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The Banks and John Howard by Dr Evan Jones - "The Westpac Letters"

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Comment: An enlightening read ...

Thu, 06/21/2007 - 21:36 — Arthur Cristian

The Banks and John Howard
By Dr Evan Jones Sydney University Political Economics

[Caution: this is a very long post. The post is rated M for mature audiences only.]

In the early 1980s, John Howard was Federal Treasurer under the Fraser Coalition Government. Howard had initiated the Campbell Inquiry into the financial sector and its 1981 Report recommended comprehensive deregulation of the sector.

The ‘experts’ thought and talked abstractly about the merits of ‘competition’ but remained blissfully indifferent to the meaning of competition on the ground. Facing a loss of market share to various newcomers, the trading banks set about transforming their cultures.

Banking culture was passé; marketing and speculative mindsets were the new cultures de jour. Dealers earned inordinate salaries and bonuses. Lending manager’s earnings and status was tied to business done. Delegated Lending Authority limits (constraints on lending managers) were increased dramatically overnight. A circular distributed by the National Australia Bank on the 9th November 1984 summed up the new regime:

‘Funds for lending are in abundance and with recent deregulation, … it is imperative that we use every avenue possible to foster our existing customer connections and expand our lending base. Competitiveness is of paramount importance and competition is to be matched or bettered if worthwhile business is at risk.’

John Salmon, a then NAB branch manager, has indelibly etched on his memory the instructions given at a manager’s conference – they were simply told to ‘lend, lend, lend and there would be no recrimination for bad debt’.

Nobody associated with the Campbell Inquiry thought about the concept of banking culture; John Howard the Treasurer remained blissfully indifferent.

Big corporates were being familiarised with the prospects of borrowing debt denominated in foreign currencies. Some marginal brokers sniffed out the idea of marketing such a debt instrument to small businesses. The banks sniffed a threat and an opportunity, and jumped on the bandwagon – notably Westpac, the Commonwealth and the ANZ. Few people in the banks had a clue of the implications, and those that did were ignored.

Between 1983 and 1986 over 3000 loans were made in foreign currencies to unsuspecting borrowers. The attraction of borrowing in Swiss francs, for example, was that the interest rate in Switzerland was of the order of 7%; in Australia it was double that. But the Australian dollar plummeted against the franc in 1985 and someone who borrowed a Swiss franc loan to the equivalent of $1m in Australian currency was soon owing over $2m in local currency.

Forget the cheaper interest rate. This was not merely not a good deal but a calamity. The rest of the 1980s saw the borrowers trying to head off business and personal disaster and the lenders trying to stem their own losses and head off liability.

Lending density across Australia of these foreign currency loans varied, depending on the aggression of the lending managers. Queensland was a shining star for the recently re-badged Westpac; behind Westpac’s success were successive Managers International Business, Neville Imhoff and Albert Look. Look and Imhoff were known by their clients to be active pushers of the instrument.

Look’s role received a searching condemnation by Justice Pincus in Thannhauser v. Westpac in the Federal Court Queensland in December 1991. Pincus had this say:

‘For reasons I shall explain, it appears to me improbable that the advice Mr Look gave was either competent or objective. …

‘Mr Look had a poor knowledge of the subject on which it was his task to advise. There is no evidence that the concentration on CHF [Swiss franc] loans was a result of a carefully thought out policy; …

‘It is not easy to believe that if Mr Look had truly engaged in the negative conduct which he claimed to have done, he would have achieved such success, reaping for the bank millions of dollars of profits in a single year. …

I am satisfied, that Mr Look was not telling the truth when he said that his role was to warn people of the risks of offshore borrowing. The truth is that it was his job to try to persuade people to borrow in that way, no doubt because of the large profits which the bank would earn, and perhaps favourable tax treatment of those profits.

