Saturday Extra

The old adage what goes up must come down is perhaps the most simple explanation you could apply to recent events on world financial markets.

The new year has heralded weeks of turmoil and plain old panic, with this week's massive write-down in the value of shares in child-care provider ABC Learning being the latest in a series of corporate meltdowns.

Of course, we've seen it all before; big companies over-extending themselves and then getting into trouble when the cost of borrowing goes up.

But is this downturn really comparable with, say, 1987, or the credit squeezes of the 1960s and 70s?

Transcript

This transcript was typed from a recording of the program. The ABC cannot guarantee its complete accuracy because of the possibility of mishearing and occasional difficulty in identifying speakers.

Geraldine Doogue: Robert Gottleibsen is a columnist with the online financial journal Business Spectator. Good morning, Robert.

Robert Gottleibsen: Good morning.

Geraldine Doogue: What should I, the lay person, make of the events of the past few weeks? I mean is it history repeating itself, or something altogether different?

Robert Gottleibsen: There's a bit of history repeating itself and there are some quite different features to this. What we have here starts in the States; we had those insurance disasters, the sub prime disasters. In the end about $US400-billion have been lost. Now a lot of that money has come after balance sheets of banks, and it's caused a global credit squeeze, and it's a credit squeeze a) because there's less money around and it's been lost, and b) because people are nervous about lending.

Now we haven't had a credit squeeze quite like this for a long time. In the 1990 exercise it's true that in Australia Westpac and the ANZ were in a bit of strife so that they couldn't lend to their clients in the way they used to be able to do it, but it wasn't a total banking system situation. And what we have in the States now, and in parts of Europe, is a credit squeeze.

Geraldine Doogue: It's interesting, it does change one's psychology, if you think about it like a credit squeeze, doesn't it? It does shift the way you look into the future.

Robert Gottleibsen: Yes, it does. Now in Australia we haven't got a credit squeeze at this point of time, but our banks are warning us, Look, half the money we use for our normal lending - business or houses, or it doesn't matter what it is, about roughly half, it depends on which bank you're talking about, comes from overseas. Now these are the people who lend to us, are the very people who are being knocked around the head in all these US situations. So if the US situation was to get worse, then we would potentially face a credit squeeze here, or certainly much higher interest rates.

Geraldine Doogue: So just take us back to previous credit squeezes. I mean the credit squeeze in '61 nearly lost Robert Menzies the election, and he never forgot that. And then of course there were the '70s and forms in the '80s. I mean what tends to happen in credit squeezes?

Robert Gottleibsen: Well first of all we thought we'd stopped credit squeezes, because back in 1960 the banks were regulated, and the credit squeeze was applied by the Reserve Bank, and they actually physically did it, and they don't have that power in the same way as they did then, they have power over interest rates, but not over the credit in that same way. So we thought we wouldn't have one again. But what happens of course is that your relationship with your bank becomes very important, because for the last five, ten years, larger corporations have bypassed their bank and gone overseas. Overseas banks have come here, and lend, there's been a lot more competition in the market. When you have a credit squeeze, it's your relationship with your bank that's all important, because that banker has only so much money to lend, and you don't swap banks, you court the bank manager. I've been using old terminology there, now. So it is a very different environment and a number of the banks are coming around to their clients now, in Australia, and saying - 'Look, do you realise we face this possibility, just watch your expansion programs, we'll look after you, you've been a long-standing client of ours, but just understand the total situation.'

Geraldine Doogue: Is there enough capital in Australia to meet the needs of the type of development we've expected?

Robert Gottleibsen: I think all our banks are going to be tight on capital, and they'll have to raise capital. Maybe not all of them, but most of them. Because as money swings from corporations borrowing directly overseas, or from other situations, as it swings to the big banks, they will need capital to fund it. And groups like the NAB for example, they've lots and lots of capital, bought back shares. Now they're not short of capital but they don't have anywhere near the same sort of margin, and their business is growing because of the swing back to banks. So yes, we do have a huge superannuation pool here in Australia, and when you're talking about infrastructure projects and things like that, we'll be calling on the capital pool in the superannuation funds, to fund a lot of that, as the banks indeed will be to get extra capital. So one of the great advantages Australia has is this enormous superannuation pool which is being funded every day.

Geraldine Doogue: It's just that the banks have had to go overseas, as you've alluded to, to prop up their conventional pool of capital, and I noticed in The Financial Review yesterday it says that businesses are pushing ahead with investment plans in a real vote of confidence, that the economy will ride out the slow-down, and there's really very, very - a real surge, a surprising surge, in capital spending. And yet we've got bank share prices really down, so it doesn't quite fit.

Robert Gottleibsen: Well no, it doesn't fit. First of all let's be careful: the banks go overseas for their deposit money. When I talked about shortage of capital, I was talking about bank capital, that's the capital of banks that backs the deposit money. So when we're talking about shortage of bank capital, we're talking about shares and things like that.

