Report : Ted Baxter
Content : ASIC Greg Medcraft, Australian Securitisation Forum, Societe Generale, recent GFC news.
Tuesday, 22nd November 2011
In a tragic twist of fate the banking industry manages to insert as the head of ASIC a dyed the in wool 30 year merchant banker who was active in the origination, structuring, distribution and investment in securities backed by among other things residential mortgages ' the very instruments that led to the sub-prime crisis and consequent Global Financial Crisis.
Hi all. It's Teddy again (by the way that's not my real name). It wasn't my turn to post something today but I begged my editor to let me jump the queue and he did, bless his soul. I just couldn't help myself. I am so angry knowing about ASIC's boss, Medcraft.
Before we expose him it's important to give you background on the Global Financial Crisis (GFC) and its origin and for this I apologise in advance. From this background I hope I can get the message across to you because I am not a writer by profession and I've been thrown in at the deep end with only my economics background to draw on.
Background of the Sub-Prime crisis and GFC
a) The goldilocks economy era of the Clinton / Greenspan duo was going gangbusters, but relying on the home construction industry economic growth engine. This was the case around the world not just in the U.S.
b) This home construction growth engine began to saturate as those who could afford to buy property, did buy property and in many cases 2nd and 3rd properties.
c) As the buyers who could afford to purchase these property assets got used up it became obvious to the banking industry that their circular lending would grind to a halt.
d) Should this slowdown eventuate then the major players would be out of the money. The bankers who needed the growth in their loan books would lose their bonuses if growth declined, the developers who built all these homes that couldn't be occupied due to oversupply would lose their profits, be forced out of business or go broke and of course the sales people who marketed and sold these sub-prime assets would be left with severely diminished incomes or out of a job.
e) In the United States the bankers, developers and sales people got together and hatched a plan to keep things on the boil. This plan required creating additional demand or even a new source of demand to keep soaking up the oversupply allowing them to continue expanding the housing stock.
f) The additional demand was created by lobbying governments and putting the wind up these governments about economic slowdown and job losses. As the pending slowdown became obvious to the various treasuries and central banks in the western world these governments elected to stimulate an already oversupplied housing market with home buyer grants and tax breaks. This even happened in Australia with Prime Minister Howard's election winning first home-owners grant stimulus package which has continued in one form or another to this day.
g) When the engorged additional demand was fully utilised the bankers, developers and sales people had to find a market which didn't exist forcing them to create new one. These smart greedy men were able to find a crack in American legislation enabling them to create a whole new group of housing investors'. Their logic was brilliantly nefarious. They reasoned that there were only 2 types of buyers for property. Those who could afford to purchase and those who couldn't. Those who could were all used up, that left only those who couldn't afford to purchase a property. All that remained was to find a way to get those who couldn't afford to buy property to in fact buy property.
h) The obstacles needed to be overcome to achieve this were few and easy to solve.
The first problem was to convince poor people that they should buy and overcome the concern of affordability. This was done by a smart sales person saying, you know property, it's safe and it always goes up and it will cost you nothing, you can borrow the lot including the costs. So if you buy, let it go up, sell, then take the profit. Easy money!' But what happens if things go wrong and I'm stuck with the property valued less than what I owe?' the canny potential investor asks. Ha, you can't lose' comes the reply, you live in a non-judicial foreclosure state where effectively you can just hand the key in, walk away and not be responsible for any negative equity.' Sounds great. I'll take one of those.' says the now gullible investor.
The second problem, once the sale is made is to actually get the guy finance to buy the place. The sales person approaches a mortgage originator enthusiastically declaring I've got a sale and you can lend some more money!' The bank replies, we need the figures for my bonus but this guy is too risky, he can't afford it.' The sales guy replies, no problem, you can just securitize these risky loans backed by sub-prime mortgages, turn them into an asset in their own right and sell them off to other investors such as banks around the world who can on-sell them (for a good commission) to unsuspecting investors for us. You can even sell these sub-prime assets to local authorities, churches, councils, charities, hospitals, nursing homes, retirement villages, listed public companies, universities, superannuation funds etc in Australia. Tell you what, to make it easy we'll use Lehman Brothers to push the stuff and pay Standard & Poor's and Moody's Investor Services a fee to give them a AA or AAA credit rating. This way everyone will trust the thing'.
