http://www.abc.net.au/news/stories/2009/07/13/2624387.htm

Mr Combet said the competition aims to fill the need for an autonomous robot operating in urban environments.

Oh yes, I ran into that exact same problem. Here I am, living in an otherwise upmarket urban environment, but where are the highly lethal, heavily armed autonomous robots? None to be seen! Glaring need to be filled right there. Obvious example of a market failure that they aren’t selling in Jaycar already.

Ah well, now is the time to move your investment dollars into landmine and spraypaint manufacture. Maybe give George Lucas a pat on the head for doing it first. Certainly Greg Combet never thought it up, someone must be standing behind cranking his handle.

Rattenkrieg… :-(

At a time when we need robust diversity in financial systems, we instead are seeing a concentration in favour of banks and especially the big four banks which are benefiting the most from the Rudd Governments Guarantee Scheme for Large Deposits and Wholesale Funding

Chris, surely this shouldn’t be a mystery. The government wrapped the banking system, or rather all deposit taking institutions with a larger guarantee while leaving everyone else out in the cold. So who other than Bob Brown would be surprised that the public is shunning the outsiders, as the effect is that government policy is promoting concentration?

In point of fact the smaller banks are the ones who benefited the most as the effect was it immediately placed them on a similar risk footing as the larger banks on their liability side. Most of the smaller banks and the “colorful banking identity” would almost certainly failed if it wasn’t for the intervention.

Greens move to establish banks inquiry in Senate

If the Government fails to act, the Australian Greens will move to establish a Senate Inquiry into Australia’s banking system when the Senate resumes in August, Australian Greens Leader Senator Bob Brown announced today.

“The market-share figures for May show that banks are increasing their dominance of the financial system at the expense of smaller non-bank institutions, with their share of loans up to a record 89.4 per cent compared with 85 per cent a year ago.”

“At a time when we need robust diversity in financial systems, we instead are seeing a concentration in favour of banks and especially the big four banks which are benefiting the most from the Rudd Government’s Guarantee Scheme for Large Deposits and Wholesale Funding.”

“I’m mystified as to why Finance Minister Lindsay Tanner can say that the pace of financial innovation has ‘outstripped the capacity’ of regulators to keep up.”

“The Government showed no such inability when it moved with great speed to provide access for banks to billions of dollars of government underwriting through the Guarantee Scheme.”

Senator Brown said a Greens’ inquiry would encompass the concerns raised recently by leading economists, and would also look at a range of other issues, such as low or no-fee accounts and mechanisms to ensure that interest rate cuts are passed on directly to customers.

The last inquiry into the financial system was held in 1996-97.

Further information: Russell Kelly 0438376082 ends

The only point I was trying to make is that the underlying assets of top quality RMBS here in Australia are essentially the same kind of mortgages as those found on bank balance sheets and that concern with asset quality probably therefore wasnt the real cause of these securities woes. In other words, I thought this might be one of the rare exceptions where structural market issues may be impeding rational pricing.

Again, you are repeating an irrelevancy. Please read this article on securitisation.

The fact that a residential mortgage-backed security (RMBS) is backed by the cash-flows from an underlying pool of home loans very similar to those held by a bank does not make the credit risk of that RMBS equivalent to the credit risk of the bank’s own bond issues. Why? Because the bondholder of a bank is supported by the earnings power and, importantly, shareholders’ equity of the bank. RMBS structures rely upon the pass-through of cash flows from underlying home loans to fund their coupons and principal repayments; there is typically little, if any, equity backing the structure. This becomes critical when the underlying home loans default at rates higher than planned – there is minimal buffer in the structure to absorb these losses. As I keep saying to you, the credit risk profiles of these bonds are very different.

Now, the RBA is correct in noting that the rate of default on home loans supporting Australian RMBS issues has been low. However, the yield premium required by debt investors on such issues has blown out, to levels where it is no longer economic to issue RMBS in traditional structures. Why? Because debt investors want higher yield for the risks they perceive in these structures, and home loans cannot be originated at yields (i.e. the interest rate on the home loan) high enough to meet that investor expectation. Why is this? Because the major trading banks are able to fund home loans at much lower yield due to their superior access to deposit funding and wholesale funding. Non-bank mortgage originators currently cannot fund home loans at a rate competitive with the banking sector. That is why the securitisation industry has collapsed.

