THE Reserve Bank of Australia was ”keeping BankWest alive” while it waited for its ”saviour” in the Commonwealth Bank during the financial crisis in 2008.
This is the conclusion drawn by Hugh McLernon, a director of the litigation funder IMF Australia, who is spearheading a lawsuit against CBA on behalf of former BankWest clients.
CBA acquired BankWest on the cheap at the height of the financial meltdown in October 2008 and promptly called in a slew of loans from east coast property developers who are now seeking to coalesce in a class action to sue the bank for unfairly calling in their loans.
Mr McLernon’s analysis of the BankWest bailout also runs counter to banking lobby arguments that the banks were never propped up by taxpayer cash during the crisis.
The issue of government support for the banks is especially sensitive now since ANZ and Westpac increased their mortgage rates last
Friday, independently of any move in the Reserve Bank’s cash rate.
According to Mr McLernon, the Reserve appeared to have had BankWest ”on a drip” from August to December 2008 as the lender struggled to source funding for its loan book. Banking statistics lodged with the Australian Prudential Regulatory Authority show that either the Reserve or Australian financial institutions were providing monthly cash to BankWest.
”And all my instincts as a criminal lawyer tell me that the RBA [rather than other banks] was the lender,” Mr McLernon told BusinessDay. ”Although I am not suggesting that the RBA and the government should not have assisted at the time.”
The documents show BankWest received $29 million in August 2008, rising to $3.75 billion in December that year. The amount increased during the zenith of the financial crisis but ceased once CBA had settled on the BankWest deal in December.
A former Treasury official told BusinessDay last week that it was the collateral pledged by troubled lenders such as BankWest that was the critical factor in determining whether these facilities should be characterised as cash ”bailouts”. ”The US Fed was accepting car loans at the time. That is clearly a bailout.”
Before CBA snapped it up from its British parent HBOS for a mere $2.1 billion in October 2008 – 20 per cent below book value – BankWest was struggling. It increasingly called on its parent for funds throughout 2008. In the nine months between December 2007 and September 2008, the amount owed by BankWest to HBOS doubled to $17 billion.
As part of its deal with BankWest, CBA demanded a warranty that enabled it to claw back $200 million from the sale price in the event the assets were not what they were cracked up to be. Not much is known of the warranty, IMF says; neither the timeframe nor the types of loans that were covered.
But what is clear is that the CBA called on it. It also promptly reviewed the assets and foreclosed on a number of east coast developers after imposing onerous conditions, including penalty interest of about 18 per cent.
The typical complainant is a property developer with a loan of $20 million to $30 million, Mr McLernon says.
IMF is seeking to establish a case for the CBA making deliberate loan impairments so as to reap a profit on the clawback from HBOS. Website documents cite the BusinessDay banking writer Danny John, now the Herald’s business editor, who wrote in May 2009 that CBA had ”activated a clause in the sale agreement to have the original price independently reviewed”. ”[The] Commonwealth Bank is seeking to cut the $2.1 billion price it paid to buy BankWest four months ago,” the story said, ”when it emerged yesterday its new subsidiary had greatly raised its level of impairment charges to cover increasing bad debt.”
Should the litigation funder proceed it would be vital to establish if there were a time limit on the warranty, Mr McLernon says.