This is the conclusion drawn by Hugh McLernon, a director of litigation funder IMF Australia, who is spearheading a lawsuit against the 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 large number of loans from east coast property developers, who are now seeking to join in a class action to sue the bank for unfairly calling in their loans.
Mr McLernon’s analysis of the Bankwest bail-out 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 RBA appeared to have had Bankwest ”on a drip” from August to December 2008 as the ailing lender struggled to find funding for its loan book.
Banking statistics lodged with the Australian Prudential Regulatory Authority show that either the RBA 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 $3.752 billion in December that year.
They ramped up 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 characterised as cash ”bail-outs”. ”The US Fed was accepting car loans at the time. That is clearly a bail-out”.
Before CBA snapped it up from its embattled 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 that the assets weren’t what they were cracked up to be. Not much is known of the warranty, says IMF, neither about the timeframe involved 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 around 18 per cent.
The typical complainant is a property developer with a loan of $20 to $30 million, says Mr McLernon. IMF is yet to decide whether the separate claims should coalesce into a single action.
It 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 BusinessDay banking writer Danny John, now SMH business editor, who wrote in May 2009 that CBA had ”activated a clause in the sale agreement to have the original price independently reviewed”.
”Commonwealth Bank is seeking to cut the $2.1 billion price it paid to buy Bankwest four months ago,” said the story, ”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, says Mr McLernon, ”and if CBA had to call up the loans or take some enforcement action within that limited time in order to get the advantage of the warranty and if that warranty was unlimited, then there is some risk that the CBA has been enthusiastic in its quest to have Bankwest identify and take action against commercial property developers whose loans were within the categories set out in the warranty”.