Chapter 30 - Australian Bank Exposure and Stability

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Here, I will give you some numbers to get you warmed up. I shall work in $ billion to keep it easy.

$1 billion = $1 000 000 000

$1 billion = $1 000 million

$1 billion is approximately equivalent to $40 per person in Australia.

$1 trillion = $1000 billion = $1 000 000 000 000

$1 trillion is approximately equivalent to $40 000 per person in Australia.

I only use billions in this book for ease of understanding.

Australia's GNP (Gross National Product) is about $A1500 billion

Western Australia's exports are about $A119 billion which is 40% of Australia's exports. [300]

Western Australia's imports are about $A46 billion which is 15% of Australia's imports. [300]

Australia's exports are about ~$248 billion (~$0.25 trillion) (2012) [301]

Australia's imports are about ~$242 billion (~$0.24 trillion) (2012) [301]

That was to get you warmed up so I can tackle you with some numbers.

I use the symbol '~' for approximately.

Now for some scary news:

Big Banks Exposure 2012

The sum of the derivatives of nine banks with the largest derivatives exposure makes a colossal total of ~$228 000 billion (~$228 trillion). No government has this volume of money. This figure is three times the world gross product. This is a massive risk to the world economy. Goldman Sachs alone has a derivative exposure of $44 000 billion dollars. [302]

Adele Ferguson: The Australian 2008

Instead of heeding this oracle's warnings, financial institutions rejoiced in these ticking bombs, which have now blown up, leading to estimates that the global banking system will lose up to $1.4 trillion before the crisis is over.

The world financial system is leveraged beyond comprehension. It is estimated that between $US500 trillion ($732 trillion) and $US700 trillion worth of derivatives are outstanding. Compare this with the total economic activity (GDP) of the world, which is about $US50 trillion, and even a 5 per cent drop in the value of the derivatives is beyond the rescue capability of the world's central banks, according to financial author Bert Dohmen in his Prelude to Meltdown.

The latest Reserve Bank Bulletin reveals that Australian banks have more than $13 trillion in off-balance-sheet derivative exposures, compared with $5.4 trillion six years ago. If just 1 per cent of these blew up because third parties at the other end got into trouble, the whole shareholder wealth would be wiped out and the banks could be broke.

As total bank assets are $2.3 trillion, why do Australia's banks have exposure to $13 trillion of derivatives positions? All banks hedge to reduce risk, but this is a great deal of hedging. To put it in perspective, Australia's GDP is about $1.3 trillion, our pool of investment fund assets is $1.2 trillion and the freely floated market capitalisation of the stock market is $1 trillion. [303]

Dead Banks Walking. Isherwood 2012.

Australia's banks are now exposed to $20 trillion in toxic derivatives obligations, which can sink them as fast as derivatives blew up Lehman Brothers in 2008 and precipitated the GFC.

Citizens Electoral Council leader Craig Isherwood today said the only way to deal with the cancer of financial derivatives is through a Glass-Steagall banking separation.

"Derivatives are the cancer of the financial system," he said. "Australia's financial institutions are so riddled with these things, they are dead banks walking". [304]

So:

  Australia Money Supply=$1 760 billion
  Australia Gross National Product=$1 300 billion
  Australian banks Derivatives exposure=$20 000 billion
Barnaby Is Right ~2010

If our banks were really so safe, why did two of our Big 4 (Westpac and NAB) both quietly borrow billions of dollars directly from the US Federal Reserve during the GFC? And never advised shareholders, the prudential regulatory authority (APRA), the RBA, or the public?

An even bigger question - why did the RBA borrow $53 billion from the Federal Reserve without informing anyone? [305]

What Are Derivatives? Barnaby Joyce 2010

Derivatives are the exotic financial instruments at the very heart of the GFC.

Back in 2003, the world's most famous investor, Warren Buffet, famously called derivatives "a mega-catastrophic risk", "financial weapons of mass destruction", and a "time bomb".

Our "safe as houses" Aussie banks are buried up to their eyeballs in the things. [306]

Craig Isherwood 2012

Australia's banks are now exposed to $20 trillion in toxic derivatives obligations, which can sink them as fast as derivatives blew up Lehman Brothers in 2008 and precipitated the GFC.

"Derivatives are the cancer of the financial system," he said. "Australia's financial institutions are so riddled with these things, they are dead banks walkin. ...

