ve heard them egg the bankers on, “You must lend more.”

And it’s all completely legal for them to do so.

In a nutshell, in a free market banking system there wouldn’t be a need for a regulator. Just a simple act of law making it illegal to counterfeit the currency. A law which is already in place but which somehow the banks are able to flout.

And importantly for you, the lack of a regulator, central bank and corrupt government would mean the banks would have no way to conspire. No way to keep a multi-billion dollar bail out a secret from the public… because they wouldn’t have gotten the bail out in the first place.

But anyway, if nothing else, the RBA, APRA and the ASX have proven themselves to be about as useful as a proverbial chocolate teapot.

Seeing as it’s your taxpayer dollars on the line, and seeing as we have to suffer with regulators, perhaps they could do you a favour by asking the two banks to explain their actions. And perhaps those same regulators could apologise for having misled Australian taxpayers and savers about the strength of the Australian banking system.

But for your benefit, here’s an example of some of the lies either knowingly or unknowingly peddled about the Aussie banking system:

“The resilience of the Australian financial system through the crisis period has reflected a combination of factors including the comparatively mild nature of the the overall economic slowdown in Australia, the absence of large-scale exposures to structured securities, and relatively conservative lending practices, particularly for housing.” – RBA, Financial Stability Review, September 2008 (News.com.au)

“The thing about the Australian banks is that they will come through this crisis extremely well… They are looking very strong… They [Australian banks] are among the safest in the world… They are some of the best banks in the world…” – Mike Smith, ANZ CEO, September 2008 (Heraldsun.com.au)

“First, our banking system has remained strong with the four major Australian banks now among just 11 AA-rated banks left in the world. The result is there’s been no need for government bailouts and not one cent of taxpayer money has been expended in supporting banks.” – Mike Smith, ANZ CEO, September 2009 (Moneymorning.com.au)

You can click on the link above to see how we knocked Mr. Smith down to size with his argument. And the NAB and Westpac Fed bailouts make his arguments look even more ridiculous.

And poor old Terry McCrann must be looking back at his April 2009 column feeling slightly miffed:

“The National Australia Bank kicked off the first set of Down Under bank profit reports in this time of global financial cholera.

“And every one of you should be glad it was a profit. Further, not just any old profit but one that was light years away from the dodgy numbers coming out of the Citibanks and Lloyds of Britain and the US.”

That would be the same Citibank and LloydsTSB who lined up alongside NAB and Westpac to snaffle a few billion dollars in emergency loans from the Federal Reserve.

As we’ve pointed out before, it’s no wonder the mainstream press has been so quiet on this. Pointing out the Fed bailouts now means contradicting everything they’ve written over the past two years about the so-called strong Australian banking sector.

And finally, before I let you sit back and enjoy the video, we noticed a strange article in today’s The Age and Sydney Morning Herald. It’s in the CBD column.

In a nutshell, it appears to be the Fairfax papers having a pop at your editor… for having a pop at the mainstream press – including the Fairfax papers. So we’ll have a pop straight back!

To be honest, we don’t understand the point the column is trying to make. And unfortunately we won’t find out until at least next year, because in typical mainstream journo fashion, the column advises readers that “CBD will return next year.”

Ah well, at least the NAB and Westpac bailout gets a second mention in the mainstream press… but rather than mentioning your editor we’d have preferred it if the journo had actually followed up on the NAB and Westpac story in more detail.

That’s obviously more than can be expected of the dismal Australian mainstream press.

Anyway, on to the video. It may take a few seconds to load. But I hope you enjoy it… click here. And don’t forget to pass it on if you like what you see.

Cheers.

Kris Sayce
For Money Morning Australia

The Secret Bank Loans saga continues. Your editor has lodged a Freedom of Information (FoI) request with the Reserve Bank of Australia (RBA).

From what we’ve been told, the RBA has thirty days to process our request.

In a nutshell we asked for all internal and external communications from and to the RBA about National Australia Bank [ASX: NAB] and Westpac’s [ASX: WBC] secret loans from the US Federal Reserve.

I’ll keep you posted on what happens next.

In the meantime, to amuse ourselves, we’ve trawled the RBA website to see what the Bank had to say about the health of the Australian banking sector during 2008 and 2009.

The best quote we could find was this from assistant governor Malcolm Edey in March 2009:

“I should stress, by the way, that Australian banks have been much more prudent than their overseas counterparts, and they have remained in sound condition throughout the crisis period.”

Yeah, at that time NAB had just borrowed it’s third amount of USD$1.5 billion from the Fed.

But still, the mainstream press fell for Edey’s claim hook, line and sinker at the time. We now know of course, thanks to the US Federal Reserve that Australia’s banks weren’t in a “sound condition throughout the crisis period” at all.

We know that because NAB and Westpac borrowed over USD$5 billion between them, and the RBA itself borrowed USD$53.5 billion from the Fed which it presumably used to bail out the local banks.

That aside, it seems our email to the Australian Securities Exchange (ASX) got stuck in the Interweb pipes somewhere – oh for a $40 billion national broadband network! – so we gave them a call this morning and have resent the email.

We’ve been told by the ASX, “Our Corporate Relations department acknowledges receipt of your expressions of concerns and will revert to you shortly regarding the progress of your query.”

Blimey, we’d just be happy if they replied. We’re not sure the RBA needs to “revert” to us as they weren’t us to begin with. But never mind. Who are we to comment on grammar? We been known to make the odd mistake.

