Australian Banksia Securities Assets Frozen As Mortgage Lending Scheme Blows Sky High; Six Canadian Banks on Moody's Review for Downgrade

Every day I get emails and links from all over the world. I wish I had time to comment on all of them. Here are a pair of stories regarding Canada and Australia.

The Financial Post reports Six Canadian banks on review for Moody’s downgrade
Debt rating heavyweight Moody’s Investors Service served notice on six of Canada’s biggest banks that it may cut their rating by as much as two notches because of concern over high consumer debt levels and soaring housing prices.

The downgrade warning covers Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, Caisse Centrale Desjardins and National Bank of Canada.

Moody’s said it will also consider the removal of government support from the ratings of some of the subordinate debt issued by the institutions, a move that would have significant negative implications on the country’s major lenders which have traditionally enjoyed an implicit promise of a bailout by the state if ever they got into serious trouble.

“Today’s review of the Canadian banks reflects our concerns about high consumer debt levels and elevated housing prices which leave Canadian banks more vulnerable to increased risks to the Canadian economy, and for some banks a sizeable exposure to volatile capital markets businesses is of concern,” Moody’s analyst David Beattie said in a statement.

The move comes about four months after Moody’s downgrade Royal Bank of Canada, the country’s biggest bank by assets, by two notches because of its exposure to increasingly volatile global capital markets. At the same time the rating agency also cut the ratings of 14 other large banks mostly based in Europe and the U.S.

Moody’s noted that consumer indebtedness has been rising steeply for the last several years, with the ratio of household debt to income recently hitting a record 163%, up from 137% in 2007, a reflection of what it called growth in debt outpacing growth in income.

Meanwhile, the rating agency is calling for economic growth of just 2% to 3% for this year and next year respectively, at the same time that external risks arising from the crisis in Europe and the struggling U.S. economy continue to rise.
Moody's Late To The Party

As is typically the case, Moody's is way late to the party. It is also overoptimistic about Canadian growth prospects.

The big three rating agencies and the IMF all fail to understand the global forces at play.

Australian Banksia Securities Assets Frozen

In Australia, the collapse of "non-bank" Banksia Securities has affected thousands of investors fools who put $660 million in a guaranteed to blowup mortgage-lending scheme that chased high yields.

How did Banksia Securities offer above market returns? The answer is risky mortgages and commercial property loans now going bust.

Please consider Rural savings threatened after collapse
Thousands of farmers and other regional Victorians face a nervous wait after the collapse last night of the financing group Banksia Securities, which has put at risk $660 million in savings.

As a non-bank lender, Banksia offers investors high interest on debentures and then lends these funds out as mortgages or commercial property loans.

Given Banksia does not hold a banking licence, the funds in the debentures are not backed by a deposit guarantee.

Debenture firms often target retirees as investors, generating new business through promises of high-interest returns backed by property.

McGrathNicol last night froze the $660 million in investments and stopped all interest payments as it began an urgent review of the company's accounts.

The attempt to claw back funds could cause a credit crunch among some property developers that relied on Banksia for loans.

Opposition Finance spokesman Robin Scott said Labor was worried about the damage Banksia's collapse may do on regional communities, particularly on jobs and development.

Mr Scott said while it was too early to know the full impact he hoped the state government would look at ways of to help those most affected.

Questions of the Day

This is yet another disastrous borrow-short, lend-long scheme blown sky high. The New Australian blog asked Is this Australia’s Northern Rock moment?

I have a question of my own: Why should the government help anyone affected by this?

Those stupid enough to have money in Banksia given the precarious state of Australian real estate deserve to lose it.

The same holds true for developers. Any developer stupid enough to depend on Banksia for credit should now pay the price.

Credit Crunch On the Way

If developers are cut off, the result would be a genuine credit crunch as opposed to a lack of demand for money.

For a comparison to the proclaimed credit crunch in Europe, please see Credit Crunch in Europe; Eurozone Lending Sinking Fast; Money Supply Contracts

Mike "Mish" Shedlock


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