Naked Among Cannibals: What Really Happens Inside
Australian Banks
By Graham Hand
Allen & Unwin, 2001
306 pages, $29.95 (pb)
REVIEW BY PHIL SHANNON
http://www.greenleft.org.au/node/26739
Banks are the most hated companies in Australia. Their expansive greed drives constant branch closures and mass sackings, while fees and charges are levied on everything that moves. This has earned the banks their just reward in the unpopularity stakes.
Graham Hand was a banker and one-time deputy treasurer of the State Bank of NSW (Australia's fifth largest bank). His inside-the-belly of-the-beast account, Naked Among Cannibals, is an angry lament over banks' behaviour in general and the privatisation of the State Bank in particular.
Banks started behaving badly, writes Hand, with the advent of deregulation in the 1980s. With the government regulatory reins off, a fierce competition commenced for the big profits available from corporate clients. Banks lent big to the likes of Christopher Skase and Allan Bond.
The stock market crash of 1987 and the 1991 recession, however, turned these corporate loans rotten. Businesses big and small, urban and farm — and the worker victims of corporate Australia's borrowing binge — were trapped under the collapsing financial rubble, their bank debts bleeding, too.
State Bank NSW was caught in this corporate landslide (two thirds of State Bank's entire capital had been committed on just one loan to Bond) but the bank survived by pioneering most of the changes to banking practices that we all know and hate.
The so-called honeymoon housing loans, and new savings products with high deposit rates, have lured swarms of new customers through the doors but, once hooked, banks change the rates and conditions to make these products more profitable. "We can change the terms of this contract or the way it operates, or both, at any time without your consent", as a clause in the State Bank's standard housing loan document put it.
Banks rely on "retail inertia" to retain their new prey — 80% of bank customers stay with a product because it is too time-consuming and disruptive to change accounts frequently.
It is no good shopping around because, while resorting to price warfare to snare new customers, banks engage in "mating calls" via the media to the other banks, resulting in common interest rates and other prices, terms and conditions. This "cooperative pricing behaviour", collusion in fact if not in name, ensures healthy profits for all banks.
Other techniques perfected by the banks include the time delay between announcing home loan interest rate cuts and their implementation. A two-month delay in passing on a 0.5% rate reduction in State Bank's $5 billion loan portfolio yielded $4 million in clear profit. Interest rate rises, of course, are passed on immediately. Except for depositors where the order is reversed.
Electronic banking is aggressively pushed, but the efficiency savings are not passed on as improved services to customers but taken as profit. Adding insult to theft, fees have been introduced for electronic banking.
The weekly meetings of State Bank's pricing committee, on which Hand sat for seven years, scrutinised every bank product for potential profit. Fees and charges became the new "wonder drug" for curing the profit blues. In 1999, fees and charges "earned" the banks $5.4 billion in revenue.
Cost-cutting added to the drunken revelry at profit happy hour. Thirty-thousand jobs were wiped out in the five years to 2000 and one third of the remaining jobs are now part-time. Branch closures ran at 10 a week in 1997-98.
While State Bank's "Profit Enhancement Project" was milking its retail client base and laying off $20,000-a-year tellers, their treasury dealing room was employing high finance dealers on six-figure salaries to trade hundreds of millions of dollars worth of equities, futures, currencies, stocks and bonds on the world's financial markets. These are the people whose "extremely useful" contribution to society, writes Hand, is to buy Australian dollars at US$0.6050 and sell at US$0.6055. The sort of people who "cheer when a large increase in unemployment is announced ... simply because it suits an interest rate view".
The banks' raging profit river, fed by the shekels of customers and the gambling of the dealers, takes a major detour through the banks' senior executives where multi-million dollar remuneration packages and share options fatten up the creatures who lecture their workers on wage restraint.
These beasts have no natural predator. Mergers do not threaten them — when the now privatised Colonial State Bank (purchased by Colonial Mutual in 1994) was taken over by the Commonwealth Bank in 2000 (with 250 branches closed and 2500 staff sacked), the redundant Colonial CEO received $3 million in compensation and an annual pension of $837,000. Other ex-Colonial directors received four times their last three years' remuneration, a far cry (not that they were shedding any tears) from the retrenched bank workers' severance pay of four weeks for each year of service.
Drawn to the profit trough as it runneth over are such admirable species as the consultants (question: What's the definition of a consultant? Answer: Someone who takes your watch and tells you what time it is) and the $500 per hour lawyers. The "elite customer" has also found its privileged evolutionary niche. Paid higher deposit rates and charged lower loan rates, there are a select 1000 of them at the Commonwealth Bank; Macquarie Bank has set the bar at $1 million for access to its exclusive club. As the NAB decimates its branches, it has opened 30 private client suites.
Privatisation of state-owned banks has also transferred public wealth to the private sector. State Bank NSW was sold to Colonial Mutual for $570 million but over half this amount was returned to the new owners in indemnities for bad loans. Premier John Fahey's Liberal government agreed to cover 90% of the cost of State Bank's bad loans. It was the deal of a lifetime for Colonial, which by 1999 was raking in $600 million in profit from its fire-sale bargain.
The taxpayer bore the brunt of corporate excess, too, when the state banks of Victoria (in 1991) and South Australia (in 1992) sunk under the weight of their bad corporate loans, costing the taxpayer $3 billion and $4 billion respectively. The state bank debacles were a classic example of socialism for the rich — the privatisation of profits and the socialisation of losses.
The banks see their public loathing as a simple matter of poor communication of the "facts": an extensive branch network is economically unviable; fees are mere recompense for services provided; stratospheric CEO remuneration is necessary to attract talent; banks are not bastards, they are just misunderstood. The banks' brilliant solution? Pay the ranting reactionaries of talk-back radio to stop their populist bank-bashing and present banks more positively.
From 1997, the Australian Bankers Association paid $1.2 million to John Laws and 2UE. Colonial State Bank had direct deals with Laws and fellow right-wing ranter, Alan Jones. What these radio jocks presented as editorial statements were in fact paid commercial sponsorship. This "cash for comments" scandal backfired on the banks. People understood only too well whose pockets were being picked to fuel the banks' annual profit growth rates of 20-30% and the 15% rate of return for shareholders.
Hand, a heartbreakingly genuine believer in "the egalitarianism that once defined Australia", wants re-regulation of the banks to restrain their greed and shift the balance from shareholder to customer.
However, don't expect to hear this, or the better and more radical call for nationalisation, from any of the capitalist parties. Capitalism is vocal about taking away the freedom of people who rob banks but is silent about taking away the freedom of banks to rob people. The old socialist demand of "Nationalise the banks" has never been more relevant.