Dr Evan Jones discusses the latest in a series of parliamentary inquiries into systemic bank corruption as the victims of fraudulent foreclosures continue to wait for justice.

"Trust is at the heart of banking. It's not good enough if trust or good ethics exist in the vast majority of the organisation, you've got to do your best to get it right across the organisation." ~ Ian Narev, CBA CEO, 18 November 2015

“We will be the ethical bank, the bank others look up to for honesty, transparency, decency, good management, openness.”

- David Turner, CBA chairman, 18 November 2015

“Today, CBA stands for contemptible, base and amoral.” ~ Letter writer, Sydney Morning Herald, 7 March 2016

Yet another bank inquiry because the previous ones were duds

The PARLIAMENTARY JOINT COMMITTEE on Corporations and Financial Services (PJC for short) is currently engaged in an inquiry titled ‘The Impairment of Customer Loans’. The dominant issue for consideration is the fraudulent foreclosure of close to 1000 Bankwest borrowers after the Commonwealth Bank (CBA) took over Bankwest from its parent HBOS in December 2008.

The inquiry was established following long-term pressure from a small group of foreclosed Bankwest borrowers. Given the seriousness of the disclosures and conflicting claims, the inquiry period has been extended.

On Friday, 13 November 2015, the PJC held its first public hearing in Sydney. Some testimony was reported briefly in the media — the ABC, Fairfax, and here, and the Australian. The coverage is welcome, alerting the public to the inquiry and its orientation. But the coverage is cursory and there has been no reportage of the victims themselves — by interviews or by noting the contents of their submissions.

The neglect of this dimension of CBA criminality is in marked contrast to media coverage of the Storm Financial, Commonwealth Financial Planning scandal and the current CommInsure scams.

The Parlaimentary Committee Secretariat, as is customary, censors submissions of all references to individuals (the front-line guilty parties?) named by bank victims. Bizarrely, the Secretariat even whites out references to such essential background information as relevant court cases. But even the redacted versions expose the nature of the malaise. My original submission (the redacted submission is no.83) is published here.

A previous parliamentary inquiry in 2012 had been mooted to examine the same scandal. Before the inquiry saw the light, it was hijacked and re-oriented to something else, formally important but amorphous and ultimately – in the context of a visionless political class – innocuous. This was what became the 'post-GFC banking inquiry’.

One infers that the Senate (and then Labor Government) re-directed the terms of reference under pressure from the CBA.

The post-GFC banking report was a disgrace. The CBA/Bankwest scandal disappeared from view. This in spite of the fact that the Senate Committee heard testimony from selected victims.

One need go no further than the testimony of Sean Butler on 8 August 2012. Butler, a successful West Australian resort owner and hotelier, was brutally destroyed by the CBA and a partner-in-crime liquidator. ASIC told him to bugger off. His and other testimonies disappeared into the ether.

I have previously written an account of this dead-end inquiry, in four parts, here. The regulatory and political copout with respect to the CBA (including with the financial planning inaction) is covered

The current inquiry gives select victims a voice

First up to this new inquiry on 13 November was Rory O’Brien. O’Brien’s story, to his successful appeal in April 2013, is told here. The Appeal Court victory provided some optimism in O’Brien’s fight against the CBA (the victory was on narrow technical grounds but implicitly acknowledged potential CBA culpability). O’Brien’s case was due to return to court in May 2014.

In January 2014, CBA chief counsel David Cohen contacted O’Brien with a view to discussing the prospects of a "reasonable settlement". O’Brien replied positively.

Four months later on Tuesday 29 April, a week before the re-trial, Cohen meets O’Brien and suggests a paltry $1.8 million settlement. O’Brien reluctantly agrees, and instigates moves to withdraw from the impending litigation. Cohen breaks his word. At 6 p.m. on Friday (the court case had been scheduled for the Monday) the bank tells O’Brien — we’ll give you $100,000, take it or leave it. This practice of a bank handing over material or deliberations at the eleventh hour before impending litigation is a regular scam. O’Brien, advised by his lawyer, even more reluctantly accepted the bank’s dictate.

As per the conventions for bank out-of-court settlements, all details remain subject to confidentiality. Confidentiality serves only bank interests. All the precious bank documents that O’Brien had obtained in discovery had to be returned. O’Brien’s testimony at the hearings was possible through his obtaining parliamentary privilege.

Much speculation has occurred over the terms on which the CBA bought Bankwest from HBOS. It is known that the ultimate price depended on adjustments linked to unforeseen elements in the quality of the loan book, but that the ultimate adjustment was claimed to be marginal.

Bankwest victims claim that the purchase contract included a “clawback” arrangement, whereby the quantum of Bankwest loans claimed to be of dubious quality could be deducted from the ultimate price paid. CBA executives have consistently denied that any such clawback mechanism existed.

O’Brien claims that the discovery process in his litigation highlighted that the CBA had indeed a clawback arrangement — of which more below. 

Other victims claim that a clawback took the form of the discounted purchase price itself — at $2.1 billion. Regardless, this speculation and denials could be readily clarified if the police were sent in and sequestrated all documents relevant to the CBA’s purchase of Bankwest.

Victims have claimed that the fraudulent foreclosure of Bankwest clients was also motivated by the CBA wanting to get the second-tier Bankwest quickly up to speed on the hierarchically graded demands from the Bank of International Settlements at Basel, whose prudential guidelines on bank capital requirements, mediated by national regulators, are applied to all licensed banks.

