Wall Street’s triple cave-in

Nick Sherry got it right.

“By the end of the day,” he said, “Lehman Brothers may no longer exist.”

The Superannuation Minister was speaking at question time in the Senate.

And just a few hours later, this once proud US investment bank has applied for bankruptcy protection.

The big brokerage firm, Merrill Lynch, was  also sold to the Bank of America yesterday.

And a third iconic  US giant, the American Insurance Group, had announced that it is seeking a $US40 billion loan from Federal authorities.

World share prices could tank, as a result of these dramatic developments.

A re-run of 1931 cannot be ruled out.

And Senator Sherry has a particularly big stake in that.

Australian superannuation funds have already suffered sharp reverses, over the past year, as share markets plunged as a result of  the US credit crunch.

They would be in for even more distress, if global share markets do go into free-fall now.

The knock-on effects would be much wider.

A glance at any good account of the Great Depression would show  just how bad things can get.

But they shouldn’t.

The chairman of the US Federal Reserve, Ben Bernanke, is an acknowledged expert on the Great Depression.

So he, more than just about any-one else, should know what is necessary, to avoid a re-run.

How, though, does the Treasurer, Wayne Swan, rate Australia’s chances in all this?

Mr Swan described the weekend’s developments in the US, succinctly, as “substantial.”

But he said Australia is better placed than most countries to “weather the storm.”

He said Australia’s banks are “well regulated” and “well capitalised.”

But he added “our economy is not immune from these developments.”

He, too, is right about that.

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US markets teeter

So it has come to this.

The US Treasury Secretary, Hank Paulson, is begging other banks to buy the big, once-proud,  US investment bank, Lehman Brothers.

The British Bank, Barclays, is looking at doing so, at a bargain basement price.

We must all hope that it, or some-one else, does make that purchase.

Because stability, of some kind, is now desperately needed, in US – and global – financial markets.

That will take nothing less than a stiff injection of capital, from somewhere.

US government officials and Wall Street executives have been meeting over the weekend, to assess the risks that US markets now face, and the steps that might be taken, to settle the situation.So far, though, no clear plan has emerged.

Even though the authorities know, only too well,  that worries are rising over other icons of the US financial system, like the insurance giant the American International Group and the nation’s biggest brokerage firm, Merrill Lynch.

A new floor, under the market, is now desparately needed.
One analyst, quoted by the New York Times, James L Melcher,   put it all very forcefully.

“You have to think of this like there is an epidemic going on,” he said.
“An epidemic of capital destruction.”

And it’s all quite personal.

It is now possible, for example, to buy a four bedroom home in Louisville, for less than $US30,000.

That figure is enough to make any hard-pressed Australian home-owner, struggling to meet stiff monthly mortgage payments, dream of emigrating to the US.

But it takes very little imagination to realise how much distress has hit the American family, that once lived in that home.

The basic building blocks of the US economy are still crumbling.

Home prices there are still falling. Defaults are rising, along with unemployment. And consumer spending is sputtering.

This is a situation of clear and present danger, not just for the US, but for the entire world.

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Wall Street plunges

Wall Street plunged last night, in what is now a four day losing streak.

The Dow Jones industrial index fell 319.90 points to 11,212.98.

The S&P 500 closed 38.15 points lower at 1,236.83.

And the tech-heavy NASDAQ composite index plunged 74.69 points to 2,259.04.

Oil fell another $US1.46 a barrel to $US107.89.

And the $A was trading, a short time ago, at 82.98 US cents.

So what went wrong?

The one thing that is absolutely clear is that the sub-prime mortgage crisis still has the US stock market firmly in its grasp.

Rising unemployment, mixed retail sales figures and, oddly enough, weaker all prices all discouraged US share traders.

And fears for the future of several sick financial companies still persist.

Some analysts now see sliding oil prices as a signal that both US and world growth is slowing.

One said, glumly, there’s basically not much good news about, at the moment.

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What will Labor do with super?

The Labor Party hasn’t finished with superannuation reform yet.

And a new MP has given the clearest indication yet of where it is likely to go.

The South Australian Senator Don Farrell did this in his maiden speech.

He declared that Labor has “unfinished business” with superannuation.

“We must ensure that women who move in an out of the workforce for child rearing are fairly treated,” he said.

“We might want to consider accessing pension payments from Super accounts through an ATM>”

“And, ultimately, hte scheme needs to be boosted by higher contributions, so that eventually all working Australians can retire with dignity.,” Senator Farrell said.

These are not small ambitions.

Why, though, should we take any notice of what a new backbencher says, on anything?

Take a look at Senator Farrell’s background.

He is a long time SDA man. That’s the Shop Distributive and Allied Trades Union.

Don Farrell was prominent among those who put the REST fund together for the shoppies.

And he”s not going to stop now.

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A super way to double your dollar

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A dollar invested in superannuation ten years ago would be worth $2.07 today, the Federal Superannuation Minister told parliament yesterday.

Senator Nick Sherry admitted that Australia’s superannuation funds suffered  an average 6.5 per cent set back,  lasst financial year as the share market turned bad.

