We’ve been warned – Australian regulators must act to avoid investment scandals: Kohler

The humiliation of the US Securities and Exchange Commission over Bernard Madoff and Allen Stanford, and President Obama’s $US275 billion mortgage bailout plan, are early wake-up calls for Australia.
There are big differences between Australia and the US, but that shouldn’t breed complacency.

It’s likely that Australia’s hard landing has merely been postponed, not cancelled. Even if, by some miracle, Australia can actually escape the global meltdown that is now evident, should Australia’s policy-makers assume that this country will somehow muddle through (as opposed to asserting that for political purposes)?

From what we are now witnessing in the news out of Japan and Europe, including Russia, as well as the US, the world is experiencing an economic catastrophe far beyond anything imagined even a few months ago. The idea that Australia can avoid a painful recession is a delusion.

It is imperative that Australia’s economic and securities policy-makers now establish a disaster plan, just like the police forces did with the threat of terrorism. The Government and the Australian Securities and Investments Commission have been given some precious breathing space, which is quickly running out. It should be used urgently.

In the US, it has been discovered that the SEC can’t pick up Ponzi schemes. Madoff and Stanford ran obvious ones – they were one-man bands; they were hedge funds without hedge fund fees; their returns were suspiciously consistent (in 1995 and 1996, for example, the returns were identical, 15.71 per cent) and so on.

Are there none of these in Australia? Well, yes, there was Chartwell in Geelong, which has caused so much misery in a town that can least afford it.

Storm Financial in Townsville was not so much a Ponzi scheme (where new money finances the returns on old money) as a scandalous partnership between spivs and a bank, that should have known better, to place ordinary people in harm’s way.

ASIC should urgently audit Australia’s investment schemes and look for the warning signs that have been highlighted by the Madoff and Stanford debacles, if only for its own sake. The credibility and morale of the SEC has been severely damaged by its failure to act early against those two charlatans.

Australia has an appalling system for managing savings in this country, in which financial salespeople are allowed to masquerade as advisers and receive large commissions for selling on “investment products”, which in turn are allowed to charge high, unregulated fees. It is a disaster waiting to happen.

And the Rudd Government should not simply assume that Australia will escape a significant rise in mortgage defaults.

Yes, there are two big differences: Australia’s banks are well capitalised and, unlike in the US, mortgage interest rates have fallen sharply with the reduction in the cash rate.

But unemployment here is about to rise sharply and house prices are still too high relatively to income (three times average income versus a long-term figure of less than one).

The US Government has now been forced to use taxpayers’ money to subsidise the modification of home loans (that is, reduce repayments in an effort to cut foreclosures).

The plan is a vast experiment in moral hazard (borrowers who took on too much debt are just being let off the hook) and it may not work anyway because ownership of the loans is so widely dispersed through mortgage securitisation.

But what is Kevin Rudd’s plan? Hope for the best?

This article first appeared on Business Spectator