This morning, sad news from across the Pacific Ocean. US car maker Chrysler has filed for chapter 11 bankruptcy protection. We thought a poem would be in order. Written in the style of EJ Thribb…

So. Farewell
Then
Chrysler Motors.

You made cars
For 83 years.

But they were
Rubbish
And no-one bought them.

So now
You
Don’t.

Why You Should Think Twice Before Investing in the Banks

We wrote to Australian Small Cap Investigator subscribers recently that we can think of many more things we’d rather do than sit through boring earnings conference calls.

However, it’s part of our job. So if we think the event is worthy enough we’ll load up with a cup of coffee and a biscuit and tune in. If we’re lucky it’s a video web conference, so we can see the superstars of the corporate elite in action.

That’s what we did on Tuesday and Wednesday morning. First it was the National Australia Bank [ASX: NAB] earnings. The following day it was the turn of the Australia & New Zealand Bank [ASX: ANZ]. And this morning we’ll try and tune into the Macquarie Bank results.

As painful as it was, we’re glad we sat through it. Because we it clarified one thing in our mind…

I don’t think I could ever recommend investing in a bank again.

We’ve sat through bank earnings conference calls before so it really shouldn’t come as any surprise to us. Maybe it was ANZ CEO Michael Smith’s relaxed manner, and the ’she’ll be right mate’ tone.

Actually, we think it was a bit more than that. The truth is the results were completely incomprehensible.

Take a look at the following to slides lifted from the ANZ presentation. The first one supposedly shows the comparison of profits between the first half of 2008 and the first half of 2009…

Got it? It is supposed to show… actually, we’ve got no idea what it’s trying to show. But here’s what ANZ CFO Peter Marriott said about the slide:

“When you look at that waterfall chart there you see clearly the highlight is just how strong the income growth has been.”

We’ll have to take Mr. Marriott’s word for that. And how about the following little gem…

Again, answers on the back of a postcard to explain this one. We especially like the inclusion of ‘Accounting noise’ as a reason to declare an increase in Net Interest Margin.

How much confidence does this give you that the banks know what they’re doing? Let me put it this way. At the ANZ presentation was CEO Michael Smith and CFO Peter Marriott.

Watching the presentation in Melbourne and Sydney were the best and fairest of the Australian banking analyst community.

Fortunately your editor doesn’t have to spend his entire day analyzing banking stocks. But these guys do. And even they struggled to make head or tail of ANZs results.

If you’ve got the time to waste, you can view the full video and slide show of the presentation on the ANZ website by clicking here. Remember to load up on the coffee and biscuits first.

As with all of these things we’re looking for a soundbite. Not to take something out of context, but just a word or a phrase that sums up in a few seconds the entire presentation. And if we get really lucky we’ll find a soundbite that sums up the entire mess engulfing the banking system and the economy.

As luck would have it, we found just that. This was it…

“The general public still don’t fully understand this. The government has not put one cent of taxpayer money into the banking system. In fact it is receiving substantial amounts of income for its wholesale guarantee programme.”

According to yesterday’s Australian Financial Review (AFR), the government has picked up a whopping $226.9 million. How can we argue with that? It’s a good investment decision by the government surely?

Only it isn’t is it. Here’s why.

Let’s take Mr. Smith’s comment that “The government has not put one cent of taxpayer money into the banking system.”

If we take the point literally, then he is correct, the government has not given the banks money directly, nor have they directly bought a stake in the banks.

Because the government has ‘given’ the banks – especially the 4-pillars – billions of dollars in protectionism, subsidies, incentives and guarantees. Whether they like it or not, the major banks have received an unfair advantage compared to their small rivals and at the expense of competition.

Here’s what we’ve come up with:

  • 4-Pillars policy: inhibits competition by creation of a cartel-like structure. This is an indirect payment from consumers to the banks. Without this regime, there would be more competition and lower fees.
  • Bank deposit guarantee: underwrites almost the entire banking system and absolves the banks of any responsibility for their investment decisions. This is a direct insurance obligation funded by the incomes of taxpayers.
  • First Home-Buyers Bribe: Hands the bank extra borrowers to earn interest from. Without the taxpayer funded bribe, many borrowers wouldn’t be able to afford a loan. This is an indirect payment from the taxpayer to the bank.
  • Wholesale Funding Guarantee: The banks are able to use the credit ‘quality’ of taxpayers’ money in order to sell bonds to enable the bank to record profits. This is another direct exposure borne on the taxpayer and paid for by the consumer as borrowers will pay higher interest and savers will receive lower interest. Further, as the banks use the credit ‘quality’ of the taxpayer it will drive up debt costs for the government debt soon to be issued and increase the cost to the taxpayer.
  • Australian Business Investment Partnership: And here we have the granddaddy of them all. If this isn’t the government putting “money into the banking system” then we don’t know what is. The bank’s cough up about half a million each, and the governments chucks in about $20 million.

This is by no means an exhaustive list, and if I’ve missed any feel free to write to the Money Morning Mailing at moneymorning@moneymorning.com.au to set me straight.

The notion that the 4-Pillars have received not “one cent” of taxpayer money is well, stretching the truth somewhat.

It’s rather like the rich heir to the family fortune swanning around driving fast cars and living the life of Riley claiming he’s never received a penny from mummy and daddy, all the while knowing that if he stuffs up his parents will come to the rescue.

Right now, the 4-Pillars have a license to swan around and do what they like because they know the mummy and daddy government will not let anything horrible happen to their precious child.