Anyway, our level of expectation is pretty low. We honestly don’t believe the ASX is going to pull-up either bank on the lack of disclosure. And we can’t imagine the ASX will admit to having known about and suppressed information on the secret loans at the time.

Which would be pretty amazing considering how quick the ASX is to jump on most other companies if there’s even a whiff of non-disclosure.

We’ve even received a couple of emails from ex-CEO’s telling us how the ASX hounded them to disclose information to the market. And we see speeding tickets all the time, especially to small-cap stocks, asking the companies if there’s anything that should be made known to the market.

That two big banks can get off scot-free for not disclosing a USD$5 billion bailout from a foreign central bank would be amazing.

All we know is that it’s time for someone to do some independent forensic accounting on the banks. And seeing as no-one in the mainstream is prepared to do it, it looks like your editor will have to devote some of our spare time to the task – providing it doesn’t take away important research time for Australian Small-Cap Investigator of course.

I’ll keep you posted on how all this goes. In the meantime, what about those markets…

Money Morning reader Marko drew our attention to a lovely bit of mainstream mumbo-jumbo. It was in Glen Mumford’s Market Monitor column in yesterday’s Australian Financial Review (AFR).

We’ll confess to not having read it, but according to Marko, Mumford wrote:

“Sometimes it’s bad news, not good, that turns a market higher. So when I saw the US unemployment rate had unexpectedly jumped to 9.8 percent, I lifted my year-end estimates for the global indices…

“I see this as great ‘bad’ news for investors.”

We’re far from being surprised at the topsy-turvy logic of mainstream commentators. They go from one ridiculous statement to the next.

It’s funny how your editor is labelled a lunatic and nutter for questioning the mainstream view on the housing bubble, on the non-existent housing shortage, and on the fragility of Aussie banks, yet a mainstream commentator gets to write nonsense such as the stuff written by Mr. Mumford and it’s seen as sober economic analysis.

Analysis where good news is great and bad news is… at least good… but sometimes great as well.

It’s this kind of warped thinking that should keep you on high alert with this market. As I’ve said for some time, don’t be suckered into having too big an exposure to the stock market.

Sure, there’s a chance we could see the market rally through the New Year – the Santa Claus rally cliché – but it shouldn’t be banked on. And even if it does happen it won’t guarantee that markets will keep rising.

The past two years are proof of that. The market rallied through the end of the year, but then sunk like a stone afterwards:

Source: CMC Markets Stockbroking

Of course, in 2009 the market did pick up again as it soared over 50% in six months. But one year later from the November 2009 peak and ten months after the last Santa Claus Rally, the market is trading lower. Buy and hold investors who bought in expecting Santa Claus to weave his beardy magic have been sorely disappointed.

But back to Mr. Mumford’s comments. Look, he’s not the only one to take that line. They’re all at it. When there’s good economic news the commentators say that’s good for the market.

And when there’s bad economic news they say that’s also good for the market. But why? How can bad news be good news? And how can it be possible for stock markets to rise in both cases?

It’s simple, the mainstream numpties have lost their minds. They’ve lost all idea about how an economy works and how wealth is created.

They now seriously believe that if an economy can’t grow of its own accord then central bankers can make it grow – by printing money.

That’s what it comes down to. The markets now see any bad news as an excuse for the US Federal Reserve to turn to the printing presses. Because in their mind, more money means more spending and more spending means higher asset prices and greater wealth.

Sure, I’ll admit that part of that argument could be true. That asset prices could see a massive price spurt – in fact we’re playing for that possibility with our Australian Small-Cap Investigator tips. But where we differ from them is our view that they won’t get the outcome they think they’ll get.

There’s no guarantee that it’ll lead to more spending – in fact we hope it doesn’t. And even if it does have an impact on asset and commodity prices, chances are it will only be temporary. And it most certainly won’t result in greater wealth – or not for most people anyway. The bankers and bureaucrats will do fine – as always in a corrupt system – but most everyone else will lose out.

But we’re prepared to take a punt that stock prices will move higher. Although we wouldn’t bet our house on it. And you shouldn’t either. We certainly wouldn’t be over-exposed to the stock market as most mainstream advisers would recommend.

In fact, personally we’ve got less than 20% of our liquid assets in shares. And we’re quite comfortable with that thank-you-very-much… but we’re also ready to dump even that small amount if we think the market is set to head south.

The reason for that is how the stock market is being manipulated right now.

As you know, the US Federal Reserve has a policy of quantitative easing (QE), even though it doesn’t like calling it that.

In simple terms, what the Fed is doing is creating new money by keying in a few numbers into its balance sheet. Once it does that it buys US government bonds on the bond market.

The theory is that this newly created money will be used by investors to buy assets including shares and other commodities. Plus, because the Fed is acting as a guaranteed buyer of government bonds, investors are happy to buy new issues of bonds direct from the US Treasury.

That in turn guarantees that the US government will be able to raise the money it needs to finance its spending programmes.

But what started out as infrequent buying by the Fed has turned into something more frequent. In fact, the Fed is now buying US government bonds every day.

Aside from the Thanksgiving Day holiday and the days either side of it, the Fed has bought US government bonds every day since 12th November.

Since that date the Fed has bought roughly USD$95 billion of US government bonds. Estimates were that the Fed would buy around USD$100 billion per month until next June.