We hear quite a lot of blather these days about how the Commonwealth Government guarantee allegedly provides banks with an unfair advantage relative to securitisation, but this is a furphy: the banks were out-competing securitisation vehicles for months (if not a year) before the guarantee was put in place. The securitisation funding structure is, in the main, no longer viable in the current market environment. If and when it does come back it is likely, IMO, to play a much less prominent role in mortgage funding in this country.

Mortgage backed securities around for decades and helped people buy homes.

The older concept (really old) was that everyone in the village chipped in to build a house for one family, and that family was expected to chip in when building more houses. Mortgages just codify the same thing and allow for finer distinctions as to the size of the house, etc. Exactly when one turned into the other I can’t say but hardly a recent Eureka moment. I guess a lot of the “innovation” at work was the long agonising over usury that took place to finally get us where we are (doing the same thing we have always done, but with numbers attached).

Credit cards. Debit cards.

These are really advances in communication, and a convenient method of identification. I’m awarding points to electrical engineers rather than economists on this one.

Adjustable rate loans.

A backward step IMHO, and heavily rigged in favour of the banks. My feeling is that all loans should be fixed rate but you can pay out the loan early if a better deal comes along. I’ll point out that if you believe in a rational market (which everyone pretends to but nobody does, I’m continuing the pretence for the sake of politeness) then the details of variable or fixed loans merely shift the risk onto the borrower or the lender but don’t improve the overall efficiency of that market.

Mutual funds

It has been possible for a group of people to buy shares into a company for a long time, and this newly created company can perform various activities including investment in other companies. Mutual funds probably streamline the process but they don’t create a new design. In some ways, streamlining the process too much just results in shareholders not paying attention to where their money is going (which is the classic problem of mutual funds).

Interest rate swaps and many other variations that have certainly helped finance smaller firms with stable long term debt.

Yeah, probably interest rate swaps are genuine innovation. I remain to be convinced that small firms should run with a substantial debt over the long term. If the small firm can attract investors then it just sells shares, it if can’t attract investors then obviously no one has confidence in the idea so maybe that should be a hint that the idea is not going anywhere. If someone really wealthy wants to start pursuing crazy ideas then they don’t need debt.

Option markets that allow corporations to hedge risk.

Insurance companies have been buying and selling risk for a very long time. Option markets allow regular Joe Public to do the same, fair enough I suppose. OK, I’ll give you points for options trading. Genuine democratisation of the insurance industry. Also allows terrorism to be self-financing.

Advance of private equity that allows good ideas to find financial partners to help grow the firm. We wouldnt have a tech world without these firms.

This is really as old as the double-entry bookkeeping that I mentioned above. Handling split equity in joint ventures was one of the reasons bookeeping was invented. However, the tech world was moving forward quite steadily even before that. Stonehenge was not built by accountants, it was built be people who had a genuine interest in accurately tracking the sun (yeah, and maybe they were also religious loonies). The fine art of steel smithing was not driven forward by investors, it was driven by professional killers who wanted to increase their chance of seeing the end of their next day’s work. Indeed tech and war go hand in hand right to the present day, just take a peek at what Obama is funding, and how is he finding that? Why the good old fashioned way — tax the peasants by force.

- Agreed, you didn’t distinguish between different types of ABS in your initial comment.

- No argument that excuses are often made for the underperformance of various securities, all in one fashion or another claiming that the market’s got it wrong. I don’t generally pay much heed because it’s almost always just special pleading and, in any case, markets tend to pick up free money if it’s simply lying there in the street.

- I’m not (as noted earlier) in favour of government intervention in these markets.

- I accept that all ABS markets have been hit pretty hard, some more than others of course, and also that the RMBS market here in Australia is still pretty much dead. Without government support, the current very low level of new issuance would probably dry up almost completely.

