Malcolm Turnbull, whose peregrinations around themes on economic management I documented earlier, might actually be revealing some method in his madness. Possibly the regular calls for bipartisanship always follow the beatups and ranting and raving over alleged government incompetence. It may be designed to suggest that he’s always willing to assist, and it’s only the partisan refusal of his expertise by the government that is the root of every conceivable problem. On the other hand, I might be reading a lot more into Turnbull’s frenetic pontificating than is justified – simply by reading too much reportage of his endlessly expressed views. Maybe he’s picking up some bad habits from Twitter?
In any event, it’s been interesting to see some more clarity emerging about the issues surrounding various types of investment funds freezing withdrawals – including the fact that there are 190 000 Australians with such investments. Turnbull has certainly been carrying on as if the problem is of much greater dimensions than that. Bernard Keane raises one salient issue in Crikey:
The demand by cash management funds and mortgage trusts that they also get a government guarantee is one of the more shameless try-ons in an era of particularly refined rent-seeking. Why don’t we guarantee all listed companies while we’re at it? It would be heartlessness of titanic proportions to dismiss the concerns of shareholders about their investments.
It’s also becoming clearer that some of these investment vehicles have been in some trouble for quite some time, though it’s worth noting that in most instances, investors still have access to distributions and dividends even if their capital is temporarily not liquid. But it does look as if the “all the fault of the government and that bank guarantee” narrative is – at best – vastly overstated. Meanwhile, as Keane also observes, the News Limited papers are full of heart-tugging stories about hardship which conveniently support the opposition’s “narrative”.
He raises the question of whether unwise investment decisions made by individuals ought automatically to attract government bailouts.
Christopher Cole sold his New Zealand home last year and invested the entire $600,000 proceeds in failed mortgage fund MFS PIF at the suggestion of a financial planner.
“I was going to buy a house with it but now I’m living in a caravan,” he said.
I’d have thought that it was always well known that you’ve got hundreds of thousands of dollars to invest, on which you’re relying, that you should diversify your investments to reduce your risk.
Without wishing to diminish the plight that this gentleman and others find themselves in, why is it that we’re so ready in this country to thunder about the “responsibilities” those on welfare have to account for, and manage their meagre finances responsibly while relatively cashed up citizens are automatically presumed to have some recourse from the state for questionable investment decisions, taken to chase high returns?
Perhaps Turnbull would care to explain.
Elsewhere: More from Ken L at Surfdom.
Turnbulls calls for “bipartisanship” are his personal code for: “Get out of the way and let me be the boss! I’m MALCOLM TURNBULL, I was BORN to be boss!”
Well, the media may be providing some wind-assistance, but according to Essential Research, the public ain’t buying Talcum’s Cwusade.
Viz, massive slump in his PPM figure: 60-19.
And anyway, I seem to recall persons putting super in banks were punished under Howard/ Costello, in the form of 100% being assessed as asset for pensions, versus 50% if it was placed in some dodge-arse super fund pre-July 07. Effecivelt, Howard forced retirees into gambling – and now look!
Silly question, but if those mortgage funds are basically solid but have been frozen to prevent a fire sale, wouldn’t this represent an opportunity for an enterprising bank to offer lending against that asset?
If the guarantee was extended to mortgage trusts, then we’d see an even bigger flight from equity markets towards the safety of Government-backed investments. Bolt et al would then doubtless rail against the Government’s creation of a stock market collapse, Alan Wood would cite Hayek and wag his faux-Professorial finger, etc.
To those who lambast the Government for drawing the line on guarantees at deposits in APRA-regulated Australian banks, I’d ask: where should the line be drawn?
Ken L makes the point eloquently: http://www.roadtosurfdom.com/2008/10/27/howards-battlers/
And yet retirees putting all their super into one fund is not that uncommon. Really have to wonder at the quality of advice financial advisors are giving.
Though I don’t really understand why the threshold for the bank guarantee had to be so high. Surely 50k-100k would have covered most people and avoided the panic withdrawal at banks and not made it so attractive for people to move their retirement savings. And those with more $$$$s in the bank can certainly afford to pay for insurance.
Robert @ 3 – why would the banks help the competition when they can take the opportunity to grab back more of the mortgage market share directly while the non bank lenders are struggling for funds?
As a retiree on an allocated pension who has paper losses running into hundreds of thousands, can I say I am disgusted that ‘investors’ in these schemes are now crying poor. FGS, you pay your money and you take your chances. The income stream continues. Be thankful!
Turnbull and his ilk are engaging in populist nonsense. There is no way in the world any government could ever rescue such investments.
And the ABC coverage of this issue has been appalling.