That would be enough to cover the USD$600 billion set aside for QE2, plus extra to continue the so-called reinvestment in government bonds of funds realised from the maturation of residential mortgage-backed securities.

It’s surely no coincidence that since then the market has rallied higher from what our technical analyst, Slipstream Trader Murray Dawes says is a crucial level on the S&P500 index at 1,174:

Source: Google Finance

And that’s the thing. Aside from the Fed creating electronic money from thin air in order to buy government bonds and help prop up the stock market, we see little evidence of any other reason to buy stocks – not unless you’re prepared to take a few high risk and short term swings at the market that is. Although fair play to him, Diggers & Drillers editor Dr. Alex Cowie has played the recent commodity boom like a peach, bagging a number of big winners for his readers.

But I still say it’s not the market to just buy at any old price. And on that score the Stock Doc and I agree.

As I’ve written before, there’s now chatter on the markets about the Fed looking at doing a QE3. In other words, extending the bond buying programme and creating even more new money from thin air.

But at what point does this become old hat for investors. At some point the Fed’s buying will reach a stage where it needs to create ever greater amounts in order for it to achieve the same effect as before. That’s when the buying goes exponential and investors soon realise the game is up and look for the exits… just like with any other bubble.

Of course, the problem – again, as with all bubbles – is knowing when the peak has hit. We’ve picked it for the top of the housing market, but picking the top of the bond and money printing bubble (or maybe we’ll call it a “central bank bubble”) could be a whole lot harder.

The simple message is, if you intend on buying stocks do it with extreme caution. And don’t fall for the idea that both good and bad news is good news for stock prices. Plenty of mainstream investors will find out the hard way when the central bank bubble pops.

For our part we note the Perth Mint now accepts online orders for gold and silver bullion… we know what we’ll be doing as soon as we’ve written our weekly update to Australian Small-Cap Investigator subscribers.

Cheers.

Kris Sayce
For Money Morning Australia

You’ve read a lot about the banks in Money Morning during the past week. And today is no different. So strap yourself in…

Yesterday we gave you the reply we’d gotten from the Reserve Bank of Australia (RBA). We’d asked them when the RBA had been told about National Australia Bank [ASX: NAB] and Westpac’s [ASX: WBC] secret loans from the US Federal Reserve.

Its spokesman wrote, “The Bank does not comment on commercial institutions’ business dealings or transactions.”

This apparently even extends to when the taxpayer is also underwriting the banks.

Its funny isn’t it. When you apply for a loan with a bank they quite rightly want to know what other loans you have. That way they can supposedly figure out whether you can afford the repayments or not.

Although over the past thirty years we’ll admit, even that is less important than it used to be. Because over that period it was assumed asset prices would always rise and therefore borrowers were given bigger loans – if they defaulted, no problem, just sell the mortgaged asset at a profit… easy.

Yet when it comes to the taxpayer underwriting loans to banks it seems to be a different story. Everything must remain top secret. The RBA “does not comment…” So there.

So while the taxpayer was told about the deposit guarantee and the wholesale funding guarantee – big enough obligations by themselves – the taxpayer was kept in the dark about the USD$53 billion of loans the RBA had taken out with the Fed. Again, backstopped by the Australian taxpayer.

And the taxpayer wasn’t told about the over USD$5 billion of obligations to the US Federal Reserve that two of Australia’s banks had committed themselves and the taxpayer to.

But the RBA isn’t the only regulator to lose its tongue.

We spoke to Andrew McCutcheon, Media and Communications Manager at the Australian Prudential Regulation Authority (APRA). We’d sent APRA the same email that we’d sent the RBA last week.

We wanted something in writing but Andrew preferred a phone call. Hopefully you’ll forgive us, our shorthand isn’t what it used to be. Actually, that’s not saying much, our shorthand has always been bad.

So we’ll just have to paraphrase the response.

Andrew tells us that Section 56 of the Australian Prudential Regulation Authority Act 1998 forbids APRA from revealing any information regarding the institutions it regulates!

What? How does that work? What’s the point of a regulator if everything is top secret?

Although we’re not surprised he won’t tell us. According to the Act there’s a penalty of two years imprisonment for revealing secret information on the banks.

You can check out the full Act by clicking here.

And here’s the best thing, Section 56 comes under Part 6 of the APRA Act. The heading for Part 6 is… of course… Secrecy.

And because it’s top secret, the Act informs you that “A document that: (a) is a protected document; or (b) contains protected information; is an exempt document for the purposes of the section 38 of the Freedom of Information Act 1982.”

As I say, your editor is no legal eagle. Our only legal training was gained from the Matlock School of Lawyering followed by a post-graduate qualification from the Rumpole Academy. But even that limited training tells us that APRA will never reveal the full extent of what it knew and when it knew it about the Aussie bank bailouts from the US Federal Reserve.

So, the last response we’re waiting on is from the Australian Securities Exchange (ASX). But considering we’re yet to see a notice appear against NAB or Westpac’s names we can assume either the ASX already knew about the secret bailouts and aided the banks in keeping it a secret, or it’s going for the old head-in-the-sand routine.

Quite frankly, either explanation is possible.

And don’t think there are any Australian politicians who are keen to expose the bankers. Unfortunately Australia doesn’t have an equivalent of Ron Paul in Federal Parliament. Someone who’s prepared to stick up for sound money.

Instead, you’re more likely to get the kind of response that Money Morning reader Stuart apparently received from Joe Hockey’s office:

“Dear Stuart

“Thank you for your email to Mr Hockey.