One has to appreciate the seismic significance of this judgement. Judges are used to automatically taking bank officer statements, sworn on the hallowed Word of God, as Gospel. Moreover, the banks and their legal teams based their litigation fights on the claim that they were passive facilitators of foreign currency loans and that they gave prospective borrowers full information as to their dangers. In most court hearings the presiding judges ruled in favour of the banks. The Pincus judgement neatly disposes of the Westpac officer’s story and the banks’ posturings. The truth was out.

The later 1980s and early 1990s witnessed a welter of litigation over foreign currency loans. But the victory for Mrs Thannhauser was quarantined.

Two people not helped by the Pincus judgement were foreign currency borrowers Lionel Potts and Tony Lanza-Volpe. Both Potts and Lanza-Volpe had experienced the Imhoff and Look marketing push as early as mid 1982. Potts even came away with twice what he had sought – $500,000 instead of $250,000. $250,000 was put on deposit, and Westpac neatly quarantined it for extra security.

Potts eventually won a judgement against Westpac in the Supreme Court Queensland in December 1990. But Westpac immediately appealed.

Coincidentally with the litigation hearings, there was general public animosity towards the banks. Democrat Senator Paul McLean had for some years been representing victims of bank malpractice in the Senate, reading details of particular cases into Hansard. Public hostility, McLean’s persistence, and related media coverage, led the Hawke Government in October 1990 to establish a Parliamentary Inquiry into the banking sector. Although the foreign currency loan saga was not central to the Inquiry’s establishment, the fury and desperation of fcl borrowers forced the issue into a significant place in the Committee’s hearings.

But the Committee, chaired by Labor’s Stephen Martin, absorbed the dissent and its report in November 1991 was a damp squib. Worse, it was a scandalous whitewash.

It was in this environment of a weak Parliamentary Committee, a recalcitrant Labor Government and the failure of the court system to deliver a modicum of justice that Potts and Lanza-Volpe decided to call on the Opposition. They were getting nowhere with the authorities. That’s what Parliamentary Opposition is supposed to be about – holding the ruling Party to account.

Tony Lanza-Volpe called on his local State member, Santo Santoro, who in turn contacted Senator Panizza (a compatriot from the old country). Senator Panizza arranged for John Howard to attend a meeting with the two disgruntled fcl borrowers. Howard was then Shadow Minister for Industrial Relations and Employment, but seen as a senior Party figure and sometime Treasurer.

What happened at the meeting is of long-term relevance. Here follows the description from the Statutory Declaration pf Antonino Lanza-Volpe, declared at Brisbane the 29th day of April 1997 (Commissioner for Declarations No.38359).

1. On the 14th October 1991, Mr Lionel Potts of … and myself had a 11.30 to 12.00 morning appointment with the Hon John Winston Howard in the late John Horace Panizza’s office in parliament House Canberra.

2. Mr Howard arrived at approximately 11.50am and asked what he could do for us. Mr. Potts raised the issue of foreign currency loans and handed John Howard various documents. Mr. Howard glanced at them and put them on a low coffee table saying quite forcibly “this bank bashing has to stop!”

3. At that point he turned to leave the room whereupon Mr. Potts protested “we have come a long way to present evidence as to what has occurred with these loans.” A short discussion followed with Mr. Howard responding “the Westpac Letters are privileged document (sic) between Westpac and it’s (sic) solicitors and you have no right to them.”

4. He again turned to leave and Lionel Potts picked up the documents from the table and handed them to him saying “could you at least read these.” John Howard then left.

5. This meeting was of short duration possibly a maximum 5 minutes and we didn’t even get to sit down. Senator Panizza expressed his apologies and indicated he was a bit surprised at Howard’s lack of interest.

After having recovered from the Honourable Member’s breathtaking performance, and having flown down from Brisbane, Potts and Lanza-Volpe tried to get value for money by knocking on the doors of other Honourable Members.

