# How much bank profits can we afford?



## nioka (31 October 2010)

"I think we are getting off topic here. If Joe Hockey and the banks merits so much discussion, shouldn't we open a thread for him/them "Can Joe Hockey add up?"; "When is an Audit not an Audit?"; "How much bank profits can the public support?"; and "Where will the banks turn for a profit after the public have nothing left to give?""

NullaNulla, Good idea. thread started.

We will see the usual "free market economy" statements but they should be tempered by the fact that we are a captive audience and held that way by government policy. For example Medibank Private only pay refunds into a bank account as do a lot of businesses and government departments. We will hear that you have a choice of banks. Yes, you do the greedy and the greedier.


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## nukz (31 October 2010)

*Re: How much Bank profits can we afford.*

Greed is good  hehe

I'm all for bank profits, they will need it when we have the collapse here. Nice dead-cat-bounce going on in ASX / DOW which mirror's what happened in the great depression. I suspect these large profits will be short lived. 

I'm not 100% sure about this but i thought some banks atleast the one who reported a 5.3b profit this week had adopted a mark-to-market accounting method a little while back.

I believe Enron used this accounting method and valued some assets way more than their market value at the time.


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## c-unit (31 October 2010)

I don't really understand the argument against bank profits. Their profits really aren't that large when you consider the size of their balance sheets and the scope of their operations. Likewise monthly account fees. You pay to use a service, just like anything else.

With interest rates, well, people will always complain when interest rates are increased by the banks, yet never congratulate the banks when they lower their rates. Can't have it both ways, people!


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## moXJO (31 October 2010)

c-unit said:


> I don't really understand the argument against bank profits. Their profits really aren't that large when you consider the size of their balance sheets and the scope of their operations. Likewise monthly account fees. You pay to use a service, just like anything else.
> 
> With interest rates, well, people will always complain when interest rates are increased by the banks, yet never congratulate the banks when they lower their rates. Can't have it both ways, people!




They have a monopoly over the industry thanks to government and are protected with taxpayer funds when it comes to the crunch. Plus nobody likes bankers


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## Smurf1976 (31 October 2010)

moXJO said:


> They have a monopoly over the industry thanks to government and are protected with taxpayer funds when it comes to the crunch. Plus nobody likes bankers



Given that taxpayers are ultimately taking the risk, it seems only fair that taxpayers also should be receiving the profits. That is free market capitalism - those who take the risk, receive the rewards.


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## Julia (31 October 2010)

moXJO said:


> Plus nobody likes bankers



Well, I've only ever experienced good treatment from banks, no complaints.
Sometimes you do have to ask for what you want.
Thousands of people whine about account fees but could access fee-free a/c if they just asked.



Smurf1976 said:


> Given that taxpayers are ultimately taking the risk, it seems only fair that taxpayers also should be receiving the profits. That is free market capitalism - those who take the risk, receive the rewards.



Let's remember that the banks have been paying the government a reasonable fee for the guarantee which was, after all, just a political measure to stop customers panicking and unnecessarily pulling funds out at the time of the GFC.


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## moXJO (31 October 2010)

Julia said:


> Well, I've only ever experienced good treatment from banks, no complaints.
> Sometimes you do have to ask for what you want.
> Thousands of people whine about account fees but could access fee-free a/c if they just asked.
> 
> ...




Do you own bank shares:

Na I'm ok with bankers, going to help build my bank managers palace / err I mean house. Being that I'm self employed I'm hoping after this I can borrow more than $50 without promising my first born and life story in hardcover.


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## alphaman (31 October 2010)

Smurf1976 said:


> Given that taxpayers are ultimately taking the risk, it seems only fair that taxpayers also should be receiving the profits. That is free market capitalism - those who take the risk, receive the rewards.



We might have already received the profits. Imagine if the big 4 actually collapsed.


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## nioka (31 October 2010)

moXJO said:


> Do you own bank shares:
> 
> Na I'm ok with bankers, going to help build my bank managers palace / err I mean house. Being that I'm self employed I'm hoping after this I can borrow more than $50 without promising my first born and life story in hardcover.