The ability to keep demand in equilibrium with supply required house prices to continue increasing. As one of my sources so eloquently put it in late 2007:
â€œNot only did prices not increase at the required rate or even flatten, but actually the worst occurred. US housing prices declined. The consequence of this asset value decline was that the house of cards' began to crumble. The original sub-prime borrowers, who were the driving force underpinning the assets, began to default on their loan repayments. This meant that the income stream of the asset dried up rendering the asset less valuable. Consequently the value of the original loans to the banks declined to the extent that nobody wanted them. Therefore this securitised asset could not be valued or traded by the market and became illiquid. Effectively the owners i.e. the secondary investors who bought these securitised assets went into margin call'.Â Although all the houses that underpinned these securities are in the US, the effect of Globalisation ensured that the ownership of these assets was far and wide. Even some council's within Australia were caught out. Clearly globalisation has allowed this virus to spread beyond the borders within which it originated. The virus of illiquidity required the vaccine of injected money. The financial health authorities, who are the world's central banks led by the US Federal Reserve, stepped in. The spread of the financial virus appears to have been contained with the strengthening of international banking balance sheets through the injection of liquidity-producing cash from various central banksâ€.
The above characterisation is pretty accurate about what happened re the sub-prime GFC with the exception of the view that the world's central banks had contained the problem. As we now know the financial cancer of the GFC is not in remission and is continuing to spread unabated, especially to Europe.
Now to the guts of my story and I apologise for the necessary lengthy pre-amble. It might surprise you to know that our ol' mate Greg Medcraft (he's not really anyone's mate), the current and newly appointed head of ASIC, is a wolf turned shepherd. A quick look into his background revealed the following:-
– He has had a long history working across global securitisation markets, the very markets that led to the sub-prime and Global Financial Crisis.
– In April 2008 whilst CBA victims / Storm clients were being groomed for disaster, Greg Medcraft was appointed executive director of the Australian Securitisation Forum.
– Prior to April 2008 he was managing director and global head of securitisation at SociÃ©tÃ© GÃ©nÃ©rale Corporate and Investment Banking in New York where he led a group of 110 specialists who were active in the origination, structuring, distribution, and investment in securities backed by commercial assets, for example trade receivables, commercial mortgages, corporate and small business loans, equipment leases AND consumer assets such as credit cards, student loans and residential mortgages (the stuff that sub-prime assets were made of). By the end of his tenure with SociÃ©tÃ© GÃ©nÃ©rale, the group was managing US$35 billion of asset backed investments.
– In total Medcraft has spent 30 years in various positions around the world with SociÃ©tÃ© GÃ©nÃ©rale including America, Asia, Europe and Australia developing and distributing (selling) various securitised assets including and especially mortgage backed securities in America.
– According to ASIC's website, in 2002 he co-founded the American Securitization Forum and was its chairman between 2005 and 2007. What ASIC fails to disclose (and ASIC is always going on about adequate disclosure) is that Medcraft was involved in ALL aspects of the securitisation industry in the period when the sub-prime securities were originated, manufactured and distributed. ASIC goes on to describe in a very innocuous and innocent sounding way, the American Forum as an industry group representing 350 member institutions comprising all major stakeholders in the US$1 trillion US securitisation market. Again what ASIC fails to disclose (and ASIC is always going on about adequate disclosure) is that Medcraft's forum represented and he had a relationship with ALL of the manufacturers of sub-prime assets, including Lehman Brothers.
Scroll forward to 2009 after the sub-prime crisis was fully blown and what have we gotâ€¦Mr Greg Medcraft getting himself appointed to the police force tasked with overseeing the activities of his previous 30 years in merchant banking and securitisation of mortgage-backed securities. Is there a better place for the hare to hide than to hunt with the hounds?
I can only shake my head in dismay and ask myself how can this state of affairs possibly occur in this country were ANZAC's have died and are still dying to protect our freedoms and sense of fair play. How on earth did the banking industry manage to have appointed as head of ASIC one of their own? What chance is there that ASIC will ever genuinely chase the big banks now that they have their hands not just on all the money but also are now able to make and control the rules? Is this the ultimate form of corruption? Here is a man who has shown his colours with his statement, â€œOur market is operating fairly and efficientlyâ€. By what measure is this man claiming that the market is operating fairly? If a general vote could be taken then the outcome would show – there is no fairness in the market. I suppose I must concede that the market, though unfair to the many, is highly efficient at sucking the small investor dry and taking care of its own. In the immortalised words of one of our resident experts Basil Fawlty…â€œThis is exactly how Nazi Germany startedâ€.
Mr Medcraft, your DNA is your DNA and you cannot change. Your cunning to become head of the police force giving yourself immunity and being in a position to never investigate yourself or catch yourself for any wrongdoing is to be applauded. But here at The Plain Truth we have a job to do and that is to protect the honest, hard working small investors who trusted the banks with their life savings. Accordingly we must insist that you vacate your position as head of ASIC and hand over the reins to someone who cares and or who has been on the receiving end of men such as you. With your DNA how can bank victims and especially former Storm client expect you to fight the good fight against the CBA and an industry in which you learnt and thrived for more than 30 years? Sadly I think the only answer to this question is that you cannot.
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Till we meet again,
Content : ASIC Greg Medcraft, Australian Securitisation Forum, Societe Generale