The only point I was trying to make is that the underlying assets of top quality RMBS here in Australia are essentially the same kind of mortgages as those found on bank balance sheets and that concern with asset quality probably therefore wasn’t the real cause of these securities’ woes. In other words, I thought this might be one of the rare exceptions where structural market issues may be impeding “rational” pricing.

I’m not suggesting the RBA is the ultimate arbiter on these things, but FWIW this is what they had to say in the May 2009 Statement on Monetary Policy:

The elevated spreads on RMBS in both primary and secondary markets do not appear to reflect investor concern about the credit quality of Australian RMBS. While losses on prime RMBS (after the proceeds from property sales) increased slightly in the December quarter 2008 the latest data available they remained quite low as a share of outstanding loans (at less than 2 basis points) and were predominantly covered by lenders mortgage insurance. Losses on non-conforming RMBS were higher (around 25 basis points of outstanding loans), with the bulk continuing to be covered by RMBS credit enhancements (mainly the profits of securitisation vehicles). No investor in a rated tranche of an Australian RMBS has suffered a loss of principal stemming from default on the underlying mortgages.

As to why these securities nevertheless remain under such pressure, they’ve offered a number of comments in the last 12 to 18 months, but I’ll quote just one from the same May 2009 SMP:

This is in contrast to prior years when there was strong offshore demand for Australian RMBS, partly reflecting the high quality of Australian mortgages. Recently, many of these offshore investors have been selling these RMBS as they attempt to reduce their leverage, and this has kept spreads on RMBS elevated, with recent issues at spreads to the bank bill swap rate of around 110130 basis points, compared with less than 20 basis points immediately prior to the market turbulence (Graph 34). At these spreads, funding mortgages by issuing RMBS is unlikely to be profitable for many types of loans at existing mortgage rates. As discussed below, the difficulties in the RMBS market are having a noticeable impact on those lenders whose business models are centred on securitisation.

This thread has dragged on more than either of us probably wanted it to, Fyodor. I will of course read any response from you with interest but am otherwise inclined to let it go. I don’t in any case think I can put the small point I was trying to make any more clearly.

Cornell: Systemic intervention must be softly, softly

Andrew Cornell

The Australian Financial Review | 13 Jul 2009 | Page: 45 | Financial Services

Having raised the idea of a Kiwibank-style competitor for the major banks in this column a month or so ago, it’s worth adding a few points following last week’s “people’s bank” kerfuffle.

A people’s bank was alluded to in an open letter drafted by a wad of eminent economists – who must have been rapt with the response – although it was by no means the point of their proposals.

Kiwibank is an offshoot of New Zealand Post, forced into being by NZ Labour’s junior coalition partner. The first branch opened in 2002 and the bank has run like a dream, although of late its role as price-setter has been reined in a tad. And it is small – about 3 per cent of deposits and 6 per cent of mortgages – and no-frills.

NZ banking is dominated by the same oligopoly as here, and the bank happily runs the slogan: Kiwibank: It’s Ours.

But Kiwibank is the least worst approach for interventionist government. If the Rudd government, as form suggests, is intent on showing it is truly worried by the cyclical exaggeration of the Big Four’s market dominance, prodding Australia Post to do more with its financial services capability is a good option.

Australia Post moved into financial services more than a decade ago and has an extensive, product-hungry branch network, some of which is franchised.

Basic banking products, white-labelled through companies such as Citibank or GE Capital, could be added to its mix.

But a more vital Post@Bank should be driven by Australia Post, rather than by government.

The last thing the government should do is get back into banking. Governments are appalling bankers. The late RuddBank, a worthy idea for a back-stop in commercial property if and when a credit squeeze emerged, would have used private-sector bankers to make credit judgements.

State Bank Victoria and State Bank of South Australia failed, losing more than $6 billion between them and costing taxpayers about $5 billion. Other state banks were rightly sold to the private sector – Commonwealth Bank also – as governments don’t have the skills or capital to provide competition. Nor should they try to get them; the focus should be removing barriers to entry and ensuring any competitor is properly capitalised.