I once asked my bank manager when my long service leave was due. He asked me why i asked him.

I told him that I had been working for the bank for 40 years so they should pay up with long service entitlements. My brother retired at 55 from a bank job with big super payout plus long servise leave after only working there for 35 years.


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## Calliope (31 October 2010)

Bank bashing is second only to Howard bashing as a favoured sport on ASF chat. Both have an idealogical basis.


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## moXJO (31 October 2010)

Calliope said:


> Bank bashing is second only to Howard bashing as a favoured sport on ASF chat. .




Also for Joe Hockey
Oh snap


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## Macquack (31 October 2010)

moXJO said:


> *They have a monopoly over the industry *thanks to government and are protected with taxpayer funds when it comes to the crunch. Plus nobody likes bankers




The thing with banks is that by default, they have a *monopoly over all industries*. 

Privatising the Commonwealth Bank was a big mistake as the government (read people) was a player in the market keeping the bankers honest.

I say bring back a "peoples bank" an listen for the 'squealing pig' private bankers.


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## Macquack (31 October 2010)

Calliope said:


> Bank bashing is *second only to Howard bashing* as a *favoured sport *on ASF chat. Both have an idealogical basis.




That's a laugh coming from the head cheerleader of the Rudd/Gillard Bashing Club.


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## Julia (31 October 2010)

moXJO said:


> Do you own bank shares:



Not at present, simply because I don't have much faith in the sector at the moment.  Or in the entire market, for that matter.



> Na I'm ok with bankers, going to help build my bank managers palace / err I mean house. Being that I'm self employed I'm hoping after this I can borrow more than $50 without promising my first born and life story in hardcover.



Fair comment, I'm sure.  I've never been in the position of wanting to borrow for anything other than real estate mortgages.



Calliope said:


> Bank bashing is second only to Howard bashing as a favoured sport on ASF chat. Both have an idealogical basis.



It's something that puzzles me a bit, given the successful history of our banks being one of the main factors that allowed Australia to weather the storm of the GFC so well.


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## medicowallet (31 October 2010)

Banks only profit what their clients are willing to pay them.


ie a highly leveraged housing bubble = record profits for banks.

We have caused our own problem, the banks only facilitated it.


So, what I am saying, is to improve competition in banking, stop government propping up of a housing bubble, which makes houses less expensive, and kills off leveraged demand.

Banks then will have to compete more for market share, and we all win.

Better lifestyles
Cheaper banking
Less whining

(Alternately the whiners can just purchase bank shares, instead of purchasing property)


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## nukz (1 November 2010)

medicowallet said:


> Banks only profit what their clients are willing to pay them.




Thats true to some extent but fractional reserve banking also helps a great deal. If that was not around we would never see profits this large.


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## alphaman (1 November 2010)

Julia said:


> It's something that puzzles me a bit, given the successful history of our banks being one of the main factors that allowed Australia to weather the storm of the GFC so well.



Australian banks were simply lucky. Thing would be very different if we had the same level of competition as in the US, and/or we did not have commodities boom supporting the Australian economy.


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## nioka (1 November 2010)

alphaman said:


> Australian banks were simply lucky. Thing would be very different if we had the same level of competition as in the US, and/or we did not have commodities boom supporting the Australian economy.




They also did it on the backs of the mortgage brokers by holding back on funds available to them and forcing them out of business. They are also profiting from the compulsory super that has to channel any funds through the banks.


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## Mofra (1 November 2010)

moXJO said:


> They have a monopoly over the industry thanks to government and are protected with taxpayer funds when it comes to the crunch. Plus nobody likes bankers



There are industries with far more entrecnched oligopolies and less competition than banking.

Take out WES/WOW and MTS (which is still less than 20% of the market) and that leaves almost no one left in the grocery space.

TLS/Optus and Voda rule the telco market.

Media? Two major players (although the internet has opened up small players in the news space).
TV? Similar to the banking industry.

Bank bashing is just lazy politics; do we really want to weaken our banking system in preperation for a GFC mk2?


