Wednesday, May 6, 2009

Janet Albrechtsen, Nick Sherry, money for nothing, your chicks for free, responsible lending and easy credit

(Above: just a few of the poor, innocent, hapless institutions who will be flung into turmoil, possibly even bankruptcy, if that evil possum Nick Sherry has his way).

There's never a day goes by where we don't have to contemplate a disaster, or possibly the end of civilization as we know it, all thanks to the loons on the pond setting up a squawking and warning us that the golem have come to stalk the earth again.

This time it's the ever reliable Janet Albrechtsen, fresh from setting up her Stalinist show trials for wayward politicians, in Having a lend of us.

It seems the policies of the new government are about to produce the collapse of the western capitalist system. What's that you say? It's already collapsed through errant lending policies, and somebody should do something about it? 

Nonsense, you frauds and pikers. We must preserve the right of bankers and con men (and women) to loan to people who can't repay, and when they fail, to kneecap them, or maybe just break a finger or two, or tear off a fingernail. And in dire emergencies dig into the taxpayers for a guarantee to make sure they stay afloat. Come on down Macquarie Bank.

Populist policies, almost by definition, are damaging in the long term. But the “responsible lending” policy announced last week by Superannuation and Corporate Law Minister Nick Sherry enjoys a distinction rare even among the most populist of policies.

It will be damaging, perhaps disastrous, in the short term as well as the long term. Most disturbing, it will significantly harm those it seeks to help: the working families so beloved of the Rudd Government.

As usual, the key features of this shambolic policy sound heart-warming. “For the first time, Australia will have laws that prohibit irresponsible lending to consumers by all types of credit providers,” Sherry says. The new laws will require lenders and finance providers to assess a borrower’s needs and whether a proposed loan is “not suitable” for those needs. New penalties, including civil and criminal charges, will be imposed on lenders or brokers who approve or recommend unsuitable loans.

Well you just know that kind of socialist clap trap is going to get Dame Slap in a right royal frenzy. It'll produce a revolution. Imagine that - requiring a lender to work out whether the loan can be repaid, when they just want to do the deal and foreclose if they have to. So long as they're happy, all's right with the world, eh.

So little you know. As always, the deep flaw - and the current subprime disaster - started, as you all would know by now, with the dire misdeeds of Bill Clinton:

Now consider the longer-term implications of Sherry’s proposals. By shifting the burden of credit risk from borrower to lender, the new laws threaten to repeat the policy mistakes of the subprime lending fiasco in the US. Though politicians rarely acknowledge this, a chief contributor to that crisis was the Clinton administration’s policies of emphasising borrowers’ rights to home loans (especially among socially disadvantaged groups) without doing anything about traditional US practices requiring home loans to be limited in recourse to the mortgaged property. Limited recourse loans remove the need for the borrower to borrow responsibly.

And now Sherry is trying to impose that same culture of borrower rights without responsibility in Australia. We now know where that leads.

Huh? But just a few paras before, Dame Slap was in a frenzy about how the housing market was going to be ruined:

Another paradox is that although these laws are intended to exclude most forms of business lending, they do cover loans to investors in residential real estate. So while the Rudd Government says it seeks to stimulate the building industry, these proposals will significantly reduce the flow of credit to real-estate investors.

Also at risk will be the loans that support the first-home owners grant. Banks are already concerned that these grants are being used by young borrowers with no savings history and little ability to withstand an increase in interest rates, let alone a bout of unemployment.

So lenders may, under the responsible lending laws, commit a criminal offence if they lend to risky borrowers.

Brain hurt time. Bill Clinton's support of borrowers' rights to home loans is exactly the same as Nick Sherry's proposal, which will result in lenders tearing up loans for real-estate investors and first home buyers? Oh poor possum, clearly you know not what you do. You're going to induce a subprime crisis caused by an abundance of cheap, easy credit ... by cutting off cheap, easy credit.

Talk about loonatic inconsistency. Feed me burgers and wonder why I get fat.

There's more, much more, with populist this and populist that flung around like a humbug pope of the free market in the grip of either a fever or cant or just inclined to caterwauling.

So what's a government to do to fix up this amontillado Sherry inspired mess? Well clearly the first thing to do is to unleash on the marketplace all the news to hand about borrowers, and whether they've ever gone bankrupt or defaulted on loans. Never mind if it's correct, or been checked, or is a current indicator of their financial situation. No let's just get all the fiscal dirt and filth out there in the public domain. To do otherwise would be Kafka-esque.

And the second thing? Why, herd cats of course. Sorry, what I think I meant to say is this:

The second, and most critical, change is to re-establish a sense of personal responsibility in borrowers. Borrowers have a duty to themselves and their families to take all the steps they reasonably can to ensure they borrow responsibly and that they give lenders the accurate information and assistance they need. These new laws should explicitly impose those duties on borrowers. Not to do so would be the height of irresponsibility.

