After McLean agreed to raise Batiste’s case in the NSW parliament, hundreds of other victims of banking misconduct got in touch with him. He also came into contact with John McLennan as the two fought to expose further banking scandals. McLean lodged affidavits, spoke under parliamentary privilege and called for a royal commission into what was occurring. In his 1992 book, Bankers and Bastards, he described how his experiences with Batiste and others led him to conclude that even at best the banks were ‘greedy and heartless’ and were involved in ‘considerable malpractice and corruption’. He also realised there was little will among regulatory authorities to address these problems.9 The Australian Government’s regulator, the National Companies and Securities Commission (NCSC), had only a small budget of $5 million and a staff of eighty, which meant it could only pursue one major case at a time. Individual Australian states also had corporate watchdogs, but they too were resource-poor and had insufficiently experienced employees.
McLean’s stories finally came to wider attention after two letters from the law firm Allen Allen & Hemsley to Westpac were leaked anonymously to Anne Lampe at the Sydney Morning Herald. The letters, sent in a fax, implicated Westpac’s international currency trading subsidiary Partnership Pacific Limited (PPL) in illegal foreign currency loans, which involved lumping transactions together, mixing them up and deal switching. Allen Allen & Hemsley had been Westpac’s legal representative for years, and a senior partner of the firm sat on the Westpac board.
The letters contained legal advice which was the result of the lawyers examining over 50,000 internal Westpac documents and interviewing staff. The advice showed that ‘the PPL forex [foreign exchange] division was badly mismanaged’ and that senior management had been aware of the ‘gravity’ of the situation by early July 1986 but had done nothing. One letter said management’s failure to act decisively ‘was a tragedy’ that resulted in clients continuing to lose money. It also suggested that if customers took legal action they would likely succeed, and said, ‘Many more documents have been examined and a number of them are very damaging . . . all those reading these letters should read these documents – they are devastating.’10
Allen Allen & Hemsley’s recommendations were that PPL should ‘keep close and cordial contact with all potential claimants’ – people like the Sonters; avoid litigation at any reasonable cost; make sure any concessions given to borrowers were made only in exchange for a complete release of legal action; and take ‘all practical steps to avoid PPL’s weakness being known outside PPL/Westpac boards and senior management’.
It was an explosive story, but Lampe knew Westpac would try to suppress it if she followed her normal practice and put questions about the letters’ contents to the bank before publishing her report. The Herald’s lawyer also thought that Westpac would try to place an injunction on the article. He agreed that the document seemed genuine and gave the go-ahead for publication. Lampe’s article appeared on 29 January 1991, with the headline ‘Westpac arm faces forex suits’. The train of events that followed became known as the ‘Westpac Letters Affair’.
Then the fireworks began. Westpac obtained injunctions in the NSW Supreme Court to stop publication of the letters. The court order demanded that Lampe and the Sydney Morning Herald hand over the offending letters on the grounds it was a ‘stolen document’ that belonged to Westpac. It also claimed copyright infringement and took legal action for compensation.
‘Lawyers arrived at my home to serve me with breach of copyright action. I stayed inside while my husband asked a young Allen Allen & Hemsley lawyer to leave the premises and, when he didn’t, turned the hose on him. He went away a bit damper than when he arrived,’ Lampe recalls.
Trying every trick in the book to escape responsibility for its wrongdoings, Westpac then argued that the letters were subject to legal privilege – in other words, that information between a lawyer and a client is confidential. The bank then spent a fortune on media advertising and public relations campaigns, trying to justify its actions. Fairfax refused to run one of the ads on the grounds that Westpac was putting its side of the story in the ad at the same time as it was trying to suppress the other side of the story with an injunction.
On 4 February 1991, a week after the article was published and the Herald had been served with the injunction, Senator Paul McLean received a fax from an anonymous source in Belgium containing the same letters that Lampe had received. McLean had followed Lampe’s exposé and knew about Westpac’s injunction. Convinced the letters provided ‘a window through which we could virtually observe malpractice as it occurred and see how their legal adviser and management reacted when they became aware of it,’ he decided to put them into the public domain by tabling them in the NSW Parliament.