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## Mofra (1 November 2010)

nioka said:


> They also did it on the backs of the mortgage brokers by holding back on funds available to them and forcing them out of business.



No they didn't. The CBA maintained the warehousing facilities to securitised lenders during the GFC - the MBS/CDO market (predominately offshore) collapsed so that the warehoused debt couldn't be shifted to market.


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## nioka (1 November 2010)

Mofra said:


> No they didn't. The CBA maintained the warehousing facilities to securitised lenders during the GFC - the MBS/CDO market (predominately offshore) collapsed so that the warehoused debt couldn't be shifted to market.




Tell that to some of mortgage brokers.eg. Do you see adds for Aussie home loans any more?


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## Calliope (1 November 2010)

Macquack said:


> That's a laugh coming from the head cheerleader of the Rudd/Gillard Bashing Club.




Thanks Macq. I always appreciate your feedback.


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## Mofra (1 November 2010)

nioka said:


> Tell that to some of mortgage brokers.eg. Do you see adds for Aussie home loans any more?



You mean Macquarie, that provided the mortgages for Aussie (Macquarie white labelled more than they sold under their own brand)? They were the specific example I was talking about, as someone who was involved. The warehousing didn't stop until the funds couldn't be shifted, absolutely not the fault of CBA. 

I guess when you watch too much ACA/Today Tonight the big four banks are all "evil" and out to get "the battlers", aren't they?


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## moXJO (1 November 2010)

Mofra said:


> There are industries with far more entrecnched oligopolies and less competition than banking.
> 
> Take out WES/WOW and MTS (which is still less than 20% of the market) and that leaves almost no one left in the grocery space.
> 
> ...




We don't give government guarantees on all those other things.  The government doesn't protect the others as much from competition either. I'm not saying weaken them by opening the market up to additional banks, but I sure as hell don't mind a bit more regulation for my benefit.


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## moXJO (1 November 2010)

Julia said:


> Fair comment, I'm sure.  I've never been in the position of wanting to borrow for anything other than real estate mortgages.




Thats what I was borrowing for. My employees can walk in and get a loan easier than I can. Not to fussed about it though


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## Macquack (2 November 2010)

Mofra said:


> I guess when you watch too much ACA/Today Tonight the big four banks are all *"evil" and out to get "the battlers", *aren't they?




*Yes they are.*

*"Commonwealth Bank lifts interest rates by 45 basis points after RBA's 25 point lift" *

http://www.theaustralian.com.au/bus...as-25-point-lift/story-e6frg90f-1225946781624

This would not happen if the Commonwealth Bank was still the peoples bank.

Thieving scumbags.


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## IFocus (2 November 2010)

Amazingly I agree with Hokey on competition if we lost one of the big 4 banks it would kill the Oz economy hence 4 banks to big to fail this is a very extreme risk to the nation.


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## medicowallet (2 November 2010)

Macquack said:


> *Yes they are.*
> 
> *"Commonwealth Bank lifts interest rates by 45 basis points after RBA's 25 point lift" *
> 
> ...




http://www.heraldsun.com.au/busines...-bank-not-so-big/story-e6frfig6-1225944411811

So the bank makes less than 1%, yet real estate investors call them greedy, and demand returns of 8%

So if you call the banks thieving scumbags 

I'll call the average joe "naive hypocrites"

Grow up Australia, and take some responsibility for the beast WE created.


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## SIGI (2 November 2010)

A cartel is nearly always bad for consumers, in this case it certainly is.

If you want a competitive capitalist environment, you must have competition, the more competition, the better for the consumer (regulation of the market is another story). 

It been said before but it's worth repeating - the risk reward for the banks is not real - it's skewed by the too big to fail, privatize the losses environment we currently tolerate. 

If you lean to the left, these profits embody everything which is wrong with capitalism (a redistribution of wealth from everyone in the country to investors, a very small percentage of the country),  if you lean to the right they are proof of a completely inefficient market. So aside from those holding bank shares, who gains from these profits.

It's not just the banks (as Mofra noted) - Australia loves a monopoly/duopoly/cartel.