Moreover, inherent conflicts of interest for state financial institutions are enormous: one issue with Fannie Mae and Freddie Mac, two sub-prime crisis bogies, was they became instruments of government policy and distorted the market.

This financial crisis is not the result of capitalism not working. It is because the return-on-investment signals that drive capitalism have been wrong. Salesmen and traders had no long-term interest in the viability of what they were selling; senior executives saw the risk-reward structure of their remuneration favoured making big bets that could destroy their institution and the financial system.

It would be wrong and disastrous to assume the lesson of the crisis is that governments are better at running financial institutions. Rather governments should be looking at such issues as pro-cyclicality in prudential and accounting standards – rules which actively prevent financial institutions building up capital buffers in good times.

Remuneration is a proper area of scrutiny, enforcing that the returns of both institutions and executives be linked to the long term. For example, institutions that originate loans should probably be required to maintain some exposure to them.

Another crucial element of this crisis, and one last week’s open letter also canvassed, is the nature of the social contract between the banks and taxpayers. One economist, Rismark’s Christopher Joye, quite rightly argues that simply because Australia and its major banks have come through this crisis relatively well, so far, doesn’t mean everything is fine.

There are significant issues from the 1997 Wallis Financial System Inquiry still alive, including the issue of government guarantees. That deposits had to be guaranteed was a response to the global situation. But the average depositor assumes they will be bailed out.

Some element of moral hazard is inevitable in a financial system. The private sector is best placed to mediate the capital in the system and shareholders and depositors should be aware of the risk. But at some point it is more damaging to society to make those who took the risk pay than it is to keep the system afloat.

That point was reached in Britain and the US in this crisis. It wasn’t here, and we should understand exactly why.

Unions to push for 15pc super contribution
Sid Maher | July 13, 2009

Article from: The Australian

THE Rudd government has left open the idea of lifting the compulsory superannuation contribution above its current 9 per cent rate as unions prepare to push for their long-held goal of 15per cent contributions by 2015 at this month’s ALP national conference.

Superannuation Minister Chris Bowen said yesterday that raising the compulsory superannuation contribution above 9per cent was being examined as part of the Henry tax review and the Harmer retirement review.

“Obviously higher post-retirement incomes are better than lower post-retirement incomes but there’s a trade-off with pre-retirement incomes and we need to strike that balance,” Mr Bowen told the Ten Network’s Meet the Press program.

His comments came as ACTU secretary Jeff Lawrence told The Australian that unions would push their long-held goal of lifting compulsory contributions to 15per cent by 2015 at the ALP national conference in Sydney later this month.

Unions would also be arguing for reforms to superannuation tax and the treatment of casuals in relation to superannuation.

The government has faced pressure to review retirement contributions from the funds management industry and from former prime minister Paul Keating, who has long been an advocate of pushing the compulsory contribution towards 15 per cent.

Superannuation has been championed as one of the solutions to funding the retirement of Australia’s ageing workforce.

The review comes as retirement incomes have been battered by the global financial crisis with median returns on balanced investment funds averaging losses of more than 13 per cent in the past financial year.

Superannuation funds in the 12 months to June 30 recorded their worst financial year performance since the introduction of compulsory superannuation in 1992, according to Super Ratings.

Last month Perpetual chief executive David Deverall called on the government to lift compulsory superannuation contributions and improve incentives for voluntary payments to boost retirement funding.

While aged pensions would continue to provide retirees with a guaranteed basic income, there was a long-term argument to sustainably increase the superannuation component, Mr Deverall said.

Mr Bowen said he was also open to a review of the Australian banking system “at the appropriate time” after calls from leading economists to overhaul the system.

Rismark International managing director Christopher Joye, who chaired former prime minister John Howard’s 2003 Home Ownership Task Force, said the big four banks had gained significant increases in market power during the global financial crisis.

