Thursday, May 24, 2007

The curious behaviour of our incurious Future Fund guardians

The institution hired by the government's Future Fund to act as the custodian of Australia's budget surpluses performed a similar role for a US fund whose members lost more than $1 billion.

The Chicago-based Northern Trust Corporation was the trustee of the Enron staff superannuation scheme. Enron collapsed in 2001. A US district court found that Northern Trust knew or should have known that the firm was in financial distress yet it continued to buy and hold its shares. Northern Trust settled the case with a payment of $US 37.5 million.

The chief executive of Australia's Future Fund Paul Costello told a Senate estimates hearing yesterday that the Fund had accepted the firm's word that it had not behaved improperly.

It had not made independent inquiries.

"We were not concerned that this represented a risk to us in terms of the arrangements that we were seeking to put in place with Northern Trust,'' he said.

"Northern Trust has made it clear that they in no way accepted guilt or responsibility. They settled the transaction, but no way accepted guilt if that's the right word for their action.''

In Question Time the Treasurer distanced himself from the Fund’s decision to appoint the US firm as its custodian... saying that the Future Fund was an independent statutory corporation not subject to government direction.

He said as he understood it, the only Australian firm bidding against Northern Trust for the job of custodian was the National Australia Bank.

“One could say that the National Australia Bank has been the subject of its own inquiries, has it not? Were there not currency traders at the National Australia Bank who have been the subject of charges? The bank dealt with those matters, as it should have. Does it have an unblemished record? No,” the Treasurer said.

“It would be very, very dangerous to say that no financial institution which has ever been the subject of litigation could be trusted in relation to the financial affairs of individuals or companies or government. As far as the government is concerned, the Future Fund conducted an open and honest tender.”

Under questioning at the estimates hearing the Future Fund’s CEO Paul Costello declined to reveal whether Northern Trust had submitted the lowest cost tender.

“They provided a very competitive fee and that was one of our selection criteria,” Mr Costello said.

The Chairman of the Future Fund, the former Commonwealth Bank chief David Murray declined an invitation to attend the estimates hearing. Asked on ABC radio whether his board had rejected the recommendation of the consultants it had hired to help choose the custodian he did not directly reply.

“We won’t step back from our accountability, the decision was ours. The experts that we appointed to help us compiled a lot of information and helped us to understand how to evaluate on a level basis all of the proposals we were given. We accepted the analysis that they put in front of us and made the decision ourselves,” he said.

Announced by the Treasurer in September 2004 as a fund that would accumulate budget surpluses to meet future public service superannuation liabilities, the Future Fund has yet to make investments. Its assets comprise cash on deposit with the Reserve Bank and Telstra shares. It will also manage the new higher Education endowment Fund.

Labor’s Finance Spokesman Lindsay Tanner said that it was wrong to say that the Treasurer had no power to issue directions to the Future Fund. He had done so and had decided not to do so in this instance.