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## medicowallet (2 November 2010)

SIGI said:


> If you want a competitive capitalist environment, you must have competition, the more competition, the better for the consumer (regulation of the market is another story).




You make it sound as if average Joe is forced to bank with the Big 4.

I'll do everyone a favour

http://www.apra.gov.au/adi/adilist.cfm

I had a quick look, I'll admit, and my memory is fading as I am getting older, but I am fairly certain there are more than four listed.


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## Julia (2 November 2010)

SIGI said:


> It been said before but it's worth repeating - the risk reward for the banks is not real - it's skewed by the too big to fail, privatize the losses environment we currently tolerate.



Can you explain exactly what you mean by "privatize the losses environment" in the Australian context?



medicowallet said:


> You make it sound as if average Joe is forced to bank with the Big 4.
> 
> I'll do everyone a favour
> 
> ...



Indeed there are, and many of the smaller institutions offer considerably better deals if you ask them.   I've never found a situation where they have not been prepared to outbid the big four on deposit rates.


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## SIGI (2 November 2010)

You are quite right there are more than 4 banks in Oz - but the point is whether the dominance of the big 4 is beneficial to consumers, their large balance sheets and advertising budgets does not make for a market of perfect information for the average joe. Bank customers are notoriously sticky, particularly the average joe, they don't move their mortgages/savings when a better deal is on offer at another institution. ASF members probably do, but most people don't. The bank profits are not bad per se, only that their size indicates an inefficient market. If it were not, you would see the spoils from the financial gravy train more evenly distributed amongst the multitude of other financial institutions.

I'm interested to hear why you think that 1% is not greedy....it's just a number, different industries have different ROC? Or why increasing rates to borrowers above the RBA is not greedy?  

If the market is such that banks are able to be "greedy",  then this is an inefficient market. Surely, the question as a consumer is, could we get a better deal with a different system. 

WRT privatizing losses (publicly funded), this did not happen in Oz during the GFC, but I think, perhaps incorrectly, it would have (or will do), should one of the large banks falter. Why should bank investors be afforded this free insurance policy, when investors in other industries are not? If you are afforded govie risk you should earn govie returns.


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## doctorj (3 November 2010)

> You are quite right there are more than 4 banks in Oz - but the point is whether the dominance of the big 4 is beneficial to consumers, their large balance sheets and advertising budgets does not make for a market of perfect information for the average joe.



Would you prefer a small number of large banks controlling a significant share of the market, or a large number of small banks each controlling very little? The current market structure affords choice to those that are engaged with their finances, whilst offering 4 safe "default choices" for those less engaged or less able. If the system consisted of only banks with smaller balance sheets, this would result in the system’s bank having a weaker credit rating, which would in turn result in:
1) An implied greater risk for depositors
2) Higher funding costs for banks
3) Which means loans would be less available and more costly for the consumer.

Banks are also required to retain certain amounts of capital to be compliant with Basel 2/3 and regulatory minimums. The capital requirements for smaller banks are proportionally greater than larger banks, which means smaller banks can often be sub-scale or need to charge relatively more than a larger bank for the same risk. Similarly, compliance overheads are a significant cost for Banks and are largely fixed irrespective of size.



> Bank customers are notoriously sticky, particularly the average joe, they don't move their mortgages/savings when a better deal is on offer at another institution. ASF members probably do, but most people don't.



This is a matter of financial education, not for the banking system.



> The bank profits are not bad per se, only that their size indicates an inefficient market. If it were not, you would see the spoils from the financial gravy train more evenly distributed amongst the multitude of other financial institutions.



I’m not sure I follow, could you rephrase?



> ? Or why increasing rates to borrowers above the RBA is not greedy?



The rate they charge borrowers reflects a combination of each bank’s funding costs, the availability of funding, the credit risk of the borrowers and the bank’s profit margin. This means rate movements do not move 1:1 with the RBA published rates.


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## medicowallet (3 November 2010)

I don't think I have much to add to the above post.



Except to say that the rates I get from the minor players are better for me, compared to the big four, irrespective as to whether they have different margins, therefore it would be quite easy for market forces to force extra competition onto the big 4, if people actually cared enough to do a little bit of work.