“The Australian banks were not bailed out by the US federal reserve [sic], nor was the Reserve Bank of Australia. As NAB is a public company it would have needed to disclose this to the market, and I can assure you that it did not.

“Yours sincerely

“Alistair”

We’ve not idea who “Alistair” is, but he may want to check his facts. As he seems to have got his logic in a muddle. His argument seems to be that because neither NAB nor Westpac disclosed the bailouts to the market then the bailouts didn’t happen.

Even though they did. Because it’s there in black and white on the Federal Reserve website. But no, a public company would have to disclose that information, and because they didn’t, no bailout!

Madness.

Even the mainstream press has pointed out the bailout dollars received by the RBA from the US Federal Reserve.

And even the mainstream press has acknowledged that Australia’s banks would have received some of that cash as emergency loans.

The fact that NAB received USD$4.5 billion of US Federal Reserve bailout money but didn’t report this to the ASX – or if it did the ASX agreed to keep it confidential shows you this cover-up has gone right to the top.

But as the Wikileaks disclosures show you, governments worldwide – including Australia – have plenty they need to cover up.

Politicians, bureaucrats, conservatives and socialists are all labelling the Wikileaks revelations as treasonous or at least criminal.

We take the opposite view. We take the view that the kind of corrupt and inappropriate behaviour revealed in those documents proves how dangerous it is to have glorified town councillors in positions of immense responsibility.

Put it this way, if you tell your American friend to whack your Chinese friend on the nose, who gets hurt? Well, the Chinese fella obviously. And he may not take too kindly to what you asked your American friend to do.

But that’s pretty much the extent of the damage.

But if a glorified town councillor like the Fairy Ruddfather asks his American buddies to bop China, who gets hurt then? Potentially everyone.

A career in politics for most people in our opinion is simply an attempt to gratify a perverse urge to control others. It’s the same urge from town councillor all the way up to Prime Minister.

Anyway, it seems to be the more we dig, the more we’re prevented from digging. Neither APRA nor the RBA have any interest in keeping you informed about the safety of your taxpayer dollars and your savings… we don’t like that.

However, we have seen several comments that suggest NAB and Westpac were simply doing what any bank should do, access funds for a cheap interest rate from the Federal Reserve.

That the banks were simply borrowing cheap money which they could then lend out for a higher rate and pocket the difference.

It’s a nice line. And it could even sound plausible – if it wasn’t complete nonsense.

Let’s not beat around the bush here. NAB and Westpac borrowed from the US Federal Reserve because they had to. And the Reserve Bank of Australia borrowed from the US Federal Reserve because it had to – because it needed to bail out Australian banks.

The idea that NAB and Westpac executives suddenly decided to borrow cheap out of choice is ludicrous. It ignores the entire reason why these emergency loan facilities were made available by the Federal Reserve.

You see, it’s true that banks borrow money all the time. That’s how they work. They borrow money from depositors. They then create ten-times the deposited amount in new money to lend out to borrowers. All the while, the depositor is free to withdraw his or her money on demand.

But we won’t worry about that last aspect today. We’ve covered that before. Banks borrow money for short-term and long-term durations. That means on any given day a bank has to roll-over a loan.

Simply put, if a bank takes out a loan for a 30-day duration then at the end of 30 days the bank needs to repay the loan or it needs to roll it over to a new loan. In normal circumstances, when everyone was happily – and foolishly – lending money left, right and centre, this was pretty easy – out with the old loan, and in with the new.

But then through 2007, 2008 and early 2009, you remember what happened don’t you? The “credit crunch” occurred and lending ground to a halt.

Now, that was a good thing. It should have been the beginning of the end for the current unstable and corrupt banking system. But the central bankers, politicians and mainstream economists thought they knew better.

Instead of acknowledging the dangers of a highly leveraged banking system and allowing it to collapse, they didn’t want that happening on their watch. Hence the bailouts. Bailouts that have only succeeded in postponing the natural consequence of the credit meltdown.

Anyway, can you guess what happened to the banks?

That’s right the banks needed to repay loans but found it hard to borrow the money to pay off those loans.

So, in order to meet short-term loan repayments, the banks needed a bailout from the US Federal Reserve – the loans to Westpac and NAB that we know about – and from the RBA – loans to the banks that we assume will remain top secret.

Without those loans the banks wouldn’t have been able to meet their obligations to repay short-term funding. And if the banks couldn’t repay their short-term funding… they would have defaulted and you would have seen a run on the banks.

That’s why the banks took the loans from the Fed and the RBA. Not out of choice. Not because they recognised an opportunity to make a quick buck. They did it because they had to. They had to in order to not go bust.

But the other thing that amazes us about this is the lack of interest from the hopeless credit rating agencies.

As we’ve pointed out, without the loans from the Fed and RBA the banks would have defaulted on their obligations. Yet the banks retained their AA ratings throughout. And despite this info now being made available to the public, the banks are still double-A rated.

You probably remember all the guff spouted by the Aussie banking execs about how our top four banks all have double-A ratings. How they are four of only twenty banks in the world to hold a double-A rating.

A double-A rating that means nothing when the four banks were obviously within days of collapse. A sure thing if it wasn’t for the Fed chucking them a few billion to tide them over.

But as I say, don’t think that means you should heap praise on the Fed or Ben Bernanke for having saved Australia’s banks from collapse, because you shouldn’t.