Chris: they’d hardly be helping a competitor. They’d be helping themselves to fairly easy profits.
Robert @ 9 – but wouldn’t there be bigger profits by going direct to the home owners and businesses that want to borrow the money?
wpd @ 8 – crunch time will come when the funds can no longer pay out the regular payments to retirees. Could be a lot more people getting their xmas bonus than the govt first though.
Governments everywhere in the West have taxidermied their financial institutions into a counterfeit of life in the hope no one will notice that they are in fact dead.
It is the role of oppositions to pretend that they can breathe life into these formaldehyded carcasses. Turnbull is playing his role rather poorly.
But who wants to do mouth-to-mouth on roadkill?
What gives these “investment vehicles” the right to just freeze the funds anyway? Nobody I have heard has questioned their power to do so.
Spose there is some buried general clause that punters have signed up to, which says pretty much, “we have the power, at any time, to grab hold of your bucks and let you have it when we bloody well feel like it, if there is anything left”.
joes2, that’s what I was wondering. What gives them such a right?
I had money invested in such fund, but I shifted it a few months ago to a more secure spot, as it was haemorrhaging and I though it was obvious it was going to get worse. If you’re going to invest you have to realise there’s a risk and be prepared to take that on. But for most people it’s a paper in any case and isn’t affecting their standard of living.
Oh dear, a paper loss.
Joe2 I suspect there’s a mismatch between the liquidity offered to investors and the liquidity available to the financial institution. The latter can’t cash in its mortgages even if it wanted to, as long as mortgagees are making their repayments as per the contract. That’s not a problem as long as most investors are happy to leave the money invested and just take the returns, but if too many decide to withdraw then the firm has to borrow to meet its obligations. Right now, there’s no way anyone will lend them the money.
As Phil Naylor said tonight, winding up the funds would not benefit anyone (or to be more accurate, it would only benefit any buyers who ended up taking over the mortgages at a discounted value, assuming any can be found). Presumably the most likely outcome would be that investors would still get their normal returns but from a receiver instead of from the original institution, and they would still be unable to withdraw their investments, so winding them up seems a pointless exercise.
Whether freezing the funds will work because people will calm down in a reasonably short period is, however, moot.
Rudd up 5 as PPM in Newspoll: 59-25. Talcum down one.
2PP 54-46.
Nothing bleats quite so much as a stuck Investor.
I hear Jamie Packer has lost a mozza too. Down to his last Billion or two. Poor baby. My heart bleeds, it really does.
As for poor Chris Cole who splashed his stash on some You-Beaut Mortgage Fund on the advice of a Financial Planner, WTF does he expect the Public to do about it? He could have put it in the bank, but no, he went for the higher returns.
Chris, me old chum, if you think you’ve been hard done by and were not told about the risks associated with your investment when you were advised to make it by the Financial Planner, see your lawyer and sue the bugger.
If, however, said Financial Planner did tell that the proposed Investment was not risk-free and that you that your dosh might not be as secure as, say, in a Bank, but you decided to go for it anyway, you’re on your own, Jose. You’ve got no-one to blame, but yourself.
Um, I’m no finance whiz, and this might sound obvious, but since banks currently return +8%, and “market-linked” funds -10% (even before the formal “crisis”) – why the hell wouldn’t money be flowing that way? Guarantee or no?
Money had been steadlily flowing out of the sector since January – even reported in the Oz!
This is a list from Crikey – with most of these funds freezing redemptions well before this month – what a try-on and what a deep turd Turnbull is for not calming the markets but stirring everything up for partisan gain. Happy to admit that I was totally wrong about Malcolm – wot a shithead.
http://www.maynereport.com/articles/2008/08/28-0958-6879.html
It’s hard to get up too much sympathy for investors, superanuants (both self funded or elf funded) when for the last 5 years, until, say, last xmas, a conservative portfolio (like a super fund) of simple aussie shares should have returned between 12% and 14%. Cash returned around 7%.
Anyone who got above cash was reaping the risk premium and would sensibly be putting it away for a cloudy day. [or as is likely spending it on non liquid assets like a Miele kitchen or pissing it up against the wall on overseas holidays and B&B weekends at wineries in oz whilst bragging about how good life was to the safe investing schmucks who didn't take the high risks by leveraging / margin loans for oz shares]
Surely no one expected returns of 14% on a conservative portfolio to sustain.
There was plenty of mainstream, reliable, easily accessed, “text book” and FREE advice around 18 months ago to get out of Oz shares and into cash.
I dunno, some of these Mortgage Fund Investor-types.
They remind me a bit of Daffy Duck in that old Bugs-Bunny cartoon, Ali Baba Bunny.
