They say the two institutions provided a quarter of the massive growth in bank funding to fight off the global credit crunch.
On this evidence the Future Fund management comes off somewhere between naïve and plain stupid. Commercial real estate, debt strategies, inability to figure currency conversions for a Senate hearing, failing to meet international governance standards! Messrs Costello and Neal would do better to cut out the business lunches and do their homework. I get a peanut butter sandwich for lunch, if I’m lucky, but even this geriatric lawyer can figure currency conversions. It appears to me that these guys are acting more like a start up hedge fund than the conservator of the country’s vital budget surpluses. The thought that these tyros are “looking at infrastructure, private equity and real estate investments” is kinda scary. NAB has just demonstrated what happens when the country cousins try to play with the big boys.
Ironwood then goes on to ask "Is there some Federal protection beyond the AU$20,000 per account holder which was recently announced? ” My response is that I haven’t parsed the terms of their client account protection but this is not an issue. Australia's big four banks are among only 20 AA rated commercial banks in the world. According to Standard & Poor's there are less than five commercial banks in the world with higher ratings.
The issue is that some of these guys are careless with the truth and “full disclosure” and “true and fair” accounts are not phrases that readily spring to mind regarding their recent conduct.
More Canaries
Last Friday astute FSO readers were aware of the first real mark to market of US CDOs when “News from Down Under” reported that National Australia Bank (NAB) had valued their senior tranche US CDOs at 10c in the dollar. I assumed that a dutiful audit clerk had finally suggested that facing reality was a good idea or was at least in keeping with the lofty ideals apparent in all Australian banks. My assumption was not only wrong but empirically flawed in ascribing such notions to they of the Janus mask (see FSO archives; Crash!). As the other shoe dropped on Tuesday, the story unrolled.
NAB were partners with US investment bank Merrill Lynch in this investment. This from Crikey.com:
The National Australia Bank's shock write-down of $830 million worth of collateralised debt obligations (CDOs) can now be explained. It was triggered by a move from struggling US investment bank Merrill Lynch to get rid of billions worth of CDOs in which the NAB was a co-investor. Merrill's took a decision to sell the CDOs at a written-down value and the NAB had no option but to follow suit. Its larger write-down than Merrill Lynch (90% vs. 78%) reflects its lower ranking of security. The NAB was involved in a parcel of what’s called "super-senior" CDOs with a face value of $19.9 billion. In effect Merrill's move to sell these holdings of CDOs to a distressed debt fund investor, forced the NAB to write-down the value of its holding in the CDOs.
It's that phrase in the above paragraph; "super senior ABS CDO" which reveals what happened. This sale was dated June 27. NAB was a 'senior' ranked investor in the CDOs and when a super-senior ranked investor decided to liquidate or sell the CDOs at a lower value, the other investors have no say in the matter and have to follow suit.
For Marius D to whom I promised an explanation of CDOs, I trust this assists. In truth I studied the structure of CDOs for some hours before admitting temporary defeat, but the short version is they are a manufactured security with the features that I have written about previously, the chief one being that all are different and so cannot be valued on a transparent basis. Perversely this is one of the features that has made them so attractive to institutions.
To add insult to injury NAB had been running an $800 million bond sale during the period that it was aware of the impending CDO write down but sadly omitted to mention the looming problem to investors who lapped up the road show and marketing blitz for the bond offer. NAB has since refunded hundreds of millions of dollars to irate investors who had bought into the bond sale in the days before the write down, according to reports today from UK Telegraph. More jolly good fun from your friendly bankers!
Gold, HUI and DX
US Dollar index had an unexpected burst of institutional support last Friday, and again on Thursday of this week, which continues to pressure Comex Gold, still holding up valiantly in the face of DX which is now rallying into the fifth month since its celebrated low on 17th March, foreshadowed and discussed in previous Financial Sense articles. At present Gold is holding within two standard deviations of its regression channel from the 05/02 low, but is decidedly on the bottom of that channel and is not being helped by weakness in the HUI Gold Bugs index
For the sharp eyed who noted the precise low in Gold at 893.30 on Wednesday, the red line at 893.1 is not a poorly drawn recognition of that turn but the Daniel code retracement level that has been on this chart for subscribers since a few days after the 07/15 swing high. For those who might wonder how often this occurs, the answer is almost all the time. The Daniel number sequence controls all markets by creating secret price levels that markets recognise but others do not see. I pray my subscribers indulgence for showing this chart, but there will be a new one with new numbers posted on Monday. Gold traders need to know these numbers.
Many traders and investors use D2 or derived data from HUI to verify signals in the primary Gold market. For those who are hoping for an early resumption of the tear away bull market, this indicator at least will be disappointing. HUI is stubbornly maintaining its sell signal on the monthly chart and tested its 2008 low on Wednesday.