Well yes because it's actually all your fault, you credit junkies, not the fault of the banks who just want to keep charging you a fortune on your credit card and making out like bandits. It's your greed that's done this, not the greed of the banks and other lenders.

But wait a second. Dame Slap's always telling me government should stay out of my private life. I should be free to fuck up how I want with whom I want. If me and the banks want to tear down the western financial system, where's the harm. As that hoary old joke goes, if you owe a bank thousands you have a problem, if you owe a bank millions, the bank has a problem.

And wait a second second. Greed is good. Dame Slap tells me so all the time. Now she's lecturing me about personal responsibility like she's some Scottish Presbyterian with a canny eye for value like good old Uncle Ebenezer in Stevenson's Kidnapped.

So now the government has to instil a sense of personal financial responsibility in all of us? Well cat herder, that cat's well and truly out of the bag, encouraged by banks and credit cards, and the entire computerized financial lending system that sees me still inundated with offers of credit cards and easy money, by letter and pigeon post. 

So I guess there's nothing for it but to introduce civil and criminal penalties for bad borrowing, possibly involving show trials and certainly involving jail time for anyone being a deceptive, malicious borrower misleading sweet little ol' bankers.

Meanwhile, it was pleasant to read a comment from reader Darren on Dame Slap's outburst, as a bit of a corrective to the hysteria she regularly engenders:

Wow. There is so much wrong with this its not funny. Do you even have the faintest idea about what youre talking about here? First, you are correct that “Traditionally, the law has assumed the borrower is best placed to assess their own interests”. But, the law, as they say, is an ass. Mum and Dad investors and borrowers are not finance experts, anymore than you are a plumbing expert or able to fix your electricity in the event of a major fault. Ordinary people have neither the time nor the ability to obtain sufficient expertise to safeguard their interests in these fields. To give you an example, a now well buried 1994 ASIC investigation and report concluded that 90% of investors did not read the prospectuses for their investments (and that included the disclosure document now known as Product Disclosur Statements). That, in itself, blows out of the water the whole regulatory idea that disclosure of investment or loan details will, of itself, be enough to safeguard an investor or a loan.
Simple fact no 1: most - the vast majority - of people dont read disclosure documents because they are unable to understand them. It therefore follows that many - most - investors and borrowers are simply incapable of looking out for their own interests when entering into financial transactions (again, thats not unreasionable - can you fix your car engine?).

The underlying premise of the current laws - the laws you say should not be changed - is fundamentally flawed. In fact the whole regulatory framework on which the consumer credit code and large parts of the Corporations Act sits is based on an assumption that even ASIC’s research has shown to be wrong. Is it any surprise that Storm, Lift, OPes and many other disaters have occurred? Right now there is another hidden epidemic of financial disasters going on in the loans field - the so called “asset loan”. That is, a loan given to a person(s) who is completely unable to service it, resulting, in effect, in the lender effectively entering into the loan in return for the asset (usually a house). There are a rash of cases going through the courts right now where these loans are effectively being nullified, resulting in big losses for the lenders. What is happening in these cases is that irresponsible banks have been lending to borrowers who dont understand what theyre getting into and are unable to safeguard their interests by avoiding the loan. Before the courts started knocking these loans over the banks were happy to make such loans - it didnt turn out to be such a smart move. Your analysis doesnt say anything about banks’ responsibility to (a) not waste its shareholders’ money (b) enter into loans that actually turn a profit and (c) conduct proper due diligence on borrowers and if due diligence inquiries are unsatisfactory or incomplete, walk away from the loan. What chance is there of a mum and dad borrower avoiding a problem when apparently even a professional banker is too dumb to avoid this? Secondly, mum and dad borrowers have generally instinctivley known that they lack the ability to safeguard their interests in these transactions. As a result they have usually turned to financial planners/advisers, mortgage brokers etc. Unfortunately, what they have not realised is that this is jumping in the water with the crocodiles. Under the laws as they stand those “advisers” have owed no duty to put the interests of borrowers and investors first (hence the FPA has recently inserted a reuquirement into its code of conduct to the effect that “clients” interests come first - obviously they werent previously and this is still a grey area in law). The result has been that these borrowers and investors have relied upon advice that has been badly tainted by conflicts of interest. Worse they have done so in the bona fide belief that since they were paying for such advice it must be the best advice for their circumstances. Nothing could be further from the truth. As mentioned, the result has been Storm, Lift and the current asset loans problems.

There's more of darren at Dame Slap's page, so if you do nothing else, go read him. Oh and some of the other blowflies who hover around the comments section, making loud buzzing noises about her raging ideological bias.

Meantime, I understand Dame Slap will be setting up a school for personal financial responsibility, since once the government legislates it as a compulsory matter for borrowers, and introduces civil and criminal borrower penalties, what a fine new world of PPP's we'll be able to establish (along with those Stalinist show trials). We can start with credit card classes in child care centres, then move on from there.

But one thing I know for certain. Whatever Dame Slap teaches or preaches, and whatever the government does, the shearers' will still find a way to clip and shear the sheep.

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