David Uren and Sean Parnell | October 07, 2008 THREE of Australia's biggest banks tapped long-term loans from the Future Fund as cash dried up from other sources in the wake of the collapse of US investment giant Bear Stearns.
Documents obtained by The Australian under Freedom of Information laws show the ANZ, Westpac and the National Australia Bank obtained funding for as long as 10 years.
The agreements emerged yesterday as world markets plunged. Australia's S&P/ASX200 fell 3.3per cent to close at a three-year low of 4540.4, with hedge-fund selling driving stocks lower.
The British and French markets shed 6 per cent as European leaders met to discuss a joint statement on the crisis. British Prime Minister Gordon Brown called together an emergency council. German Chancellor Angela Merkel broke ranks with her European partners and guaranteed individuals' deposits following the near-collapse of property lender Hypo Real Estate.
In early trading in the US today, the Dow Jones plunged by 286 points, or 2.8 per cent.
The price of oil fell below $US90 on fears that slowing world growth would cut demand.
Investors worldwide have concluded that Washington's $US700billion ($935billion) bailout of Wall Street will not on its own be sufficient to avert a world downturn.
Meanwhile, talk of a cut in interest rates prompted a sell-off of the Australian dollar by Asian investors yesterday. The dollar fell almost US3c to close at a two-year low of US74.97c. Just nine weeks ago, it hit a peak of US98c.
The Reserve Bank board is expected to agree on a 50-basis-point cut in the cash rate at its board meeting in Sydney today. However, a rise in bank funding costs means home buyers are likely to see their mortgages reduced by only 25 basis points.
Wayne Swan said yesterday families had a right to expect as much interest-rate relief as was responsible. "When conditions normalise, we also expect banks to pass on any further relief promptly," the Treasurer said.
However, in a speech to be delivered this morning, he is expected to indicate he does not expect this to occur soon. "We in Australia are not immune from these global developments of epic proportions. These developments will affect growth. They will affect employment. They will affect government revenues."
ANZ chief economist Saul Eslake said that if the Reserve Bank did not cut interest rates today there would be a chance of private banks having to raise rates further. He said it was possible that if market conditions calmed, mortgage rates could fall further without a Reserve Bank cut.
Non-bank lenders, in particular, are under pressure to retain some of the expected rates cut.
Wizard chief executive Mark Bouris said the global funding environment had changed drastically since the September RBA meeting, when Wizard was the first to announce it would pass on in full a 25-basis-point cut. All financial institutions have found it more expensive to obtain long-term funding over the year, but the big banks have raised record amounts of long-term funding in Australia and overseas, tapping a wide variety of markets as insurance against the global downturn.
The FOI documents obtained by The Australian reveal that Westpac and the NAB have issued the Future Fund with notes with as long as a 10-year maturity, while a $500million issue to the ANZ had a five-year maturity.
The documents show the deals were concluded about the time of the Bear Stearns collapse on March 16, with NAB concluding its deal on March 19, ANZ on April 3 and Westpac on April 4.
The Commonwealth Bank did not raise money from the Future Fund - set up to guarantee the superannuation of public employees - possibly because the fund's chairman, David Murray, was formerly the bank's CEO, which would have raised perceptions of a conflict ofinterest.
A spokesman for the Future Fund said there was nothing out of the ordinary in the investments, which form part of the fund's $4.2billion portfolio of fixed-interest investments.
"We have made investments in long-term funding with NAB, Westpac and the ANZ," he said.
"The deals are normal, commercially competitive private market placements."
The loans did require the approval of the banking regulator, the Australian Prudential Regulatory Authority. Smaller banks, which have had a harder time raising funds thanthe large banks, said they would also like some Future Fund investment.
A Suncorp spokeswoman declined to comment on whether the company would now be entertaining buyout proposals for its banking division if it had also been able to draw on the Future Fund. "Our funding is on track for the year: we have to raise between $4billion and $4.5 billion this financial year, and we're already a quarter of the way there with $1.1billion," she said.
Suncorp's bank business was "in good shape", but the company was obligated to consider any offer that would maximise shareholder value, she said.
A spokeswoman for Bendigo and Adelaide Bank said all Australian banks should be allowed access to the Future Fund.
"Australian banks are among the strongest in the world - domestic banks are well regulated and closely supervised and have sound credit standards," the spokeswoman said.
Bendigo and Adelaide Bank had a diverse funding base centred on retail deposits, the spokeswoman said, and allowing it to access the Future Fund would be an excellent way for domestic funds to be applied to good-quality domestic assets.
"This would offer the fund high-quality investment opportunities and further promote active local competition," she said.
The Future Fund's investment mandate does not preclude it investing in bond issues by second-tier banks, simply requiring that the board of guardians maximise the fund's returns with "acceptable, but not excessive" levels of risk.
The Future Fund refused to divulge the size of the loans to either Westpac or the NAB (the ANZ transaction having earlier been leaked) or the terms of any of the transactions.
It argued that it would have an adverse effect on the fund's ability to operate in the private placement market if the terms of the transactions were disclosed.
The banks suffered in yesterday's sharemarket tumble, with Macquarie Bank losing 10.5 per cent of its value and ANZ losing 3.5 per cent. Resources stock were also belted, with Andrew Forrest's Fortescue Metals Group falling 11per cent to a one-year low, BHP losing 2 per cent and Rio Tinto dropping 5 per cent.
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