Citizens Electoral Council of Australia

Media Release Wednesday, 13 November 2013

Craig Isherwood‚ National Secretary
PO Box 376‚ COBURG‚ VIC 3058
Phone: 1800 636 432
Email: cec@cecaust.com.au
Website: http://cec.cecaust.com.au

Are the profits claimed by Australia’s derivatives-riddled banks real?

Australia’s big four banks have declared combined profits for 2013 of $27 billion:

CBA $7.8 billion; Westpac $7.1 billion; ANZ $6.5 billion; NAB $5.5 billion.

The combined profit is up from $23 billion in 2012.

There is a huge question mark hanging over these profit announcements: how can the banks be making these profits, in this economy? As the 4 Nov. Sydney Morning Herald understated it, these profits have come “despite slowing across the economy”.

Anyone involved in small and medium-sized business, manufacturing, and farming, or simply a working family struggling to meet the high cost of living, knows that Australia’s real economy is far different from the official statistics.

The most suspicious aspect of the banks’ profit claims, is that they coincide with a five-year period of binging in the toxic gambling side-bets that caused the 2008 GFC, called derivatives. The total off-balance-sheet derivatives exposure of Australia’s banks has skyrocketed from around $13 trillion in 2008, to $23 trillion as of July 2013. And the biggest derivatives gambler of them all, CBA, supposedly Australia’s most profitable bank, in 2012 suddenly decided to hide its full exposure.

How derivatives can fake profits and hide losses

Former Wall Street derivatives salesman Frank Partnoy explained in his 1997 book FIASCO: Blood in the Water on Wall Street, how financial derivatives are used to fake profits and hide massive losses.

He uses the analogy of a bucket of gold valued at $100, but half of the bucket is real gold and valued at $90, while the other half is fools gold which is only valued at $10. If you sold the real half for $90, you wouldn’t make a profit. However, if you applied some accounting trickery, and “averaged” the value of the two halves, you could value them on your books at $50 each. Then if you sold the half that’s real gold for $90, you could record a $40 profit. You would get away with claiming this profit, so long as you didn’t sell the other half of the bucket of gold, because if you did, you would only get $10, and record a $40 loss, which would cancel out the $40 profit.

There are numerous financial derivatives that take this form, such as CDOs—collateralised debt obligations—which combine both valuable and risky debt obligations such as mortgages, to enable the derivatives gamblers in the banks to commit outright fraud. In 1995, Japanese banks that lost massively when the British bank Barings collapsed under a $1 billion derivatives loss on 27 February, were able to announce fake profits just one month later when their financial year ended on 31 March, using these kinds of derivatives. Partnoy reports it is possible for a bank to park the worthless parts of the derivatives “bucket” on its books for decades. The $1.4 quadrillion—$1,400 trillion—in total global derivatives bets hanging over the world financial system includes hundreds of trillions of dollars of such hidden losses.

Australians should ask: why is CBA, which started announcing huge profits just as it started running up huge derivatives bets, all of a sudden hiding its true derivatives position? Are its profits real?

And even though they aren’t yet as secretive as CBA, the same question must be asked of the other banks too.

Fight bail-in

In October 2011 the Financial Stability Board (FSB) that operates out of the Bank for International Settlements in Switzerland declared that Australia’s financial sector was “globally systemically important”. This means in essence that Australia’s banks’ derivatives obligations are large enough to threaten a global meltdown if they experience a Lehman Brothers-type failure; therefore, to avert such a failure Australia’s banks must be “bailed in” by seizing customer deposits, Cyprus-style.

In other words, your savings will be seized to honour the banks’ gambling debts.

The CEC is leading the fight to a) stop the Australian government from enacting the bail-in legislation currently being drafted in the Treasury department, and b) force the Parliament to enact a Glass-Steagall banking separation in Australia that splits up the big four banks so that the deposits they hold are completely separated from their toxic derivatives bets.

If you haven’t yet joined the fight, do it now.

Click here to endorse the CEC’s public statement against bail-in and for Glass-Steagall and a national bank. Names will be published in an advertisement in a national publication.

Click here for a free Glass-Steagall pack to find out how Glass-Steagall can solve the global financial crisis.

Click here to join the CEC as a member.

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