But the NSW Senate stopped him from tabling the documents after Westpac briefed the president of the Senate, Senator Kerry Sibraa. McLean then sent copies of the Westpac letters to all senators as well as to Prime Minister Bob Hawke, Treasurer Paul Keating and the leader of the federal opposition, John Hewson. Keating, through his parliamentary secretary, said the matters raised in the letters were best resolved in the courts. Hewson’s office returned the envelope unopened.
McLean then sent the letters to the South Australian Upper House Democrat Ian Gilfillan, who read them into Hansard to cover their contents under parliamentary privilege, permitting politicians to speak about issues in parliament without risking legal action and allowing the media to report the items. However, the Westpac injunction in NSW meant that newspapers in that state, including the Sydney Morning Herald, couldn’t write about the letters.
The more Westpac fought to suppress the letters, the more adverse publicity and outrage it generated. On 7 March 1991, Stephen Martin, chairman of the House of Representatives’ Standing Committee on Finance and Public Administration’s inquiry into banking and deregulation, commonly referred to as the Martin Inquiry, weighed into the debate and called on Westpac to table the letters at a special hearing of the inquiry to be attended by Westpac boss Stuart Fowler.
The Martin Inquiry had been called in October 1990, well before the Westpac Letters had burst onto the scene. Its purpose was to report on the deregulation of the banks and investigate claims by Treasurer Paul Keating that the banks hadn’t been passing on official interest rate cuts to customers, pocketing them instead in what Keating described as ‘a deliberate plan to recover bad debts amounting to about $10 billion’.11
Following the 1987 crash and with the economy wallowing in recession, banks had found themselves hugely exposed. They had loaned billions of dollars to companies like Qintex and Equiticorp, which had now gone broke and couldn’t repay their loans. Witholding official interest rate cuts from consumers was a way for the banks to claw back some of that money. But customers were also doing it tough, and bank borrowers wanted to know why falls in interest rates hadn’t been passed on.
With public opinion shifting firmly against the banks, Westpac allowed the letters to be tabled at the inquiry and dropped the various court injunctions with what Stuart Fowler famously described as ‘the greatest reluctance’. Fowler also said, ‘This campaign, timed to correspond with the commencement of [the Martin Inquiry], has been conducted by certain journalists, interest groups and others prepared to traffic in stolen documents.’ He defended Westpac’s actions and accused McLean of ‘making outrageous claims’ against the banks.12 He also argued that the letters and the poor behaviour related to PPL, not Westpac, and that Westpac had sold PPL. Few Westpac customers had been affected, he said, and Westpac had paid compensation to those who had. In other words, nothing to see here.
The banks would wheel out similar excuses every time a banking scandal erupted – someone else was to blame, it was ‘just a few bad apples’, it happened in the past, few customers had been affected, compensation had been paid and it wouldn’t happen again. These arguments belied what was really going on. Compensation was often avoided or low-ball offers made, and customers were obliged t
o sign gag orders. The misconduct was buried and nothing was learned. It destroyed people’s lives. Some died waiting for banks to be held accountable. Others continued to fight, hoping for justice one day.
The Sydney Morning Herald business writer Max Walsh summed up the controversy as ‘Westpac’s Watergate’. In an article published on 11 March 1991, Walsh highlighted how the cover-up indicated a culture of arrogance and an inability to acknowledge wrongdoing. He also pointed out that the cover-up, not the original misdeed, had become the issue.13
But if Paul McLean had been disappointed by the way the NSW Parliament hadn’t backed his request to table the Westpac letters, as well as by the lack of action on the part of federal politicians, he would be equally disappointed by his treatment before the Martin Inquiry on 15 March 1991. He was given only three hours to discuss thousands of pages of documents, outline complex cases and attempt to prove fraud on the part of Westpac. It proved too difficult. Martin would later disparage McLean to journalists, saying, ‘He had his day in court and couldn’t deliver . . . If people are out there with the impression that the banks are bastards, I believe that you have to be able to put up or shut up.’14 Headlines at the time concurred, saying, ‘Claims of fraud dismissed’.15
The Martin Inquiry did, however, recommend referring the Westpac Letters to the National Crime Authority and state fraud squads. Unfortunately, those recommendations were never followed up. No one was ever charged, despite the letters showing fraud and theft had taken place. Executives rode off into the sunset and the bank started to settle court cases relating to the mis-selling of foreign currency loans.