“Outside of the big four banks, there is no effective competition and the regional banks have made appeals to government to level the playing field,” said Mr Joye, who was one of six economists who wrote to the government last week asking for the review.

He said the government also needed to examine a regulatory regime to cover the securitisation market, which had provided funding for up to a quarter of the home loan market before the global financial crisis.

Koala Bank stillborn: still a case for an inquiry
The Sheet

13 July 2009 7:02am

Six prominent economists released an open letter to the Prime Minister and Treasurer last week. Included in the letter was a question that asked whether there might be a role in Australias financial system for a publicly owned bank akin to Kiwibank in New Zealand that could offer basic savings, payments, and wealth management products and leverage off unique government infrastructure such as Australia Post, the ATO and the government bond market.

The proposed bank was dubbed Koala Bank by some. As it was, Koala Bank went off quicker than a dead dingo. Given the recent demise of the Australian Business Investment Partnership (and dubbed RuddBank by the media) this was hardly surprising, although if it had been dubbed RuddBank MkII it may have received some initial support from the government.

However, while Koala Bank may have been a dozy idea, it was what the media picked up on, somewhat overlooking the real thrust of the letter, which set out why Australia needs a comprehensive financial system inquiry. The Koala Bank question was the ninth among 14 that were suggested for examination by an inquiry.

Given that we are in the midst of the GFC, which has devastated the global financial system; the US and UK are reviewing their own financial systems; we will soon be confronted with recommendations from the G20 on the overhaul of the global financial system; and that the last inquiry we had was the Wallis inquiry completed in 1996; such an inquiry would seem to be a very good idea much has changed in the last 13 years.

Political leaders at the Federal level appeared to be supportive of the call for an inquiry, but not the government. Presumably, they are happy with the policy that they have made on the run and the unintended consequences that have flowed from it (such as having to guarantee just about everything that moves in the financial market), and have more important matters to deal with.

Events may move ahead of the government anyway, with Graeme Samuel threatening to hold his own inquiry into the financial system, if he receives another bank merger proposal. Such an inquiry into the competitive position of our financial system would likely address many of the questions that have been put forward anyway.

But added to the list of questions could be added one on why we have failed to develop a viable corporate bond market in Australia. All the necessary infrastructure is in place with supportive legal, regulatory and taxation environments, and we have a sizeable corporate sector and institutional funds management industry.

Yet for the last half of this decade our market has looked more like a wholesale bank deposit market, denying institutional investors the opportunity to demonstrate their credit risk assessment skills, and now the market is morphing into a government bond market.

Many academic studies have pointed to the usefulness of well developed corporate bond markets in mitigating the effects of a credit crunch.

But the big question, which is beyond the scope of an ACCC inquiry, is what is the post G20 restructured global financial system going to look like and do we want to have a say in this or have it thrust upon us? For those who believe we have or will have no influence in the G20, the question is irrelevant: dont worry about it.

For the rest of us, an inquiry would have us better prepared to meet the challenge. We are also in the fortunate position of being able to review our financial system from a position of strength.

Joye told Crikey he was bewildered by an evidently coordinated News Limited attack.

It appears to be a case of expedient and ideologically motivated journalism that has manufactured an utterly artificial strawman to tear to shreds the Peoples Bank that we never endorsed nor described as such, he said.

I was very disappointed with their coverage of this matter and have written directly to Jennifer Hewett and Chris Mitchell communicating this fact.

Chris, I’ve read your letter and agree that media coverage of it was highly distorted with excessive and inappropriate focus on the so-called “People’s Bank”. However, IMO the fault doesn’t lie with News Ltd, but with the SMH, for its initial coverage: the front page article of the SMH was titled “People’s bank to break the Big Four”. Unfortunately that hyperbolic tripe set the media agenda for your letter thereafter, and it’s consequently not surprising that that is what drew the fire of News Ltd journalists.

You can’t control how the media will manipulate a “story”, but perhaps you should have anticipated the reaction to some of the more controversial elements.

