Horses Have Bolted, But Investors Still Want Blood

Sydney Morning Herald

Tuesday April 15, 2008

Ian Verrender

Was that the ominous sound of a gate slamming over the ever diminishing thunder of horses bolting into the distance? Last Friday, the Australian Securities and Investments Commission began advertising for analysts with the skills to investigate manipulation of our capital markets.

Some may say it's a little late.

Others would counter there now are experienced hands available who can get straight to the nub of the matter.

And yesterday, ANZ Banking Group's boss, Mike Smith - fresh from a whirlwind trip of China at the same time as our Prime Minister - took a leaf from "The Politicians Guide On How To Be Seen To Be Doing Something" by ordering a review of securities lending and ANZ's involvement in the collapsed Opes Prime.

Better late than never. Items on the agenda include whether ANZ employees were complying with a) Australian law and b) internal policies, procedures and ethical standards.

That it even has to raise these as issues for investigation is a savage indictment on the bank, its board and its management.

Most of us take it for granted that the senior officers of one of our biggest companies and one of the "four pillars" of our financial establishment act within the law - let alone with integrity.

Smith hasn't been in the job long enough to take blame for the unfolding debacle at ANZ.

And he's right to order a full inquiry, so long as the results of those investigations are made public.

But there are only two chances the ANZ will reveal the full extent of its involvement in this disaster - none and Buckley's.

Even at this stage, just weeks after the collapse of the stockbrokers Tricom, Opes and now Lift Securities, it is clear at the very least there has been a total failure of risk management within ANZ, while the regulators, the Australian Securities Exchange and ASIC, have at best idly sat and watched. Within ANZ, there have been serious concerns among some staff for at least four years at the way the bank was operating its margin lending business through intermediaries.

ANZ used Tricom and Opes as agents or dealers to dole out its money. Merrill Lynch, the other main player in this farce, used Opes and Lift.

It was a unique arrangement that involved loans going in both directions, bank to client and client to bank, all through an intermediary.

Under what's known as the Australian Master Securities Lending Agreement, Tricom and Opes lent ANZ's money to individual clients. The clients, in return, lent their shares to ANZ via Tricom and Opes. This arrangement is wildly at odds with every other dealer or broking arrangement in the land. Your house, your car and your mobile phone belong to you, even if you borrowed the money for the purchase.

If the mortgage broker, the car dealer and the mobile phone retailer all go belly-up, it won't make a lick of difference to you so long as you keep up the repayments. Not so with margin loans over shares.

For the banks it was easy money. They didn't have the onerous task of managing individual accounts. They just handed the money over in bulk, took the fees - and held the shares as security.

So far, four ANZ staffers have been caught with Opes Prime margin lending accounts and have been suspended.

But accusations are emerging of conflicts of interest - including preferential treatment in lucrative bull market floats - stretching back at least four years from the time ANZ first became involved with Tricom.

Smith says he's planning a fully transparent inquiry into his bank's involvement in Opes.

He should widen that to a full investigation of ANZ's margin lending through intermediaries including Tricom. Perhaps he could find out just how and why Tricom - which now is propped up by ANZ and Babcock & Brown - managed to retrieve its shares from the collapsed Opes when other Opes clients couldn't.

Just how much, if anything, Smith will be able to reveal from his investigations is open to question because he's likely to be nobbled by his own lawyers.

The finger-pointing now is on in earnest and hordes of angry investors are looking to recoup their cash.

Court cases already are under way in Sydney, Melbourne and Perth and more are planned.

Professional litigation funders are on to these cases like flies to a cadaver, trying to drum up support for class actions.

And if there's one thing they know, that is it's useless pursuing those with no cash.

They'll be targeting ANZ and Merrill Lynch because that's where the money is.

That's where they can inflict the most reputational damage. And that's where their main chance of getting any sort of compensation lies.

So don't expect Mike Smith to be providing the ammo.

© 2008 Sydney Morning Herald

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