The Honourable Alexander Downer (then a member of the Martin Committee banking inquiry) was located. The conversation with Mr. Downer went something like this (liberal paraphrase):

AD: I can’t talk to you because I used to work for the Bank of New South Wales 23 years ago. I am bound by confidentiality.
LP: But you’re now a Member of Parliament and represent all Australians.
AD: No, I represent the constituents of Mayo. I’ve had enough of you.

Potts and Lanza-Volpe eventually found their way to the office of Ted Mack, Independent member of the Lower House. Mack told them (liberal paraphrase):

TM: Get on an aeroplane and forget it. Westpac flew into town the other night; an entourage. There was much wining and dining with members from both sides of Parliament. You’re wasting your time.

Before proceeding with the narrative, let us divert to outline the significance of the ‘Westpac Letters’, the status of which Mr Howard claimed to have been abused by the gate-crashing miscreants.

The Westpac Letters were two letters from Westpac solicitors Allen Allen & Hemsley to Westpac dated 26 November and 11 December 1987 regarding the practices of Westpac subsidiary Partnership Pacific’s mismanagement of borrowers’ foreign currency loans. The chaotic essence of foreign currency loans was displayed for public consumption. Westpac fought furiously but unsuccessfully to impede their publication in the media.

Fairfax journalist Anne Lampe noted at a seminar on the Letters at the University of Technology Sydney in June 1992:

'The Westpac Letters are the only 'absolutely private and confidential' documents I ever received. They were without a shadow of a doubt the most exciting leaked documents I have ever seen.

'But it didn't take long for it to dawn on me that what I had sitting on my desk was Bankgate - devastating evidence of a major cover-up by Australia's largest bank being advised by one of Australia's largest law firms about major wrong doings of staff in one of its major subsidiaries on how to best prevent information about those wrong doings ever being revealed.

'These letters … were the findings of a senior partner in the law firm advising Westpac, who considered 50,000 documents and looked at the details of 7,000 before he concluded that there had been major irregularities in Partnership Pacific Ltd's dealings with its offshore loan clients.'

This is definitely the kind of document that an Honourable Member would prefer to remain privileged.

Potts returned to Brisbane to face Westpac in the Court of Appeal. The April 1992 judgment reversed the Trial Hearing and gave the decision to Westpac. Justices de Jersey and Dowsett prevailed over Chief Justice Macrossan. de Jersey and Dowsett have twinned careers – same age, same school (Brisbane Grammar), same clubs, elevation to the bench at the same time. According to John Salmon, consultant to small business bank victims since his retirement from the NAB, this decision was the most disgraceful judgement he has ever witnessed.

Westpac delayed the appeal for sixteen months. Potts was of the view that Westpac delayed the appeal until Potts’ experienced Barrister was not available. Westpac then delivered 250 documents to Potts’s legal representatives on the Friday at 5.30 p.m. before the Monday case (Potts himself was unaware), a scam that the bench did not rule as out of order. Salmon believes that the documents included bank officer diary records that were concocted.

de Jersey’s brief judgment included an argument lifted from another (non-bank) judgment:

‘Indeed, in a competitive society, the infliction of pure economic loss upon another will commonly be concomitant of the successful pursuit of personal advantage by the way of lawful conduct in that there can be discerned, in many commercial and financial transactions, a correlation between the attainment of personal gain for one’s self and the sustainment of economic loss by another.’

So there we have it. Westpac plays by the law of the jungle; we oversee the law of the jungle; and Potts is a very sore loser. Goodnight Mr. Potts and Good Riddance.

Yet four months earlier, in the Thannhauser judgement, Pincus J had blown Westpac’s integrity out of the water. Brisbane is not a large city. What is going on? What is going on is that Westpac let it be known that Potts was the decisive judgement. You cannot win against us in the courts.