All this sorry affair has done is prolonging the pain. Pain that would have been swift and sharp in 2008 has turned into something that will last for years, possibly decades.

Even Ben Bernanke has admitted on 60 Minutes in the US that:

“At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate”.

So much for saving the economy. Ruining it more like.

Make no mistake, the Australian banking system was bailed out in 2008 and 2009 just like most other banks around the world.

We figure that’s the reason why the mainstream press has completely ignored this story. Because it rubbishes their entire argument about the strength and stability of Australia’s banking system.

It isn’t strong, it’s just like the rest – perpetually on the verge of collapse.

Cheers.

Kris Sayce
For Money Morning Australia

It’s time for an apology. No, not from your editor. We’re always right, so there’s no need to apologise [wink].

Instead the apology needs to come from the Australian mainstream financial press. The same financial press that told you Australia’s banks were strong.

That Australia had the best prudential regulation in the world. That Australian banks were different to all those dirty foreign banks.

But an apology also needs to come from the banks who themselves claimed things were different here. And that Australia’s banks didn’t have the same solvency problems as US and European banks.

Why do they need to apologise? Well, two years after the global financial markets collapsed, a secret bailout of two of Australia’s biggest banks has been revealed.

This is pretty big news. Or rather, you’d think it would be pretty big news. But as you can imagine there’s almost uniform silence from the banks and the mainstream press.

Shortly after we sent you yesterday’s Money Morning we decided to do a bit of fishing around on the US Federal Reserve website. You see, earlier that morning the Fed had released some pretty hot material, and we wanted to see what it contained.

What we found shocked us. Although it really shouldn’t have, because we knew the claims about the Australian banking system being strong and robust were complete lies anyway.

In fact, so shocking is this revelation that we considered sending you a Money Morning special edition yesterday afternoon. But we didn’t. We’re fed up of giving the mainstream scoops which they then claim as their own.

Instead we thought we’d wait to see if the Australian mainstream press picked up the story first.

Surprisingly they have. But not with any enthusiasm. And hardly with what you’d call any effort. Probably because they’re a bit sheepish about the fact the banks and regulators have made fools of them. I’ll provide you with the link to the one story on it in a moment.

So excited were we to see how the mainstream had handled this story we did something we normally never do – enthusiastically open the Australian Financial Review (AFR).

The first thing we did was check the Companies Index on the back page. This was promising, the two banks in question were mentioned. We eagerly flicked through to the relevant pages… and drew a blank.

Not a single mention of it. So we started from the front and worked our way quickly through the paper… page seven… here it is… “Rescues: RBA borrowed billions from Fed” was the headline… but no, this isn’t what we’re looking for.

On we went, past the big centre-fold spread telling readers that the AFR contains, “Up-to-the-minute market information, news, commentary and expert analysis… All from just $44 per month”.

We continued… through to the end. Not peep. Not a single mention.

And the AFR is supposed to be Australia’s premium business newspaper. We wouldn’t have thought so.

About all it’s good for is lining bird cages in our opinion.

But then, we guess if the AFR exposed the banks’ duplicity it wouldn’t be able to get an interview with the likes of Commonwealth Bank of Australia [ASX: CBA] CEO Sir. Ralph Norris.

Said person is the feature item in the Boss glossy mag insert in today’s AFR.

We can’t be bothered reading it. It’s surely pap.

But anyway, what the heck are we going on about? This…

I’m talking about the near collapse of the Australian banking system in 2008. I’m talking about the likelihood of two Australian banks collapsing in 2008 if they hadn’t secured a secret loan from the US Federal Reserve.

The fact that National Australia Bank [ASX: NAB] had to borrow USD$4.5 billion from the US Federal Reserve during 2008 and 2009.

And Westpac Banking Corp [ASX: WBC] needed USD$1.09 billion in January of 2008 and 2009.

What’s that, you don’t know anything about it?

And you don’t remember reading about it?

There’s a simple reason for that. It’s been top secret information until yesterday morning.

That’s right, if it wasn’t for the passing of controversial legislation in the United States you’d never have found out about NAB and Westpac’s Federal Reserve bail outs.

And based on the lack of interest from the mainstream press – including Australia’s so-called premium business newspaper, if it wasn’t for Money Morning you’d still be none the wiser.

The one and only article we’ve found that mentions it is this one from The Age, headlined “NAB, Westpac tapped Fed”.

It appears to be an adaptation of a New York Times article based on the reference at the end, with localised bits added by Eric Johnston. But this one pathetic effort shows just how clueless the Australian mainstream press is.

Johnston makes this comment:

“The Westpac borrowings are unusual, as it barely has a North American presence, operating only a US representative office.”

Seriously, do I really need to explain it to a veteran journalist?

Talk about not being able to see the wood for the trees. Talk about not getting it.

Here’s a clue for Mr. Johnston, it wasn’t Westpac’s US office that needed the dosh, it was Westpac in Australia that needed it. It shows you that without the direct financial support of the US Federal Reserve Westpac and NAB would have been toast.

Westpac and NAB needed the loans because they were on the verge of going belly up. It’s that simple. If they hadn’t gotten secret loans from the US Fed they would undoubtedly have needed secret loans from the RBA.

Fortunately for the RBA, the Fed opened the door and this allowed Aussie central bankers and bankers to claim that the Aussie banks hadn’t received a bailout.

But not only that, what’s most extraordinary is that Westpac was one of the first institutions to borrow money from the Fed when the lending facility became available!

