Bulls in retreat as bears roar to the fore

by Michael West | Jun 18, 2011 | Business

Commonwealth Bank CEO Ralph Norris. Photo: Rob Homer

BULL-MARKET correction? Or just another leg down in a longer bear market?

The bulls are lying low these days. Until only a few weeks ago, they were saying the bull market had begun at the nadir of the financial crisis in early 2009. The bears said the rebound was merely an uptick in the great bear market, which had begun in 2008.

Now the bears are back, mooting a haunting resemblance to the great crash of 1929, when Wall Street recovered in 1930 only to tank again, not touching its peak until 1954.

Not to worry – things should improve before the 2030s! We have Asian industrialisation, far deeper global capital markets and more sophisticated regulation. But there is no quick fix. The encroaching despair is borne of the realisation that spraying cash at Wall Street hasn’t worked. Keynesianism, once again, is in crisis. Forget Greece. If the US were hunky-dory, Greece would be a mere speed bump in the recovery.

On Wall Street, thanks to taxpayers, the bonuses are back. The Dow is still 90 per cent above its lows, corporate balance sheets are in fine shape, yet the jobless number in the US is stuck at 14 million. The real unemployment figure is more like 20 million. There are 40 million Americans on food stamps. Banks aren’t lending. People aren’t spending.

The conundrum for investors is there is nothing to buy. Share prices have almost doubled. Bond yields are negligible. The property market is in glut. Commodities carry China risk. The big question is: will there be a “flight to quality” and the US dollar? The alternative is hard to contemplate.

It is always darkest before dawn. Problem is, it feels like 2.30 in the morning.

Ahem: Exclamation: used to represent the noise made when clearing the throat, typically to attract attention or express disapproval or embarrassment.”

Oxford Dictionary.

Originating in the 18th century, ”ahem” – the lengthened form of the word “hem” – is perhaps the most courteous response to Commonwealth Bank’s protestations this week that it had never considered Insurance Australia Group as a takeover prospect.

The bank would be in dereliction of its duty to shareholders had it not at least run the numbers. All the banks have clandestine corporate teams beavering away on merger and acquisition deals.

Were it not for the pernickety political implications of the biggest bank in Australia swallowing the biggest general insurer, IAG would be a sitting duck.

The bank needs top-line growth. Its capacity to slug customers with fees is constrained. Some 60 per cent of its lending book is concentrated in home loans. Credit is expanding at its lowest rate in 20 years. Wither the growth?

CBA chief Ralph Norris can hardly buy another bank, nor a life insurer or funds manager of any size, so insurance has to be on the menu. In banking, there is nowhere else to go except offshore – and that’s risky.

Would you like some home-and-contents insurance with that home loan, madam?

Of course! Why, personal insurance premiums are growing at 7 per cent – what a lovely idea!

Insurers have two sources of revenue: premium income and investment income. Slap the IAG investments into funds management unit Colonial.

Marry the bank’s fledgling general insurance operation, CommInsure, with IAG and its cost of funding NRMA, SGIC, RACV and SGIO becomes far more amenable, what with a big bank balance sheet replete with implicit government backing.

And so we get to CBA’s tenuous denial, even in the face of a rare ”on-the-record” account of two meetings between Norris and the pesky and indefatigable NRMA dissident Richard Talbot. The second meeting was last October.

Down to the fine detail of tea and silver service, care of Norris’s butler – yes butler – high in the bank’s eyrie on level 18, Darling Park, Talbot says Norris canvassed the prospect of a takeover play for IAG should its share price dip below $3.40.

Norris was keen to hear Talbot’s views, as Talbot was the chief dissident in opposing the NRMA’s demutualisation as it morphed into IAG. He is familiar with the 850,000-strong shareholder base. The bank doesn’t dispute the meetings, only that Norris discussed a takeover.

Let’s hark back to press speculation in the year of the financial crisis. CBA issued this release on October 2, 2008: ”We do not have any offer with HBOS to acquire BankWest”.

After an apparently diminutive due-diligence period, the bank announced on October 8: ”CBA to acquire Bankwest.”

Ahem. One wonders therefore that when CBA says it has no interest ”in acquiring Insurance Australia Group” it might yet entertain an interest in ”purchasing” Insurance Australia Group.

Mind you, so fraught politically would a CBA takeover of IAG be, that a deal is unlikely. Even now, with the serial predator QBE out of the picture, its depressed share price rendering a scrip bid too dilutive.

But even if there were a deal on the table, you could bet that CBA would deny it with high indignation as: 1. there was a folder between the actual deal and the table so the deal was not literally “on the table”, 2. it wasn’t a deal, it was a ”transaction proposal” and 3. it wasn’t even a table, it was a desk! You’ll be hearing from our lawyers!

Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

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