Wednesday, November 19, 2008

Why Australia has Avoided the Sub-prime Crisis...

So credit agencies are watching their tales and attempting to reposition themselves as objective thinkers. The following is the last statement I think they would make if it were not true.

“…the Australian banks benefit from strong asset quality, sound capital positions, and good earnings profiles, which are partly due to the country's relatively favorable economic environment. Moreover, we expect the Australian economy to grow further, albeit at a slower rate. In addition, Australian ADIs have limited exposures to U.S. subprime loans and associated complex structured transactions, and major offshore financial institutions affected by the loss of global investor confidence.”
-Standard and Poor’s October 13, 2008

So how did Australia avoid this? Was the whole country sleeping during the global gluttony of the past few years? In order to participate in the subprime disaster, financial institutions, and end investors would have had to buy these repackaged assets. Without someone willing to buy them, risky loans cannot be made.
This new reality of the true risk is feeding the current credit crisis in America. Credit card companies can't get people to buy bonds covering credit card balances. Does America finally have a healthy fear of the ability to get our money back?

Similarly, if Australian institutions did not lend to overtly risky debtors then garbage debt (sorry, I mean "CDO's") would not exist for purchase. In large measure Australian banks and individuals did lend. Here is a link to from the Australian regulatory authority website of a real-life Australian subprime situation from the 1990's.

--Almost Pollyanna. In hindsight, don't we wish American institutions were forced to care about the public similarly?

Notice the financial product was not the issue. The advice was inappropriate.

Subprime mortgages repackaged into CDO's should not be illegal. They were simply misrepresented through conflicted advice as a conservative investment. Hiding conflicts in financial instruments with fine print and confusing acronyms can never be prevented by regulation.

So how can this new found wisdom benefit you today?
  • Educate yourself on how the Australian structure actually works. See "Getting Advice." and other helpful information at
  • Just because US law does not provide for objective financial planning, you can demand it from your financial professional. If they are unwilling, you will at least know how important your financial success is in relation to theirs.
As a service to the public, point out this obvious long-term solution to your legislators. In the past too much money was taken from clients by financial institutions to protect their interests in Washington. With widespread failures and financial industry lobbying viewed like GM's private jets, this is the first time in 80 years elected officials might listen to the public instead of conflicted institutions. Australia for its part has campaigned for widespread global adoption of their regulations to the International Monetary Fund (IMF) and the United Nations. If the IMF were to look in the mirror, maybe they would take personal responsibility for allowing this crisis by not adopting and advocating for Australia's structure.

As final illustration here is a link to a telling video satire on how Australia justifiably views the United States. Very worth while to watch.