Geraldine Doogue: I suppose I thought they'd have to replace the money that the securitised market -

Robert Gottleibsen: No, that overseas capital, that's deposit money. Australians invest in the sharemarket, they don't put all their money in bank deposits, so we go offshore to get bank deposits. So look, all these companies plan to expand, they will find that unless they've tied up their money very carefully, they will not be able to do it. And they may get a superannuation fund that will put equity capital into it, but if they want high leverage, high bank debt and they haven't got it organised now, they may have difficulty doing it.

Geraldine Doogue: So we might see some projects that look like they're on the hoof, they might have to pull back?

Robert Gottleibsen: They may well have to pull back.

Geraldine Doogue: Have you heard of any like that?

Robert Gottleibsen: No, we have not seen anything like that yet. But look, we've seen change in the way banks, ABC Learning, we talked about that earlier, suddenly the banks are tighter, they're looking at their situation much more carefully, and so that's because they can see that a) they don't have as much capital as they used to have in terms of relationships to deposits; and they can't get the deposits as easily as they could from overseas. So a lot of those projects that you see in the surveys will now, when people go to fund them, and they find it rather difficult, unless they've got it tied up, unless they've got all their share money organised, through superannuation funds or those sort of avenues.

Geraldine Doogue: Yes. In fact I think it was the head of Lend Lease the other day, saying however that there were real opportunities in all of this if you had cash, you're likely to do very well out of the current situation. That's not made enough of, I would suggest to you. Do you agree?

Robert Gottleibsen: Yes, and the head of Lend Lease, talking his own books I might say, because Lend Lease is a company that has very low borrowing. They've managed their situation extremely well, and what he's saying there is, 'Hey, I've got very low borrowing on my balance sheet; I can see around the property companies, or asset owning companies, that are very highly leveraged, a high amount of borrowing. I can buy them at a cheap price.' So Yes, he was saying, Yes, for the opportunities. And in our sharemarket, I don't know when the sharemarket bottoms, but the big fortunes are made when you can buy somewhere near the bottom.

Geraldine Doogue: Yes, so that would be true for average Mum and Dad investors too. If you're not geared up and you're free of loans, you really could be sitting pretty, couldn't you?

Robert Gottleibsen: Yes, well people who have borrowed money to buy shares are losing a lot of money at this point of time, and unless you're extremely careful and can pick sharp runs down and get the market ready to time it very, very well, unless you're very, very clever, bear markets and borrowing are usually a recipe to lose money.

Geraldine Doogue: Robert Gottleibsen is our guest here on Saturday Extra, and we're talking about the financial year that is, thus far.

Look, the events surrounding ABC Learning have really shone the light on some pretty worrying trends, and I must say Peter Mares covered this very well on The National Interest on Radio National (it's repeated tomorrow if you might like to catch up with it). But I wonder what you personally think about this fact of fund managers, the custodians of our superannuation, in effect leasing our shares to hedge funds for a small fee, to short sell in order to sort of force down the share price of shares owned by their clients. I mean it's a very odd arrangement, isn't it?

Robert Gottleibsen: I think 'odd' is a very favourable way of putting it, Geraldine. I think it's scandalous. I think that it's one of the worst things I've ever seen, and one can only hope that the courts - we don't have as much evidence, we believe this has to be the only way this could have taken place in this form. All the anecdotal evidence says that this is what's been happening. The people in the market say this is what's been happening. We don't physically - are unable to see the documentation but this practice has been carried on for a long time, on a small scale. And people have shorted a bit of stock this way.

Geraldine Doogue: And it hasn't mattered so much in a bull market.

Robert Gottleibsen: No, it's smoothed out things. But where you have a massive loaning program that is used to cause the Managing Director of a company to have to sell his shares because he had borrowings on them, and the hedge funds knew this, so they forced the stock down so he wouldn't just go out and make a fortune. And this is all done with superannuation funds and index funds who are holding shares on your behalf and my behalf and everyone else's behalf. I don't think I've seen much worse than that, and I do believe the authorities are going to clamp down on it, and with a bit of luck we might be able to get the courts to deliver to these people what they deserve.

Geraldine Doogue: So, final question, Robert. If you're sitting back watching, what's the essential question you must ask of yourself if you're just an ordinary person in the midst of this, about this credit squeeze?

Robert Gottleibsen: Well first of all make sure that your borrowings are tied up and you can service them. That's pretty important, and I know lots of people with high mortgages are having difficulty servicing their loans and there's nothing they can do about it. But if you're running a business and you're relying on short-term money, money that hasn't been properly contacted with your bank or whoever's lending you money, get that under way. Get it fixed up so that you have the money you need to run your affairs. So that if there is a credit squeeze, and I'm not saying there necessarily will be one, but if there is one, you've taken the steps early, to make sure that you've done it and secured yourself. And if you're borrowing on shares, margin living on shares, well if you're clever enough you can make money in this market, but it's a much tougher market, and I would say this is not a market for most people to be margin borrowing on.

Geraldine Doogue: Thank you very much indeed Robert. Robert Gottleibsen, who works for Business Spectator these days and has a great record and set of credentials in terms of watching the ups and downs of the share markets over many years now. So good luck, to all who sail in her.

Guests

Robert Gottliebsen
Columnist with Business Spectator

Story Researcher and Producer

Scott Wales