Thats the one where Bugs and Daffy are tunnelling to Pismo Beach (and all the clams you can eat) for a vacation and end-up in Ali Baba’s cave ( Yep, shoulda turned left at Alberquerque). Anyway, Daffy pops-up first and gets a dekko at the treasure, whereupon his pupils shrink to tiny pin-pricks of greed and his tongue starts popping in and out.
He spends the rest of the show dodging a dim-witted guard named Hassan and trying to pinch the loot (while simultaneously dudding Bugs of his share), all in an effort to make himself, in his own words, “Rich, Rich, Rich…well, at least, moderately well-off”.
These guys remind me a bit of poor old Daffy.
You can just see their pupils shrinking and the little tongues popping when they get a dekko at a Prospectus offering twice or three times the returns of a Bank deposit.
Unfortunately, like Daffy, they end-up chopped by Hassan.
joe2 @ 12 – I think you’ll find that when people invest in these funds, they have to agree that under certain circumstances (like when a run on withdrawls happens) that the managers are allowed to freeze redemptions
until conditions get better (or not).
Lefty@18 – people still thought that the initial sub prime blip a fair while back would be just a blip and that the extra-ordinary growth would continue.
The all ords has been rising steadily since about at least 1980 with a few blips like the Asian Crisis etc. It rose to about 7,000 last year. It rose steeply since a while after 9/11.
A simple trend line (if one was a simple chartist) would put it, at the previous 20 years growth trend, at a bit shy of 4,000 now.
Today it’s about 3,700.
Thats about where it should be without the steep spurt since 2001 without any of the current meltdown.
So in this version the current meltdown should well overshoot the “normal” trendline and plunge down. I wouldn’t be at all surprised to see it down to around 3,000 soonish. It will take at least 12 – 18 months to get back around either side of 4,000.
At 3,000 down from 7,000 that will be a 43% haircut for some people if they sell.
Nice pick-up Jo! Thats incredible. The media should hang, draw and quarter Talcum. These funds were toast before the guarantee!!
As I said, I was rally vcurious – whats ort of money would hang around for a beating like that? And hey – they weren’t!
Guarantee my ass. These finds stank all the way back to 07.
FXH the notion of getting out of shares and into cash isn’t so easy if you’ve been in the market for some time. Even at these reduced levels you can incur horrendous capital gains. The All Ords was 1527 in September 1991.
I still think it’s better to buy the bank and get franked dividends rather than put your money in the bank. ANZ have just taken a 20% hit on profits but have kept their dividend steady. They can do this because the norm for listed companies is only to pay out 67% of after tax profits in dividends, so they just increase their payout ratio.
You have to think twice about being in cash for any length of time because it’s such a lousy long term investment. After inflation and tax the yield is negligible even if the nominal yield is say 8%.
Most of the funds jo linked to at 19 are unlisted property trusts. Anyone buying into those should know that things turn nasty if there is a run on redemptions. Normally the fund will keep a small cash reserve to cover redemptions. Otherwise as Ken L says they have to borrow money. Ultimately they would have to sell property as a forced sale in a fucked market. Hanging in there and continuing to take the income stream is probably the best course for most investors.
If people had planned to buy a car or something substantial they shouldn’t be depending on this type of investment. Anyway it’s hard to see that waiting three months is any great hardship.
True Brian – the tax on term deposits (that is, normal income tax) is a bummer. But I’m glad Ive stuck it out. I’ll never make a lot, but then again, nor will get stressed out.
Frankly, this ‘crisis’ is actually going rather well for me – banks are keen on cash flow, upping their interest rates, and having said no to the all-singing, all-dancing ‘super choice’ clowns a while back, in favour of old school defined benefit, I don’t even have my super on the line.
Contact Low risk Lifestyles, Keating Towers. Actual product may meet (low) expectations.
But it will interesting to watch how the feds respond to the mortgage fund problems – not so much as to investors’ immediate problems, but the impact that selling their assets – real estate – will have on the housing market.
Average housing prices have yet to plummet as they have done in most OECD countries, and our chronic shortage of housing stock is a significant factor. Our high immigration, running close to 200 000 per annum is helping to maintain that demand. The Feds won’t be inclined to force mortgage funds to sell assets, and therefore won’t be pushing the issue of access to their capital for investors caught.
Lefty E #2 makes an interesting point about government’s role in “encouraging” people into higher risk strategies. There’s also the issue of how Centrelink calculates pension rates based on assumed levels of return on investment of any monies owned by the pensioner – the deeming rate set has for the last few years been running higher than bank deposit interest returns, again putting people at the mercy of the market. Greed might be part of people’s motivations, but poor government policy shouldn’t drive them to risky strategies.