"Since the 2008 GFC, when the banks almost collapsed under their un-payable debts, they have gone on a derivatives binge, gambling at an unprecedented rate in order to artificially leverage their profits. In that time, their derivatives exposure has sky-rocketed by $6 trillion, from $14 trillion to $20 trillion.".....

"You can't regulate derivatives. Who are they kidding?" he said. "Regulating derivatives is as futile as regulating cancer. They are side-bets, and side-bets on side-bets. Derivatives gamblers will make even more side-bets on the derivatives they try to regulate. [307]

Kellie Tranter 2013

Australia has had a current account deficit since the 1980s. That means we are spending more than we are earning. We've had to sell public assets to balance the current account deficit. Put simply, the surplus on the capital account is flogging off the sideboard to buy the fruit.

Our net international financial position is not strong and our gross foreign liabilities are alarming. Banks are the intermediaries between foreign lenders and Australia's big spenders. The banks have mediated the private household debt and as a result if there is a worldwide recession, banks could be called to pay up.

Our banks have borrowed short (internationally) and lent long (domestically, for mortgages etc.) which may explain why a US diplomatic cable dated 7 July 2009 published by WikiLeaks states, '...In late June, the IMF advised the Government to limit its borrowing in case it needs to bail out the major Australian banks, which must roll over short-term international debts which exceed A$500 billion...

It may also explain why despite subsequent denials from the Australian Bankers' Association, economist Professor Ross Garnaut suggested in October 2009 that the big Australian banks were essentially insolvent at the time of the crash [in 2008] because "they were starting to have great difficulty in rolling over their huge external debt". [308]

John Pilger 1992

Since [Paul] Keating abandoned exchange controls, more than $A7,000 million [$A7 billion] has fled Australia every year. A major industrial economy, like Britain's, can sustain bleeding of this magnitude for some time. A small economy cannot; and unless the flight of capital is stemmed, Australia will be left with an insoluble balance of payments' deficit and is likely to join the ranks of Latin American states in permanent hock and bereft of their sovereignty. Indeed in surrendering one of the few weapons with which a small country can defend its economic sovereignty, Keating has given away almost all that the Labor Government in the 1940s fought to preserve against extreme American pressure. No Australian Government now can afford to stand up to the power of the international money markets or to major foreign investors. If, for example, the Government wants to improve rather than further reduce its welfare provisions, the international banks almost certainly will 'sell-down' the Australian dollar, and bring intolerable pressure to forestall such a measure. Brokers in New York have said as much when consulted by Australian politicians and by those Australian commentators who constantly seek Wall Street's approval of Australian policies... As part of his de-regulation policies, [Paul] Keating abolished the Federal Reserve Bank's power to monitor money leaving the country, which allowed the very rich to practise 'tax avoidance' on a previously unheard of scale. Moreover, the interest incurred on the huge amounts borrowed on world money markets in order to finance takeovers is tax deductible in Australia. This has helped to give Australia a foreign debt which, under Keating's stewardship, has risen to $A114 billion and is behind only that of Mexico and Brazil. The scandal of this is that Australia, with one of the smallest public debts in the world in relation to Gross National Product, has to bear two-thirds of the overall debt because of the private borrowing of corporations, banks and individuals. ... [309]


[300] www.dfat.gov.au/geo/fs/wa.pdf

[301] www.dfat.gov.au/geo/fs/aust.pdf

[302] www.silverdoctors.com/infographic-9-biggest-banks-derivative-exposure

[303] Ref: Adele Ferguson. 18 October 2008 Source:www.theaustralian.com.au/archive/business-old/counting-cost-of-derivatives/story-e6frg9j6-1111117783464

[304] Source:cecaust.com.au/main.asp?sub=releases&id=2012_11_08_Derivatives_Cancer.html Kill the $20 trillion derivatives cancer. November 2012.]

[305] barnabyisright.com/resources-articles/tick-tick-tick-aussie-banks-15-trillion-time-bomb retrieved 2015-04-20

[306] barnabyisright.com/2010/08/16/aussie-banks-14-2t-time-bomb retrieved 2015-04-20

[307] Media Release 2012-11-08 Craig Isherwood. cecaust.com.au/main.asp?sub=releases&id=2012_11_08_Derivatives_Cancer.html retrieved 2015-04-20

[308] By WikiLeaks Party National Council member Kellie Tranter http://www.wikileaksparty.org.au/blog/lurking-beneath-australia-s-aaa-economy.html retrieved 2015-04-20

[309] A Secret Country by John Pilger. 1992