But more about that in a moment. Let me give you some of the background first…

You may have read about something called the Dodd-Frank Act. The full name is the Wall Street Reform and Consumer Protection Act. It’s called Dodd-Frank after the bill’s sponsors, US Senator Chris Dodd, and Representative Barney Frank.

The legislation mandates a number of things, but part of it is the requirement for the US Federal Reserve to reveal which institutions it loaned money to under the various bail out programmes.

One of those programmes was titled the Term Auction Facility (TAF). According to the Fed’s website:

“Under the program, the Federal Reserve auctioned 28-day loans, and, beginning in August 2008, 84-day loans, to depository institutions in generally sound financial condition…

“…Of those institutions, primary credit, and thus also the TAF, is available only to institutions that are financially sound.”

OK, so only “financially sound” institutions were eligible for TAF loans. That would be financially sound institutions such as LloydsTSB plc which got a USD$10.5 billion loan from the Fed and which later had to be partially nationalised by the UK government.

It would also include ABN Amro Bank which grabbed USD$1.5 billion of loans from the Fed, and which would later cause such a financial strain on Royal Bank of Scotland (RBS) after RBS bought it that the UK government had to partially nationalise it too.

Not to mention the USD$53.5 billion of loans RBS needed directly.

Then there was Allied Irish Bank, who could forget it? The Irish certainly won’t.

Between February 2009 and February 2010 Allied Irish Bank needed USD$34.7 billion of loans from the Fed. Allied Irish Bank also had all its obligations guaranteed by the Irish taxpayer and is the primary reason why Ireland now requires an International Monetary Fund and European Union bailout to the tune of $113 billion.

And what about Bayerische Landesbank which needed a USD$13.4 billion bailout from the state of Bavaria? Well, apparently it was financially sound enough to borrow USD$108.19 billion between December 2007 and October 2009.

So, we can take with a grain of salt the Fed’s claim that only “financially sound” institutions had access to the TAF programme. Financially unsound and insolvent banks were given loans too.

And in the middle of all that wheeling and dealing, when a total of nearly USD$4 trillion was loaned to and repaid by “financially sound” institutions, Australia’s very own National Australia Bank and Westpac were in on the action too.

Although it was only a relatively small amount compared to some of the other transactions, it was still USD$4.5 billion and USD$1.09 billion respectively. But it was still a lot more than the USD$1.5 billion needed by financially unsound ABN Amro.

Also don’t forget that the NAB went to the Australian stock market in late 2008 to raise $3 billion. That was a sum it needed to bolster its capital.

If $3 billion was a significant and important number for the market to know about then surely USD$4.5 billion (about AUD$7 billion at the time) was even more crucial for the market to be aware of.

But there wasn’t a peep from them.

Because as I say, you didn’t know anything about the NAB’s and Westpac’s Fed loans. It was all top secret.

And it’s obvious that $3 billion capital raising still wasn’t enough because NAB had to go begging to the Fed twice after that for $1.5 billion a time.

But as I say, you didn’t hear a word about this at the time. It was all top secret. But that didn’t stop the bankers and regulators and politicians from posturing about the stability and strength of Australian banks.

In January 2008 Westpac denied there was a problem with its US exposure. That’s despite the fact just one month before, on December 20th 2007 Westpac had gotten a USD$90 million loan from the Federal Reserve under the TAF programme.

Not only did it get the loan, but it was one of the first in the queue! As you can see from the screenshot below (click to enlarge):

Source: US Federal Reserve

You can check out the full details here by downloading the spreadsheet.

You’ll note that Westpac applied for the loan on the same day as Citibank (bailed out by US government), Lloyds TSB Bank (bailed out by UK government), Bayerische Landesbank (bailed out by Bavarian government), and Societe Generale (which was bailed out by the US government courtesy of the AIG bailout against which SocGen had a massive CDS exposure).

In other words, we’re talking about a rag-tag bag of insolvent banks. And our own insolvent bank – Westpac – was amongst the thick of it, begging for an emergency loan from the US Federal Reserve as soon as the doors were opened.

It’s something you’d think would be of interest to shareholders don’t you? But there wasn’t a word from them.

And it must now make the Reserve Bank of Australia (RBA) feel foolish, considering in September 2008, just before NAB sought the Fed’s help, the RBA wrote:

“The Australian financial system has coped better with the recent turmoil than many other financial systems. The banking system is soundly capitalised, it has only limited exposure to sub-prime related assets, and it continues to record strong profitability and has low levels or problem loans. The large Australian banks all have high credit ratings and they have been able to continue to tap both domestic and offshore capital markets on a regular basis.”

Tapping “offshore capital markets” obviously included the US Fed.

So we wonder, how much did the Reserve Bank of Australia know about this? While it was talking up the strength of the Australian banking system did it know that two of the four Australian banking pillars were desperately seeking loans from the US Fed?

Or, like you, was the RBA in the dark? And what about the Australian Prudential Regulation Authority (APRA)? We’ve been told they’ve done all manner of stress tests and the banks passed with flying colours.

How can that be possible if Westpac and NAB need emergency loans from the US Fed? Was this included in the stress tests?

Anyway, we’d like to know. So we’ve fired off emails to the RBA, APRA and the Australian Securities Exchange (ASX) asking them these simple questions.