McLean, disillusioned and worn out by his battles, quit the NSW Parliament in August 1991. He wrote a memoir, hoping it would do what parliament hadn’t been able to do and ‘change a financial system that is working against people but pretends it is working for them’.16 But the book didn’t fulfil those dreams, and McLean was again criticised for ‘bank bashing’. After years of trying to do something about what he saw as the banks’ bastardry, McLean moved to Tasmania and lived alone in a mud-brick cottage. He would re-emerge, years later, when Wacka Williams went into politics and another scandal blew up, leaving yet another path of destruction and financial ruin.
Chapter 2
Diversify or perish
The shift to financial services
IF DEREGULATION AND THE onslaught of competition from foreign banks into Australia’s banking market were characteristic of the 1980s, the early 1990s would see the sector battling the rise of a new type of competition. Mortgage intermediaries such as Aussie Home Loans and RAMS, life insurance companies and global financial services companies all began offering home loans at lower rates. Customers were no longer blindly putting excess money into savings accounts; instead they were looking at managed funds and superannuation funds, which promised them better returns. And businesses had started looking overseas for cheap finance, primarily in US bond markets, where interest rates were lower and money easier to access.
The traditional role of a bank as an intermediary between borrowers and lenders was being eroded. Banks realised that if they didn’t adapt, their profits would shrivel. They began offering new products and services, and expanded domestically and overseas to build on their economies of scale. NAB purchased four banks in the United Kingdom: the Clydesdale, Yorkshire, National Irish and Northern banks. ANZ tried to diversify into life insurance and superannuation with a $3.6 billion proposal to merge with National Mutual. It was blocked by Treasurer Paul Keating on the grounds that it wasn’t in the national interest, but it triggered a strategic alliance between the ANZ and National Mutual. Westpac soon did the same with AMP, while CBA didn’t have much room to grow because it was owned by the government.
In this new era of deregulation, Keating was becoming increasingly frustrated. He feared CBA couldn’t be a ‘gutsy competitor’ if it didn’t have sufficient capital. He became convinced it had outlived its time as a government-owned enterprise. ‘It was the natural thing to do . . .’ Keating said of his desire to privatise CBA. ‘Basically it was a post office bank with the deposits of pensioners and it had the cast of mind of a post office bank.’1 But Keating knew that privatising the ‘people’s bank’ would be a tough sell within his party. Privatisation remained a vexed and unresolved issue between the right of the party, who were in favour, and the ‘true believers’ on the left, who vehemently opposed such sell-offs.
Keating’s chance to privatise CBA arrived with Black Monday, the day of the 1987 stock market crash, when the State Bank of Victoria, owned by the Victorian Government, was undone by the disastrous antics of its free-wheeling merchant bank subsidiary Tricontinental. Tricontinental had lent money to high-risk operators and entrepreneurs during the 1980s. When these entities defaulted on their payments after the crash, Tricontinental ran up losses of $1.3 billion by 1990 and bad and doubtful debts to the tune of $2.7 billion.
The Victorian Government couldn’t afford to save the bank. But there was a risk that if the public got wind of the State Bank’s dire financial situation it would trigger a run on the bank, sending it broke, and with it the Victorian economy. Keating pounced, telling the Labor Caucus, ‘If you allow me to sell a quarter of the Commonwealth Bank I will fund what would otherwise be the collapse of the State Bank [of Victoria] and the decimation of the Victorian economy.’2 While the left wing of the party hated the idea of privatising the ‘people’s bank’, the ramifications of the State Bank going under would be intolerable.