The point I initially raised with you was a narrower one . In your initial comment, you assumed the sorts of asset pools they had in mind were similar to the kind of exotics whose failure initially triggered the meltdown. I didnt think it was; I figured they had something far simpler in mind, namely pools of plain vanilla high-quality mortgages, fairly homogenous and transparent.

In my initial comment (#4) I did not differentiate between “exotic” and “plain vanilla” ABS, as no differentiation was necessary – the markets for both collapsed. The assumption was yours, at #18.

- Chris, in his comment (#18), confirmed that was exactly what theyd intended. You then wondered why, if that were so, there was little or no market for these securities.

No, I did not wonder at #23. I wrote:

“The near total collapse of investor support for Australian plain vanilla securitisation issues belies your and Chris assertions. You must know something about assessing credit risk that debt investors dont.”

That is, I noted that the evidence contradicted your and Chris’ assertions.

- I suggested that asset quality issues were unlikely to be the problem, since the exact same kind of assets comprise a big chunk of banks balance sheets (about a third in fact) and then put forward some possible explanations for why the RMBS market here is still pretty dead.

And I noted at #27 that this point was irrelevant, as the nature of securitised credit is different from corporate credit.

Hopefully thats removed any possibility of misunderstanding.

On your part or mine? I don’t say this to offend, but I don’t think you understand securitisation.

When does a media outlet judge an important story not to be an important story? When it appears as a scoop in a rival media outlet.

Exhibit 1: the way Fairfax (who got the scoop) seriously treated this weeks call by six well-respected economists for a new inquiry into the financial system, while and News Limited (who didnt get the scoop) almost totally ignored or dissed the story.

This isnt a partisan or ideological issue. The economists hail from across the political spectrum. The issues they raise go well beyond the simplistic Left-Right debates that have marked much of the commentary on the economic crisis. While John Quiggin and Nicholas Gruen are perceived to be from the Left, the likes of Christopher Joye and Sam Wylie are not exactly bomb-throwing socialists. All are widely-respected. And all, contra Terry McCrann (and more of him in a moment), are influential.

Gruen is chair of the Government 2.0 Task Force; Stephen King was an ACCC commissioner. Quiggin is a world-class academic researcher. Wylie (who incidentally used to work for ASIO), is a former Dartmouth professor and a Senior Fellow of the Melbourne Business School. Gans and Joye were responsible for convincing the government to invest $8 billion in the securitisation market last year. Joye ran John Howards home ownership task force and has been a frequent op-ed contributor to The Australian. If theyre not influential, I dont know who is.

And Ian Harper, a member of the Wallis committee and still a pin-up for the Right, lent strong support for the idea.

But, perhaps because the economists gave Fairfax papers the drop rather than News Ltd, the letter was barely covered by the latter. Jennifer Hewett, while barely mentioning the letter, attacked the peoples bank idea, as did John Durie.

The peoples bank proposal was one of fourteen issues raised by the economists, and the letter does not recommend the idea (although John Quiggin in the past has been a strong advocate).

The substance of the letter was ignored by the non-Fairfax mainstream media. Online media like Crikey and Business Spectator both gave serious coverage to the letter (we didnt get the drop either).

And then there was Terry McCrann, who launched a vitriolic attack in the Herald Sun involving obscure allusions to can openers, a critique of the peoples bank proposal (again), and the argument that there was no problem with the current financial system that merits any sort of inquiry.

Quite which part of the banking oligopoly, or the punishingly high interest rates faced by business, is not a problem in the view of McCrann?

The McCrann logic seems to be that because Australia dodged a bullet from last years financial crisis we can dodge the next one with equal skill with a financial system grown even more cartel-like in the interim.

Joye told Crikey he was bewildered by an evidently coordinated News Limited attack.

It appears to be a case of expedient and ideologically motivated journalism that has manufactured an utterly artificial strawman to tear to shreds the Peoples Bank that we never endorsed nor described as such, he said.

I was very disappointed with their coverage of this matter and have written directly to Jennifer Hewett and Chris Mitchell communicating this fact.