• When did the RBA/APRA/ASX become aware of Westpac and NAB’s loans under the TAF programme?
• If RBA/APRA/ASX were not aware of the loans under the TAF programme please explain why.
• If RBA/APRA/ASX were aware of the loans please explain why this wasn’t considered to be important enough to inform the market?

We’ll let you know if or when we get a reply.

But it wasn’t just Westpac that kept quiet about it.

NAB chairman Michael Chaney must surely have realised what he was saying when he made the following comment at the December 2008 annual general meeting:

“Our traditional banking and wealth management operations are all profitable, strongly capitalised and conservatively funded. In addition, our banking businesses have sound asset quality and are well provisioned.”

So sound was the asset quality that just six weeks earlier NAB’s New York branch had to arrange a USD$1.5 billion loan at an interest rate of 0.6% with the US Federal Reserve.

All under a shroud of secrecy.

All under the belief that no-one would ever find out about it because no-one could find out about it. The Fed at that time was under no obligation to reveal which banks were taking short term loans from the Fed…

Until the Dodd-Frank Act was passed.

Look, we’ll say we told you so. We’ve claimed all along that Australia’s banking system is no different to any other. It’s inherently insolvent – as are all modern day banks.

Along the way we’ve been called a “lunatic” and a “nutter” for writing what we believed to be true. And would you believe it, once the secrecy of corrupt governments and bankers is revealed this “lunatic” and “nutter” has been proven correct.

But I understand it may not seem like that at the time. Yesterday we received this email from a Money Morning reader:

“Hello Kris

“I don’t normally send comments to publications nor do I sit there and read others comments, however, yesterday I came across a sticker on a car bumper. When I read it, I immediately thought of you and I think you will like it too.

“‘Do not steal. The government does not like competition.’

“I enjoy reading your daily newsletter. Even though some of your theories sound crazy at the beginning, it’s funny how they do in the end sound believable. We do live in a world where some people do not put other peoples’ interest first.

“Lisa”

It’s true. Government is above the law. It can legally steal private property – it’s called taxation. Nice trick huh!

But Lisa hits the nail on the head. What you read here may sound crazy, but it only sounds crazy because it’s outside the norm. It’s different to what you read anywhere else.

And that’s simply because we don’t have to worry about what our advertisers think – because we only advertise our own services. And we don’t have to worry about turning readers off with our seemingly radical ideas, because most of our readers come here because of those radical ideas.

My guess is you’re fed up with being told the same rubbish day-in and day-out by the mainstream press. A mainstream press that reports from press releases, and trusts whatever it is the guys in government or on Wall Street say.

In contrast we’ve learned to doubt everything they say.

We take the view that anything a mainstream economist or analyst says is wrong. It’s up to them to convince us they’re right. Very few of them succeed because ultimately… I hope this doesn’t sound arrogant, they are wrong.

The state of Australia’s banks is a perfect example. For the past two years you’ve had to put up with a constant drone of commentary from the mainstream telling you that Australia is different.

As I say, this bombshell from the Federal Reserve proves otherwise. And it proves we’ve been right to call the Aussie banks for what they are.

Maybe our claim about NAB’s system shutdown last week being caused by a solvency problem rather than a computer glitch still seems crazy to you. But we wonder, after reading today’s Money Morning, perhaps it now sounds just slightly less crazy than you first thought…

And furthermore, it must surely make you wonder what else it is the government and central bankers are keeping secret. Most of which will probably never be revealed.

All you and I can do is use our scepticism and questioning brain to figure out what’s really happening. Because more often than not, the story the mainstream peddles is as far from the truth as you can get.

Yesterday’s revelation from the US Federal Reserve about NAB’s and Westpac’s secret loans is a perfect example. We look forward to getting a reply from the RBA, ASX and APRA about how much they knew and when…

But we won’t hold our breath.

Cheers.

Kris Sayce
For Money Morning Australia

In a couple of weeks the RBA will release the full minutes of the meeting. If the official version is anything like the previous versions it will mention international economic conditions, domestic economic conditions, financial markets, and considerations for monetary policy… Blah, blah, blah.

Of course the unofficial version goes something like this: [pump, pump, pump...]

For all the bluff and bluster about wanting to return interest rates to “normal” levels, there’s absolutely no doubt that the RBA lost its bottle.

It knows the impact that higher interest rates will have on the economy and so chose to take the cowards’ way out. The decision means the era of cheap money and easy credit continues. And that crazy housing bubble will last a while longer yet.

But yesterday’s decision by the RBA really shouldn’t come as any surprise. After all, as we pointed out in Money Morning on December 4 following Westpac’s interest rate increase of 0.45%:

“So, come next February and the next interest rate decision will the bank increase rates again because that’s what they planned to do anyway. Or will it cut them to take into account that Westpac has increased them too much? Or will it just leave the rate as it is?”

The fact is, last December Westpac played the RBA like a violin. In the same article we went on:

“All Westpac was doing was betting on the RBA continuing to increase rates through the early part of next year. Quite clearly, it’s [sic] thinking was, if the RBA is going to put rates up and harm all the lovely lending banks do, why not get in first and at least try and make some money out of it.

“That’s what they did. Their first gamble was that the other banks would follow. Their second gamble was that the RBA might think again about increasing rates at the February meeting, seeing as the banks were increasing rates anyway.”

And that’s exactly what happened. The poor little power-freaks on the RBA board who think they can tweak financial markets at their whim received a lesson from the bankers at Westpac.

