The problem is that even as they get more outrageous, the market becomes more desensitised.
The real bombshell this year was the LIBOR scandal.
Some of the world’s biggest banks got caught with their pants down, manipulating the LIBOR rate. If you think that sounds boring, then know that it underpins derivatives worth over $300 TRILLION. Tweaking LIBOR a few basis points here and there can pay for more than lunch.
This was a scandal so huge that it involved some of the biggest names in the banking game: Barclays, HSBC, Deutsche Bank, UBS, Credit Suisse, Soc Gen, Citibank, JP Morgan, and Bank of America, amongst many others.
So global banking titans formed a cartel to deceive the world?
This is the kind of thing that should spark a revolution!
But sadly, no one seems that surprised or that fussed. Maybe investors are just too battle weary after four long hard years down in the trenches.
It seems the forgotten headlines about LIBOR are already today’s fish and chips wrapper.
Now the current ‘scandal-du-jour’ served up by the media is the ‘The London Whale’ which is now going through the courts.
Somehow, within six years of leaving Uni, this Ghana-born lad was in charge of multi-billion dollar bets in UBS’ London office.
Didn’t anyone ever question the wisdom of this?
Or just perhaps…keep a bit of an eye on him?
But no! The trading culture and poor oversight let ‘The Whale’ singlehandedly rack up a loss of nearly $12 billion.
It’s not too hard to draw the dots from this loss, to the recent announcement that UBS is cutting 10,000 jobs (16% of its workforce) over the next few years.
Obviously HQ in Switzerland isn’t too chuffed at what’s been going on at the London branch, as the job cuts kicked off with a swift axing of 100 traders in London.
But this is happening everywhere.
The financial services industry blossomed for decades on an
irrigation channel of cheap credit. Now that the channel is drying up,
the sector is being ruthlessly rationalised.
The Australian Banking and Finance Industry Under Attack from a ‘Meat Cleaver’
We saw big cuts last year and they continue unabated. Nancy Bush, a famous bank analyst puts it bluntly. ‘The whole structure of the financial services industry has got to change. We are in the meat cleaver stage right now.’
Just recently, I heard a broker in the Aussie market, Marcus Padley, saying that two hundred Aussie brokers are now leaving the industry each week.
I’ve also heard rumours that one of the big four Australian banks is facing a major ‘restructuring’, which is a nice way of saying mass redundancies.
It took years for the Libor scandal and the London Whale scandals to surface.
So you have to wonder what is unfolding behind the scenes a bit closer to home at the big-4. Regular Editor of Money Morning, Kris Sayce, has already uncovered a few stinkers like the secret loans NAB and Westpac took from the US Federal Reserve.
And looking ahead, my pal Greg Canavan of Sound Money. Sound Investments sees more trouble unfolding for Australian banks. He thinks 2013 could be the year the polished facade collapses.
Australian banks would have you think they are amongst the most secure banks in the world, but Greg reckons they’re just houses of cards built on quicksand. For example, he calculates that if Commonwealth Bank (ASX: CBA) suffered a 5.8% fall in the value of its assets, all shareholder equity would disappear. In other words, Australia’s biggest bank would be bankrupt.
Greg’s not saying this this will happen. He’s just pointing out the inherent leverage and riskiness of bank balance sheets. This leverage works a treat in the good years, but it has the opposite effect when things slow down. And Greg reckons Australia’s looking at a major slowdown in 2013.
Let me say that Greg is very good at making big-picture calls that start out as unpopular but turn out to be correct.
Be Worried About Australian Banks in 2013
For example when China was still flying along, he was calling it to slow down during 2012, several years before anyone else. Listening to his reasoning back then was part of the reason I avoided iron ore and coal stocks for almost two years. And thank god too.
So if he’s pointing the finger at Australian banks today, it’s worth listening to why. Part of the issue is with property prices. As national income falls off the back of China slowing down, he expects property prices to correct in a major way.
In fact, he reckons a $1.3m home in Paddington, Sydney could be worth $880,000 two years from now. And this would simply kill the Australian banks, whose balance sheets are dominated by residential property loans.
The Aussie dollar has defied gravity so far, but at some point this has to reverse. Iron ore prices have taken a hit on falling Chinese property construction, and coal has dropped as the US moves to cheap gas.
By rights, the Australian dollar should have fallen by now. However, Aussie bonds are the best yielding AAA rated bonds globally. So investors are buying in, which keeps the price up. Once rates fall, which they will, then this tide of buyers will reverse – and spectacularly so.
Goldman Sachs certainly reckons the Aussie is primed to collapse, and are selling it. They think it’s 20% overpriced, so worth closer to 85c. A slowing economy and falling commodity prices will see it tumble. In fact they’re going as far as to call ‘Short Aussie, Long Euro‘ the ‘trade of the century’.
Taking Goldman’s advice on anything can be dangerous of course. They’re not famous for respecting their clients, and have recently been dragged over the coals for endemically referring to clients as ‘muppets‘.
Neither are they famous for giving out advice for free, so perhaps take the ‘trade of the century’ call with a pinch of salt.
However I put more weight on Greg’s calls in this area. For one thing he’s not an investment bank taking the other side of the same trade! He’s far too nice a bloke for that. And most importantly, he’s been calling the big picture correctly for a few years straight now.
So when he’s saying a tough year for Australia in 2012 was the warm up for the main course in 2013, it’s worth taking the time to listen why.
Dr Alex Cowie
Editor, Diggers & Drillers