Banks, the tax and the $14 billion insider trade

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Wooden duck on rubber tube with title Committed Liquidity Facility
Illustration by Michael Mucci

The biggest insider trade of the year has just been executed before our very eyes thanks to a monumental government leak.

Word of the Budget measure to hit the banks with a $6 billion tax hike spread through the market late yesterday, wiping $14 billion off the value of the banking sector.

Now, bank stocks are bouncing. Those who sold and short-sold bank stocks on yesterday’s leak – and ensuing “rumourtrage” – will have cleaned up. No doubt many are “covering” their positions, that is buying back bank stocks, right now.

And that may be a wise thing. Despite on the bank-lobby scaremongering in the financial press, the banks are effectively an oligopoly which will simply compensate itself for the $6 billion Budget hit via shareholders or customers.

As new lobby boss Anna Bligh – former Queensland premier and now chief of the Australian Bankers Association – inferred menacingly in ABC Budget coverage last night, the banks would “make it up” elsewhere.

The broader financial implications of the government’s move may be felt in other countries such as Canada, which also has a small bunch of very big banks, as it appears touching up big banks for billions is a relatively painless exercise politically.

As for the wailing and gnashing of teeth in the bank lobby, let’s not forget there is no more mollycoddled sector. Unlike any other large corporations, the banks have an explicit sovereign guarantee. The Committed Liquidity Facility (CLF) is effectively a hundred billion dollar bail-out fund for the banks to access should they get into strife.

If it looks like a duck and quacks like one .

This CLF is the quintessential case of “privatising the profits and socialising the losses”. In the view of this humble reporter, they don’t have a licence to whinge.

Casting back to the Global Financial Crisis, the banks had at least three protections from government introduced during the emergency.

If readers would like to have a stab at the value of this “government love” in dollar-terms, please touch base.

Not only were the banks protected from short-selling due to emergency measures (thereby keeping their share prices high and their capital costs low), they also enjoyed the government’s protection on their bank deposits.

Even better, they made billions from the sovereign guarantee as their capital raisings overseas (Macquarie alone did about $17 billion) were struck at very choice rates. The could raise funds cheaply on global bond markets with the government credit rating then sell money to their customers at far higher rates.

There were other, more complex measures too, such as the Reserve Bank special liquidity measures which allowed them to trade in mortgage-backed securities (RMBS) for cash during the GFC.

To recap: five kinds of taxpayer subsidies:

  1. Sovereign funding guarantee.
  2. Sovereign deposit guarantee.
  3. Special RBA window for trading RMBS.
  4. Ban on short-trading on the share market.
  5. CLF Reserve Bank “bail-out fund” in case of emergency.

And so it is that, as much as it is a tough ask for five institutions whose net profit surpasses $30 a year, there ought to be zero whinging from the banks.

Then there are the leaks and the insider trades. Who made a killing today and yesterday? It will never be investigated so we will never know as those who were privy to the Budget information will be too big to prosecute.

Even if they were pursued, the information would not be in an email, but rather word-of-mouth, in which case the insider traders could comfortably plead, “We looked at bank valuations and felt they were overpriced at the time … it was merely a coincidence”.

Macquarie’s junk yard dogs on the prowl

  • Paul Dawson

    Whether or not these sharks can plead innocence it would be good if they had to front up to an inquiry – anonymity is the best cover, but these trades would have been recorded. One suspects that the stock market is rigged ( as it has always been – look back to the crash of “29)

  • mark

    Dont call it a tax, call it an inurance levy, and it should be multiplied on the risky derivatives if they want Gov backing in the next GFC?

  • mark

    And, ASICs call for a federal Police enquiry? Five proffessional tight lipped directors vs hundreds of Five-eyes Sigint interpreters,… Hows our federal police going to get inside five eyes to guage any holes? FB deleted such comments from my feed, M