As the RBA admitted in its statement:

“Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point.”

And not only that, but the bankers have backed the RBA into a corner so tight it’s in danger of crushing Governor Glen Stevens’ wooden head.

A new moral hazard

Just as the bank bail outs gave the banks carte blanche to take as many risks as they like – moral hazard, knowing full well the government will save their bacon, so the RBAs move yesterday has let the banks know that if they act independently of the RBA by increasing rates then the RBA won’t do anything.

That means bigger margins for the banks, higher interest costs for you, and a lame duck reserve bank. Not that that will stop it from fiddling with what it shouldn’t.

But let’s be honest, what is the point of the RBA? As we’ve mentioned before, it’s failed spectacularly in its main aim of providing a stable currency. Inflation of the money supply is proof of that. As our sometime contributor and ex-builder, Mark Thompson commented last year, it gets a “Grade F” on that score.

The general idea of having a group of half a dozen or so individuals invincibly setting interest rate levels is ridiculous. There’s nothing the RBA does that couldn’t be done better by the free market.

I mean, you don’t even have to look past the quarter-percentage point steps the RBA uses to raise or lower rates. Apart from it being a “tidy” number, what is the logical reason for moving rates by increments of 0.25%?

Why not 0.24% or 0.26%?

When you look at interest rate movements on the markets you don’t see them move in increments of a quarter point. Rates change on increments of 0.01%. Why does that happen? Because the free market demands it.

If futures markets traded in increments of 0.25% then few, if any traders would play along. In contrast, the RBA has no such market dynamic. It has a government mandated monopoly over interest rates and therefore can do how it pleases – it’s the same for all central banks.

Take a look at the table below of the ASX Target Rate Tracker:

The table shows the market expectation for an interest rate rise at the March RBA meeting.

Until yesterday, the financial markets had factored in a 100% chance of the RBA increasing rates by 0.25% in March. It was as dead a cert as you’ll ever see.

But then following yesterday’s RBA decision to not raise rates, suddenly markets don’t have a clue. Now the futures markets are only pricing in a 30% chance.

Last December we wrote that we’d like to give Westpac bankers a high-five for their ingenious decision to increase rates higher than the RBA move. We bet the other banks wish they’d followed Westpac’s lead and increased by the same amount.

Well today we’d like to give Glen ‘Woodenhead’ Stevens and his RBA buddies a slap across the chops for manipulating the markets.

Legalised market manipulation

And look, that’s exactly what it is. If any other private citizen or private firm intentionally manipulated financial markets for their own benefit as the RBA board members do, they’d be up before the beak quicker than you can say ‘monetary policy.’

That’s right, and I do mean for their own benefit. Maybe they don’t gain financially from it, but they gain mentally. It’s an ego thing. In their own mind they know the power they have to influence markets and they wield it with pride.

The fact is, holding rates at artificially low levels is doing irreparable long term damage to the economy. But it shouldn’t be left to a bunch of superannuated public servants and control freaks to determine the level of interest rates, it should be left to the free market.

Consider that table again. What is the market betting on? The truth is we don’t know. And the market doesn’t either.

The market is confused. Does it bet on an interest rate rise because market players believe an interest rate rise is necessary? Or does it bet on whether it thinks the RBA board thinks an interest rate rise is necessary?

And to take the manipulation further, the RBA board is trying to work out whether and how much the banks will adjust their interest rates before it decides whether to raise rates. So market players have to consider whether banks will independently raise rates in order to determine whether the RBA will raise rates…

Talk about a mess. It’s more like a standoff at the OK Corral than the functioning of a free market.

Think about it this way. For the past month individuals and businesses across the land have made decisions on their personal or business finances based on what they think will happen with interest rates.

The consensus among almost everyone was that interest rates would rise yesterday. So individuals and businesses may have acted accordingly. They may even have locked in a fixed interest rate in anticipation of it.

Or they may have bought Australian dollars and sold US dollars believing the rate would increase and the Aussie dollar would rise further or remain steady. Whatever individuals and businesses have done they’ve done so based on what they thought the market was telling them – that interest rates would rise.

Then what happens. The muggins’ on Martin Place decide to pull a fast one and not move rates. The outcome is that quite possibly hundreds of thousands of market players have been hoodwinked by the RBA.

But what would have happened in a free market? For a start, in a free market you wouldn’t get manipulation from government and government agencies.

Market players would make decisions free of manipulation by government. The market would send clear signals about which way interest rates were tending and people would act accordingly.

That very action would cause interest rates to move over time. The free market would eventually push interest rates to a level determined by free market forces.

Central banks create false signals

The problem with a manipulated market is that people see false signals. In hindsight people were fooled into believing the RBA would return interest rates to “normal” levels. And they were fooled into thinking that because it was the message coming from the RBA and all its mouthpieces in the mainstream press.

But then the RBA punched market players – that includes you by the way, individuals comprise the market as much as anyone else – in the guts by saying, “not so fast, we’ve changed our minds.”

Sure, in a free market individuals and businesses can change their minds and their priorities too. The difference is no one person or organisation would have the same level of control over the entire market.

No one person or organisation would be able to impact the personal or business decisions of millions of people through a single act.

Yet again, it’s the government’s banker that has decided who the winners and losers are rather than a genuinely free market. We can only hope the RBA is abolished before it gets the chance to celebrate its 60th birthday in nine years time…

Somehow and unfortunately, we can’t see that happening.

Cheers.
Kris.