There is a hard and fast distinction between a deposit and an investment.
If the government breaches that line by offering any guarantee to investors on the security of their invsstment, then there is no defensible line to hold all the way down to recompense to me for my losing bets on last Saturday’s Cox Plate.
I’m appalled by the populist irresponsibility of Turnbull, Bishop et al.
And it is impossible not to be impressed by the hydra-headed nature of the monster that is devouring the financial world. When a government smites one head, it makes a hundred other heads bigger, hungrier, angrier.
No wonder Rudd and Swan started looking very shaken about a fortnight ago.
Stop all yer whining.
The traditional remedy for all this financial hurting is listen to a new AC/DC album.
I’m surprised that neither Rudd or Turnbull have not suggested this course of action given its effectiveness.
What is happening to all that superannuation that Has To Be invested every time I get paid because it is part of the deal when one is employed?
Am I ever going to see any return on it? I’m already behind the ball on super as I didn’t return to the paid workforce until relatively recently, so in one way I have less to loose, but…
It’s enough to drive one to drink, except at the rate the dollar is falling I’m starting to think that drinking is going to be too expensive too.
Curi-oz – if you’re really really conservative, use a superfund that invests mainly in cash rather than shares. But I think the general consensus is that if you do that you’ll get lower returns in the long run. The volatility is only really a concern if you need to get to the money in the short to medium term, otherwise you just wait downturns out.
Just heard on the news that the govt may invest the future fund in the mortgage funds. I wonder what side effects that will have….
Katz @ 28 – perhaps the solution is not to guarantee more, but to guarantee less instead?
According to Alan Kohler last night the current run on sharemarkets and various currencies is caused by hedge funds having to close out their exposures and sell out. So the sharemarkets in Russia and smaller economies were caned by 10% in one day.
I don’t understand hedge funds, but he said they had been buying commodities etc which they are now also selling. While some hedging is no doubt economically useful it seems that much of it is a casino played by very rich people. So I can’t be too sympathetic, but it seems to be stuffing things up for everyone.
I’d like to see any non-economically necessary casino-type activity either banned or taxed heavily, but I’m not holding my breath that Bushco’s G20 meeting would contemplate anything like that.
Bernice, I’d like some analysis of how many of the funds are actually invested in housing. I’m not familiar with that segment of the market, having decided years ago not to invest in unlisted property trusts for reasons that are now clear to everyone. Kohler said last night that the top end of the housing market would come off considerably but the rest would hold up because, as you point out, the shortage in supply.
David Murray this morning, who is looking good by staying largely in cash in the Future Fund, said that the oversupply in the US housing market would have to be fixed before the whole thing could settle down. Lower house prices in the US means people feeling poorer, means less consumption which ends up via Asia in a lower demand here for commodities.
Meanwhile here unless there is a serious recession companies should remain profitable so dividend payouts should hold up pretty well. This is a much better situation than the US where people depend more on capital gain than on dividend streams. We need to thank Paul Keating for establishing that basic pattern which should continue while full franking of dividends (crediting company tax paid to the shareholder) is maintained.
Chris (a different one), David Murray said this morning that they were about to do a Buffet and start buying, but only where there was value and safety. Putting a bit of FF money into the funds under pressure could restore confidence, I would think.
It’d be the most consistent and intellectually honest solution.
Unfortunately, the decision by Ireland to be the first nation to guarantee all deposits without limit made it impossible for the Australian government to offer something of the sort in retaliation.
Such is the fear and panic abroad, it is possible that even the biggest Australian banks could have been wiped out by the silent run on them. Don’t expect to see lines of panicked depositors lining up in the streets for their savings. Now, the run happens right there on your computer screen.
Curi-oz: I wouldn’t worry too much about the market down-turn in terms of super. The price of ‘units’ in your superannuation fund will be going down, making any currently held units worth less than before. However, any contributions will be buying those lower priced units, partially offsetting the reduction in value of previous investments. Then, when the market goes back up, the money invested during the down-turn will be worth proportionally more. It all works out in the long run.
The only problem would be if you were retiring and redeemed all of your super in a lump sum in the next 12 months. Which would be a stupid thing to do anyway.
Brian wrote:
It’ll only stuff things for a while – they’re basically selling to cover their borrowings (effectively, a lot of hedge funds are getting “margin called” by their creditors as the market tanks, a self perpetuating cycle which will eventually bottom).
It’s a matter now of sucking it up and seeing it out – selling now is a disaster that only the truly desperate should undertake. Buying, if you have capital and are prepared to take some medium term risks, would be what Buffet would do in this situation as he absolutely luuuurrrrrrrvvvvvves distressed sellers. That’s how he makes dough.