From Rory O’Brien:

“There were also compelling reasons at the time why CBA wanted to impair and default many of these inherited loans from Bankwest to meet their Basel II liquidity requirements. This is a crucial issue peculiar to the banking industry which has been somewhat overlooked in this saga …”

From Romesh Wijeyeratne:

Several CBA public documents state that the goal for the Bankwest purchase strategy was to be 'capital neutral to maintain its Basel ratio'. …

Essentially, capital adequacy is dictated by the Basel ratio. A Basel ratio is effectively capital divided by risk-weighted assets, which is the bank's money divided by the customers' loans, and you get a ratio out of that. Different banks have different certifications and they have to abide by different ratios. At the time of the purchase, Bankwest was a Basel I accredited bank, and Commonwealth Bank was the first bank to move to Basel II advanced accreditation. So they had different capital profiles. We now know that Commonwealth Bank were having difficulty raising capital during this period, so the solution was to reduce the amount of customers that they had on the books. …

But the problem with this Bankwest scenario … is that Bankwest was subject to the Bankwest act, which stopped Bankwest from being moved up to the Basel II advanced accreditation. That could not be moved up in line with Commonwealth Bank, which created a discrepancy of capital profile between the two banks. The resolution of that was that they could not raise the capital; therefore, they terminated the customers.

At the 29 April meeting with Cohen, O’Brien claimed (his lawyer present) that the CBA had O’Brien’s loan within the clawback quantum.

O'Brien notes:

During the discovery process, however, it was definitively established through indisputable written evidence that, pursuant to the provisions of the sale contract, CBA did in fact attempt to clawback our loan from the vendors of Bankwest, through their advisers, PriceWaterhouseCoopers. …

CBA improperly tried to influence Bankwest to impair our loans. CBA's attempt to impair our loans was contested by HBOS Lloyds, understandably, as the vendors and sent to the appointed arbiter, Ernst & Young. Ernst & Young found out that our loan was in fact stable and ultimately unimpaired and refused to allow the clawback of CBA.

Obsfucation and lies by CBA management concerning the contract terms, have led victims to closely examine CBA financial reports to infer what the bank declines to disclose to victims and public authorities but is happy (or compelled) to disclose to shareholders.

Thus did Trevor Hall, victim Iyad Rafidi’s lawyer, say to the Inquiry Committee members — don’t take our word for it. Rather, examine what the bank has had to say itself about the contract terms and the orgy of defaults and foreclosures. See also the anonymous submission (#111), titled 'Critical Analysis of CBA and Bankwest Public Statements 2008 to 2015'.

The CBA had a warranty window of 18 months (until end of financial year 2009-10) to invent “impaired” loans in its purchased loan book — which it did with gusto.

From the hearing transcript:

Mr Rafidi: The Bankwest commercial loan book that we assessed was about $23 [b]illion; $8.2 [b]illion of it was impaired. That is 42 per cent of the book, to our calculations. Every loan that had a risk rating of six or greater — the Bankwest credit policy describes an RG6 loan as 'adequate', but in recent cases that we have seen the bank now describes a risk rating 6 loan as 'substandard' and 'watch list', which tells you the way they started thinking I guess. They just impaired every loan; 100 per cent of any loan that had a risk rating of six or greater got impaired. They happen to be 42 per cent of the book.

Senator WILLIAMS: How do you know that?

Mr Rafidi: Just have a read of the financial statements and do the maths. We sent it to you in the submission, and they have not questioned it. They have not said that number is wrong.

And the broader significance of it all? From private consultant Peter McNamee (whose submission to the inquiry is no.107):

The CBA's own documents that we have state[d] that the average size of these performing loans that were reviewed was $8 million. So it all sounds about right: the CBA probably defaulted a thousand loans with an average value of $8 million for a total of $8 billion in total defaults. This must be the largest mass default of commercial loans and the largest mass destruction of Australian family businesses in our history.

And these are not people who overspent on their credit cards by $5,000. You will have read their submissions; these are people who are in their 50s, 60s and 70s who have been in business their whole lives. They are successful business people and successful families. They are people of substance. The average loan was $8 million; a bank would not approve a loan for an $8 million facility if the borrower were not already very successful, trustworthy and financially strong.

The scale of the crime is also put into perspective by Rafidi’s adviser Ross Waraker:

“To put the seriousness of this alleged crime in context, in June of this year, a former Commonwealth Bank employee was reportedly jailed for stealing $19,000. This crime is, conservatively, half a million times bigger.”

The O’Brien experience is not an aberration (as with the Butler case). The testimony of Trevor Eriksson is also a shocker.

Eriksson was a large-scale successful developer in the booming region of Orange NSW. His work involved development of significant infrastructure for both private and public sector institutions.

From Eriksson’s testimony:

“The Senate inquiry came up in 2012. David Cohen took over. There was a bit of lull there. Then they served a bankruptcy notice on me in March 2013, but it was dated two weeks after your Senate inquiry. There was a bit of a payback for me doing a submission to the Senate inquiry, so I think.”

The Eriksson account is also a classic exhibit for the absolute corruption of the entire system. Lawers Norton Rose Fulbright, receivers Grant Thornton and bankruptcy trustee Ferrier Hodgson all were corrupt partners in the heinous takedown. ASIC said to Eriksson, “don’t bother us”.

I originally thought that the O’Brien experience was an outlier in terms of the monetary scale of the victim’s loss (several hundred million dollars). But no. At the 13 November hearing, I met several others in that category. One of these, Chris Evanian, has been previously off the radar publically. Evanian made a submission to the inquiry (no.124). I met another victim who had lost a lifetime’s hard work, in this instance on rural and semi-rural properties. He remains off the radar, but he’s out there.

Part 2 coming soon.

Bank hold-ups to be certified A-OK? (Part 1)