The chairman of CBA was Keating’s good friend, the highly regarded and well-connected Morrish Alexander ‘Tim’ Besley, who’d become CBA chairman in 1988 after a phone call from Keating in late 1987. Besley, who had worked in Treasury before moving into the private sector, agreed with Keating that Australia’s financial system was ‘uncompetitive and rigid’, and needed modernising.
When Keating approached Besley and Don Sanders, CBA’s chief executive, about buying the State Bank, Sanders was reluctant, but Besley was keen. Besley recalls Keating saying to him, ‘Let’s crash through.’
Keating still needed to win over CBA’s union, the Commonwealth Bank Officers’ Association (CBOA), which had a strong membership base among the bank’s senior executive. He summoned Peter Presdee, the state secretary of CBOA, to Canberra with four other union officials for a meeting in August 1990 to discuss the partial float and privatisation. Says Presdee today, ‘It was a smart move to get us in a room and win over the union. The last thing they wanted was union opposition.’
When Presdee heard Keating’s arguments – including that the Victorian Government didn’t have the money to bail out the State Bank – he realised it would be hard to argue against privatisation: ‘We were told if it didn’t happen there would be massive job losses in Victoria and a loss of confidence in the banking sector and the economy. I didn’t want that on my conscience, so I agreed.’
*
When CBA released the details of its partial privatisation on 8 July 1991, it was billed as the ‘sale of the century’. A lot was riding on the float. It would be the government’s first privatisation and it wanted it to go off without a hitch.
The government had decided to sell 30 per cent of the bank at $5.40 a share, to raise more than $4.5 billion. The target market was first-time investors; 1.25 million prospectuses were printed and distributed throughout the bank’s vast branch network and ads appeared on TV. Ironically, when the shares were about to be listed on the Australian sharemarket, Keating wasn’t there to celebrate. He’d been moved to the backbench after a failed leadership challenge and John Kerin was the new Treasurer.
A series of interviews was given ahead of the float, detailing a new logo and corporate identity. Passbooks and chequebooks and all CBA stationery were redesigned, and branches throughout Australia were repainted in time for the listing.3
But there were other, less cosmetic changes in the works. ‘Until then, the bank had been government-coddled, if you like. It
needed sharpening up. There were still people who played business golf on Wednesdays, it was fully unionised, and it had to change,’ Besley says. According to Besley, the public-service culture was entrenched right up to the board. About half the CBA workforce thought the bank existed for commercial reasons, Besley says, while the other half saw it as operating under a social charter. ‘The most important things were to clarify [that] we operated on a commercial basis, ensure there was a group of very good commercial people and that our objectives were very clear.’
The salary of the chief executive – along with those of other senior public servants – had previously been set by a tribunal in Canberra. That was about to change, along with the pay structure of almost every front-line bank employee. ‘Targets and incentives were introduced which changed the culture overnight,’ remembers Presdee. ‘The bank went from having a primary aim to provide the people of Australia with a good service to a primary aim to look after shareholders.’
Besley needed to find a new chief executive who was equipped to manage a bank with a majority government shareholder and hundreds of thousands of retail shareholders – and who could change the public-service culture of the bank’s staff to a more commercial mindset. One of the applicants for the CEO role was forty-two-year-old executive David Murray, who’d started at CBA as a teller and gained an MBA while working his way up the ladder. Ambitious, serious and ruthless, he’d played a major role in the bank’s commercialisation and had strong ideas about the strategic direction of the bank.
In his interview, Murray expressed an unwavering commitment to changing the bank’s brown-cardigan public-service image and turning it into a formidable competitor. He was confident he could bring this about even if the bank was ‘half-pregnant’ – with a mix of private ownership and government control. He’d been running the retail bank for the past year, had been involved in the complex merger with the State Bank of Victoria, and had a blueprint for what had to be done to modernise CBA. He also outlined a vision for the bank to transition from a savings bank to a diversified financial services provider and expand into Asia.
Banking Bad Page 3