Consider ASIC's performance, in the case of Storm Financial, the Townsville-based financial planning company that collapsed late last year, leaving 3,000 or so clients, many of them retirees, facing bankruptcy and the prospect of losing their homes. Just weeks before Storm Financial went under, as the stock market was falling, ASIC fielded complaints about the company. Storm's business model was to encourage its clients to borrow against their homes, from its preferred lenders—the Commonwealth Bank, Bank of Queensland and Macquarie Bank—to invest in stockmarket funds managed by CBA's Colonial and Challenger Financial Services; Storm charged commissions of seven per cent of gross assets-among the highest in the business-for arranging the investments. In a falling stock market, its performance deserved scrutiny.
ASIC investigated Storm, and gave it a clean bill of health; however, within weeks the company had gone under. It has since been reported that ASIC had been tipped off about Storm's founder a number of times in the past 20 years, to no effect.
Contrast ASIC's treatment of Storm (and probably many similar outfits), to its treatment of the Citizens Electoral Council. On 27th July 2005, ASIC's Perth office sent a terse, "please explain" letter to CEC National Secretary Craig Isherwood, demanding to know if Craig was proffering financial advice, without an ASIC license.
What was ASIC's concern? What was Isherwood and the CEC doing that this great public watchdog was so determined to guard against? Precisely what ASIC should have been doing-warning the Australian public of the danger posed to the Australian financial system from its widespread exposure to derivatives speculation.
The headline of the June 2005 edition of the New Citizen had blared, "The Mother of All Bubbles", explaining how the exponential growth in over-the-counter derivatives had turned the entire world financial system into one giant gambling casino.
Anybody who paid attention to that New Citizen report, and acted on it in regards to their personal finances, would not have lost any money in a Storm Financial, or a hedge fund, or Lehman Brothers' collateralised debt obligations (CDOs), so what explains ASIC's behaviour?
The way ASIC performs its role is one example of what an Australian Pecora Commission should thoroughly investigate. One question that needs to be answered, is just what is the relationship of Australia's banks to businesses like Storm Financial? What practices has ASIC allowed, which have since proved so dangerous, and who benefits?
Interestingly, Slater & Gordon, the law firm handling the class action lawsuit of 240 Storm clients who have been ruined by the company's collapse, charge that the villain in this case is the banks, for whom Storm in fact functioned as a front, to sell home loans and home equity products.
This charge is not without strong grounds, and, if true, Storm would be the tip of the iceberg: banks are desperate to lend money, especially in a financial bubble, because banks' loans are in fact assets, and the more the banks loan, the more they feed the bubble. Since the collapse of the dot.com bubble in 2000, U.S. banks, in their desperation to lend money, increasingly went sub-prime; did Australia's equally-desperate banks use companies like Storm Financial as fronts to get around any prudential limitations on their lending?
It would be a travesty if the directors of Storm Financial carried the can, but not the banks for which they were a front. An investigation should include the banks, ASIC itself, and, as Craig Isherwood demanded in his Pecora Commission call, the politicians whose deregulation policies enabled these scams in the first place.