But we might look at Martin Place for the real motivations behind McCranns attack on the economists. It has long been considered, including by market analysts, that the Reserve Bank notionally committed to greater transparency has a handful of commentators such as McCrann and the AFRs Alan Mitchell on the drip regarding interest rate recommendations to the RBA Board. This enables them to appear to accurately anticipate interest rate movements. In return, the RBA gets a sympathetic ear in the commentariat useful when youre holding interest rates too high, for example, as the Bank did early last year.

The RBA may have encouraged McCrann in his attack. Or, possibly, McCrann merely acted in the way he thought his RBA information partners would have appreciated.

But Crikey understands that senior RBA figures consider that the economists letter raises a number of interesting ideas and that there is a case for a review of the financial system although, in their view, now is not the time for it, given the Government is still wading through a number of other major reviews and has the Henry tax review arriving at the end of the year. Further, one senior bank official indicated that they hoped policy-makers would listen to the case made by the economists.

There appear to be splits within the RBA itself over some of the issues raised by the economists. Governor Glenn Stevens and Assistant Governor Phillip Lowe are not opposed to the idea of the RBA leaning against asset-price bubbles. But Assistant Governor Guy Debelle, in a speech in Brazil in May, savaged the concept. Debelle and Lowe are the two primary internal candidates to succeed Stevens.

There is nothing but opposition in the RBA, however, to a publicly-owned bank of any kind. And the economists might have erred in providing such an obvious hook for attacks like those of McCrann, who used it to ridicule the entire letter although it is hard to see how they could have downplayed the proposal any further than they did in the letter, where it got 42 words out of 1700.

The fact that Australias financial system emerged relatively unscathed from last years ordeal by fire doesnt reduce the case for an inquiry, it strengthens it. Unlike the Americans and the British and others, who are overhauling their financial systems in the heat of battle, Australia has the luxury of being able to take a step back, look at what went right and wrong, and try to ensure we can deal with future challenges.

Too bad some in the media apparently arent up to that kind of debate.

- In the letter, Chris and his fellow signatories were indeed comparing the merits of guaranteeing banks directly versus guaranteeing pools of tangible assets. FWIW, I’m agnostic on this question, not being particularly in favour of either (with the probable exception of guaranteeing retail deposits).

- The point I initially raised with you was a narrower one . In your initial comment, you assumed the sorts of asset pools they had in mind were similar to the kind of exotics whose failure initially triggered the meltdown. I didn’t think it was; I figured they had something far simpler in mind, namely pools of plain vanilla high-quality mortgages, fairly homogenous and transparent.

- Chris, in his comment (#18), confirmed that was exactly what they’d intended. You then wondered why, if that were so, there was little or no market for these securities.

- I suggested that asset quality issues were unlikely to be the problem, since the exact same kind of assets comprise a big chunk of banks’ balance sheets (about a third in fact) and then put forward some possible explanations for why the RMBS market here is still pretty dead.

Hopefully that’s removed any possibility of misunderstanding.

Fyodor, from Chris comment hes talking about exactly the same assets that populate the greater part of banks balance sheets.

No, he isn’t. He’s comparing a bond backed by the cashflows on a pool of assets with a bond backed by corporate credit. They’re not “exactly the same”; they’re different. As evidenced by the fact that investors are still buying corporate credit, and not ABS.

If thats correct…

It isn’t.

If that’s correct, then the reason for the “near total collapse of investor support for Australian plain vanilla securitisation issues” is probably some combination of generic investor revulsion after all the recent unhappy experiences, continuing (albeit much reduced) financial markets turmoil and perhaps relative value considerations (i.e. there are juicier deals around).

Someone more well versed than me in the mortgage and securitisation markets will hopefully step in with any necessary corrections or additions.

When the letter talked about tangible portfolios of assets the characteristics of which can be relatively easily assessed by independent experts, I imagine the signatories had something far more plain vanilla in mind than the esoterica that blew up in the US and elsewhere. The hubris and tin ear bit may therefore have been somewhat over the top.

