Saturday, August 18, 2007

Who were the financial geniuses behind RAMS?

The next time you hear either the Coalition or the Labor Party talk about what financial geniuses they are, remember RAMS Home Loans.

Its business model was flawed from the start. It committed the textbook sin of “borrowing short” and “lending long”. It borrowed money short-term from international financiers and then lent it to Australian homebuyers for periods of 25 to 30 years.

It made sense only as long as international money was cheap.

On Wednesday night RAMS faced one of its regular refinancing deadlines and couldn’t find anyone to lend it the money.

Its existing lender has given a 180-day extension, but at a punishingly higher rate, although I suspect the rate it eventually pays will be even higher. If the US experience is any guide it could be one, two or three complete percentage points higher, for money that its customers expect to paying off at the same rate as they did before.

RAMS is a public company now, worth only a third of what it was when it floated last month. But it began life privately with some very high profile board members.

One was Tony Staley, a former Coalition minister and the national president of the Liberal Party. If he saw problems with the RAMS business model he didn’t prevail in its boardroom...

Another was George Campbell, who until next July remains a Labor Party Senator. The RAMS board was bipartisan, if not prescient.

The other lenders – Aussie, the Commonwealth and all - are not RAMS. Their business models make sense. That’s why the signals they are sending via radio interviews about the need to raise rates seem to me like collusion.

If they met in a room and decided to put up rates it would be illegal.


Australian shares and the Australian dollar went into freefall yesterday with the share market at one stage losing 5 per cent and the Australian dollar falling below US 80 cents for the first time in five months.

The fall in the share market was magnified by a decision of the Australian Securities Exchange to halt futures trading for more than an hour, leaving some traders flying blind.

The All Ordinaries Index closed down 1.54 per cent at 5,712, barely above where it began the year.

Prices plunged from Tokyo and Seoul to Beijing and Shangahi to Jakarta, Bangkok and Manila, with some of the losses exceeding 5 per cent after Wall Street slid a further 1.3 per cent Thursday morning Australian time.

The New York Dow Jones index was down 8 per cent from its peak in July; the Australian All Ordinaries index down 11 per cent.

The Australian home lender RAMS led the market down sliding a further 37 per cent to close at 86.5 cents, barely a third of its price when it debuted on the exchange just one months ago.

RAMS told the market that it had been due to refinance more than $6 billion in loans overnight on Wednesday but had been unable to do so. Its lenders had granted it a 180 day extension, but at a rate more than 0.25 percentage points higher. It said its troubles were the result of the tightening in global credit markets and that its business “continues to operate profitably”.

Also hard hit were the financiers Macquarie Bank, down 4 per cent, Allco, down 7 per cent, and Babcock & Brown, down 5 per cent.

The Treasurer Peter Costello said it was inevitable that companies that borrowed overseas would find themselves facing much higher costs.

“People who were raising money in the United States will not be able to raise it for the same type of prices. In order to raise it they will have to pay a bigger margin, and what’s going on at the moment is the world is re-pricing risk and they are going to charge a bigger a bigger premium for risk,” he said.

The Treasurer said he thought mainstream banks were not at risk and were not under pressure to raise their interest margins.

“There is no reason whatsoever why there should be any change in relation to the banking system. I make that very clear, because the banks are well capitalised and profitable. There is no reason whatsoever why they should be affected.”
The US economist David Hale said the events demonstrated just how far the financial globalisation has gone.

“The European Central Bank injected more than 155 billion euros of liquidity into markets because unemployed workers in Detroit are defaulting on home loans they obtained during 2006 that did not require any down payment, principal repayment or documentation of income,” he said.

“In the 1980s those defaults would have merely led to a run on the local bank.”
After the end of local trading yesterday the Australian dollar slid below US 80 cents to US 79.84 – a fall of 10 per cent from its peak of US 88.70 reached only three weeks ago.

The Reserve Bank Governor Glenn Stevens will be closely questioned about developments when he appears before a Parliamentary Committee this morning.