But he said  the $2.07 included an allowance for that.

” The matter of superannuation fund returns for many millions of Australians is of course very, very important, and at no time more important for millions who have received fund statements which show widespread and deep negative rates of return—negative rates of return averaging approximately 6.5 per cent,” Senator Sherry said..

“What is important in this context is to understand that superannuation is a long-term form of investment, over 35 or 40 years or even longer, depending on when a person retires,” he added..

“So it is the long-term rate of return in a defined contribution system which is the relevant measure—over at least five to seven years, preferably 10 years.”

Senator Sherry was, of course, making a point.

That of course was, that superannuation needs to be assessed in a medium to long term context, because it is a long term investment.

He was not expecting to be taken too literally.

If he was, he would have allowed for inflation in reaching that $2.07 figure.

Ominously, though, Senator Sherry  also said the sub-prime crisis, which precipitated the stock market crisis, would be with us for some time yet.

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Industry welcomes unit pricing changes

The financial services industry is welcoming proposed changes to unit pricing rules.

These are spelt out in a guide published jointly by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.

It is called Unit Pricing – Guide to good practice for the life insurance, superannuation and funds management industries.

The Investment and Financial Services Association praised these authorities for their decisions.

“In particular IFSA welcomes the amendment to permit scheme operators to elect not to make payments to exited members for unit pricing errors where the compensation due is less than $20,” IFSA’s deputy CEO, John O’Shaugnessy said.

Mr O’Shaugnessy described this change as “commercially workable.”

He said his association – and its Unit Pricing Focus Group – had been working closely with these authorities on these changes.

“IFSA now looks forward to further  the regulators with further enhancements to the Guide,” Mr O’Shaugnessy  said.

The revised guide can be found at http://www.apra.gov.au and following the prompts from the front page.

APRA’s Deputy Chairman, Ross Jones, said there are “significant costs” involved in drawing small cheques.

He said drawing the line at $20 was reasonable.

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Senate haggling about to begin

The government’s first round of haggling, with recalcitrant Senators, is now in sight.

The Coalition has decided to block the government’s plan to lift the Medicare levy threshold to $100,000 for singles.

The opposition doesn’t have the numbers in the Senate to block that measure, by itself.

A small clutch of Greens and independents now holds the balance of power.

A former Prime Minister, Paul Keating, despised the Senate, dismissing its members as “unrepresentative swill.”

The new government of Kevin Rudd will have to be more diplomatic.

And Family First Senator, Steve Fielding, has already set his terms, in the latest stoush.

He says he will not vote for the government’s bill, unless low income families withhttp://privatebriefing.com.au/2008/08/28/how-inflation-hits-working-families private health insurance are compensated.

He says these families are those least able to afford private health insurance.

But they make that choice, to protect their financial security.

“They already provide a rebate,” Senator Fielding said.

“That rebate needs to be looked at to work out how we can compensate low income families,” he added.

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The investment watchdog’s low growl

As any experienced reporter will tell you, Friday is almost always lousy day to make a big announcement.

That is especially so if your announcement happens to coincide with major events, such as the opening of an Olympic Games and Russia’s invasion of Georgia.

These tie up what little spare space is left, in the heavily pre-planned weekend papers.

Yet the warnings that Australia’s investment watchdog gave last Friday should not be overlooked.

So we will repeat the main points here.

Belinda Gibson, a commissioner of the Australian Securities and Investments Commission told the Investment and Financial Services Association’s Annual Conference, that it would be watching five areas, very closely, while the present turmoil on financial markets persists.

They are:-

• Managed Investment Schemes (MIS) and the disclosure of risk

• Credit Ratings Agencies (CRA)

• Listed investment vehicles

• Audit and accounting issues surrounding present valuation methodologies and disclosure for complicated financial assets and

• Market surveillance for illegal trading activities.

ASIC recently issued a draft regulatory guide for mortgage and property funds.

That followed its detailed work on unlisted and unrated debenture products.

“It is perhaps self evident to say that where a MIS is in financial difficulties, we will want to focus management on liquidity, redemption practices and valuations,”  Ms Gibson said.

She also said that ASIC is working with Treasury on a review of how credit rating agencies operate.

Ms Gibson said that is part of Australia’s response to the Financial Stability Forum recommendations.

“It recently held roundtables with the CRAs, industry groups, research houses and consumer groups,” she said.

Ms Gibson said the review was considering the extent to which investors rely on the ratings agencies.

It would also investigate whether the level of diligence and discussion undertaken by agencies warrants this reliance.

Possible conflicts of interest would also be watched.

“ASIC will also focus on major transactions involving listed investment vehicles that are trading at a significant discount to their announced asset values,” Ms Gibson said.

“These transactions aim to increase share price or provide an alternative exit mechanism for holders.

“These transactions can take the form of privatisation, substantial buy-backs, buy-outs of activist shareholders, asset sales and wind-ups.

“ASIC will also look at adequacy and timeliness of disclosure,” Ms Gibson said.

“Directors should be frank about alternatives to the proposed transaction, and the possible benefits of the transaction to the person proposing it,” she added.

You have been warned.

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