Too harsh? The near total collapse of investor support for Australian “plain vanilla” securitisation issues belies your and Chris’ assertions. You must know something about assessing credit risk that debt investors don’t.

Im yet to see evidence that innovation in the financial services world delivers a real world benefit.

Really tel…

Mortgage backed securities around for decades and helped people buy homes.

Credit cards. Debit cards.

Adjustable rate loans.

Mutual funds

Interest rate swaps and many other variations that have certainly helped finance smaller firms with stable long term debt.

Option markets that allow corporations to hedge risk.

Advance of private equity that allows good ideas to find financial partners to help grow the firm. We wouldn’t have a tech world without these firms.

I could go on, however it would run out the site.

The banking oligopoly in Australia is costing us dearly over the long run in reduced innovation and customer ripoffs. They raise the cost of doing business and reduce incentives to save.

I’m yet to see evidence that “innovation” in the financial services world delivers a real world benefit. Mostly it is about making products that look great on paper but are too complex to evaluate for risk. Profits are made in the physical world, the financial world merely keeps track of that.

As an example, suppose someone started espousing the amazing innovations they had come up with in timekeeping — every third day has extra hours, and daylight minutes are shorter than nighttime minutes. Then they claim the productivity to be gained from having more time available right where we need it most. But of course, that’s just nuts. The day is what it is, clocks merely count the time that passes, they don’t create time. The best possible timekeeping system is something completely consistent, easy to understand that never innovates!

As for reduced incentives to save, the obvious one is inflation coupled with capital gains tax. If you hold cash, the value decreases, if you hold assets you are taxed on the nominal increase which is really just a constant valued asset floating on a sea of devaluing dollars. The only saving options for the average Australian are buying bigger and bigger homes, or watching their superannuation get juggled by investment managers who are expert at ticking boxes on forms but very average at investment decisions. I don’t see how any of the banks can be blamed for this situation.

I remember a story about occupied Europe during WWII where two guys each had bicycles and one of the guys cut up the tyres on his bicycle and tied hosepipe to the wheels making a lumpy, bumpy ride but serviceable. The other guy laughed about it until the occupying forces decided that bicycles were needed for the war effort so they took the good one, and left behind the one with lumpy, bumpy wheels. That’s my picture of why Australians don’t bother saving or investing.

One small side matter. When the letter talked about “tangible portfolios of assets the characteristics of which can be relatively easily assessed by independent experts”, I imagine the signatories had something far more plain vanilla in mind than the esoterica that blew up in the US and elsewhere. The “hubris and tin ear” bit may therefore have been somewhat over the top.

Perhaps Im reading you wrongly, but in a more general sense you dont seem to allow much room for the possibility of people engaging in public debate in good faith whilst also having some business involvement in the area under discussion. To my mind, this is too cynical (even though, Lord knows, recent events around the world have given us plenty of reasons for that to be the default position).

I apologise if I gave that impression, as I have no issue with people advocating policies in which they declare a personal interest. As long as those interests are disclosed everyone knows where they stand and democracy can take its course. If a person identified as Chairman of XYZ Home Loans were to advocate subsidising the securitisation industry I’d have no issue with his participation in the ensuing debate. I might oppose the policy, but not his voice.

I know this is the very thing disclosure is meant to take care of…

Exactly.

More importantly, an inquiry such as the one proposed above sounds like a good idea.

I only waded into this for two reasons. First, I felt your tone was kind of disdainful and effectively cast both of them as villains of a sort. It didn’t seem to easily allow for the possibility (near certainty in my view) that they were putting forward ideas they truly believe in, quite apart from any business interests, and that any failure to disclose was innocent.

Which brings up the second thing. Perhaps I’m reading you wrongly, but in a more general sense you don’t seem to allow much room for the possibility of people engaging in public debate in good faith whilst also having some business involvement in the area under discussion. To my mind, this is too cynical (even though, Lord knows, recent events around the world have given us plenty of reasons for that to be the default position).

I know this is the very thing disclosure is meant to take care of but I guess I’m trying to get at the question of one’s deeper stance, well before considering any specifics.