Years grind by and Honourable John becomes Prime Minister in 1996. The Foreign Currency Borrowers Association writes to the new Government hoping for a fresh start, yet receive a reply that is the quintessence of Sir Humphrey Appleby. Said the Honourable Jim Short, Assistant Treasurer (the position invented by the previous Labor Government to deal with all the shitty jobs considered too demeaning for the Treasurer), dated 8 July 1996:

‘[I]t is not appropriate for the Government to intervene in private commercial dealings between banks and their customers nor does the Government determine the lending policies of the banks or interfere in their daily commercial decisions.

‘The Government’s role is to ensure that the banking industry is both competitive and secure. To this end, the Government is concerned that there are no barriers to effective competition and that industry codes of conduct and prudential standards are fully observed. This approach is designed both to safeguard the interests of bank customers and to ensure an efficient financial system.’

Confronting the magnificent appropriation of language in the mouths of Honourable Members of Parliament and Learned Judges of the Bench, Potts turned to direct action. At one stage, Potts was frog-marched out of Westpac’s Sydney Head Office. But his pièce de résistance was a bulky booklet titled Do You Trust Your Bank? of August 1995.

Amongst myriad reproduced clippings and documents, Potts highlighted selected colorful phrases from the November Westpac Letter, notably:

‘5. PPL undoubtedly took points which, at best, exceeded its entitlement and to which, in my view, PPL had no entitlement at all.
‘7. As a result of 1-6, it is likely that managed borrowers would succeed against PPL.

5. My concern is that if [particularly dangerous potential claimants] come onshore without a concession, they may become bellicose once their reduced capital and higher interest rates start to bite.
6. Take all practical steps to avoid PPL’s weaknesses being known outside PPL/Westpac boards and senior management.’ Etc.

Potts also reproduced Westpac’s Mission Statement from its 1982 Annual Report.

‘To support excellence as the measurement standard for everything we do. To acknowledge our social responsibilities and our special role in the economic life of the community by absolute integrity, efficiency, and good corporate citizenship.’

With Potts trumping Westpac on the propaganda front, Westpac conceded defeat and settled with Potts.

The guard has changed at Westpac but the script has not. Said CEO Dr Morgan (late of the Federal Treasury which oversaw the debacle of financial deregulation) on 11th March 2003:

‘Business trust has been significantly undermined in Australia. People are understandably frustrated and angry at what they see as a lack of corporate transparency, accountability and a breakdown in the corporate oversight business. With corporate integrity under question globally, Australian business at the minimum will need to continually demonstrate a genuine commitment to good governance and social responsibility, both of which are fundamental to our future. Those of us privileged to hold leadership positions ... we need to chart a new course and not just begrudgingly accept true reform.’

Tony Lanza-Volpe is still looking for justice from Westpac, and his foreign currency loan continues to tick over, racking up interest. Yoo-hoo, Dr. Morgan; are you there?

And the Honourable Member for Bennelong, the Prime Minister?

In the House of Representatives on 21st June 2004, Mr Latham referred the Prime Minister:

‘to the difficulty that most Australian consumers and small businesses face in transferring from one bank to another. Will the government now adopt Labor’s policy of increasing competition in the banking industry by making it easier for customers to change banks – that is, by requiring a customer’s old bank to transfer all direct debit details to their new bank within three working days?’

One would have thought this suggestion entirely sensible and its implementation a matter of little inconvenience to those with ‘a genuine commitment to good governance and social responsibility’. But it is known that the banks consciously inhibit transfer to enhance their leverage over borrowers.

And Mr Howard’s response?

‘The Member for Werriwa belongs to the Australian labor Party that presided over the highest interest rates this country has had since the end of World War II. … Those interest rates have come down under this government. One of the reasons they have come down is that we have fostered greater competition …’

The Prime Minister was in election mode as early as June. What Mr Howard has fostered (with considerable assistance from Labor in office) is the institutionalisation of corruption on a grand scale in the Australian banking sector.

This is another bravura performance from John Howard. Another term of office for this man of the people would be richly deserved.

The Banks and John Howard - Wednesday, September 22, 2004 by Dr Evan Jones


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