Seriously, I get sick and tired of bank bashers who have the energy to bash banks, yet the lethargy to keep feeding their own monster.

PLUS

no politicians, nor beneficiaries of the housing bubble are game to say that it is their own investment, be it greed or demand driven, that has allowed the banks to do what they want to do.

It just keeps coming back to the same thing.

The naivity of the consumer on multiple fronts (overpaying for property, failing to shop around)
The stupidity of the government (Labor and liberal) on multiple fronts (advising, subsidising housing market etc)


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## alphaman (3 November 2010)

SIGI said:


> If the market is such that banks are able to be "greedy",  then this is an inefficient market. Surely, the question as a consumer is, could we get a better deal with a different system.



Come on, laziness will never get you a better deal, whatever the system is.


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## Mofra (3 November 2010)

moXJO said:


> We don't give government guarantees on all those other things.  The government doesn't protect the others as much from competition either. I'm not saying weaken them by opening the market up to additional banks, but I sure as hell don't mind a bit more regulation for my benefit.



The guarantee was a kneejerk reaction to an event that led pollies to panic, and may well not be renewed.
I dare say if a Telstra or Optus went belly-up pre NBN, they'd receive a bailout too to keep communications services connected.


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## Mofra (3 November 2010)

Michael Pascoe has an interesting perspective on the big 4 rate rises, and it does make some sense:

http://www.theage.com.au/business/making-hockey-and-banks-look-good-20101101-1796h.html



> All the bluff and bluster about those naughty overpaid bankers lifting mortgage rates doesn't mean much in the real world. Yes, the CEOs are over-paid, but when they put up rates independently of the RBA, it just means the RBA has less need to increase its cash rate. If the banks gave back all their extra rises tomorrow, the RBA would race to make up the difference.


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## Julia (3 November 2010)

SIGI said:


> WRT privatizing losses (publicly funded), this did not happen in Oz during the GFC,



No, it didn't, nor was there any likelihood of it being necessary, because of the health of the banks.

Implicit in the wording of your original post was that taxpayers did in fact bail out banks.


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## Calliope (3 November 2010)

Mofra said:


> Michael Pascoe has an interesting perspective on the big 4 rate rises, and it does make some sense:
> 
> http://www.theage.com.au/business/making-hockey-and-banks-look-good-20101101-1796h.html




An extract from above link;



> *The mock concern about bank rate movements is just one of the cynical games Wayne Swan and Joe Hockey play with us. Well, I hope they're just being cynical – it would be a bigger worry if they actually believed it.*




The only one who wins from this tomfoolery is Bob Brown.


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## drsmith (3 November 2010)

Standard variable rates from the 4 big banks are as follows,

ANZ: 7.41% comparison 7.52%
NAB: 7.24% comparison 7.37%
CBA: 7.36% comparison 7.49% (prior to yesterday's 0.45% rise in response to the RBA's 0.25% increase)
WBC: 7.51% comparison 7.64%


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## SIGI (3 November 2010)

Perhaps I should be more clear - I'm not bashing banks. I have no axe to grind over CEO pay or bankers bonuses. Neither am I suggesting that the banks have any responsibility to anyone other than their shareholders. I'm just making a simple economic observation, the large profits imply, to me, that there could be room for more efficiency in the sector.
I'm afraid that I don't see the direct correlation between the size of the B/S and the risk of a bank. Size is a factor, but there are may others.
If for example we had a smaller 16 instead of the big 4, would these institutions be a greater risk to customers by virtue of their size? Or perhaps the quality of their B/S would be more important. They would still be very large institutions, meeting Basel cap. requirements may indeed mean a higher proportional cost for a bank with a smaller mkt cap, but perhaps also the trade off vs more competition would mean the consumer could still come out ahead?
My comment re more even distribution of profits/market share amongst other players stems from the sticky nature of bank customers. If the market were more efficient I would expect the profits and market share of the big 4 to fall and those of the smaller player to rise more quickly.

I understand why the banks rates don't move 1:1 with the RBA, I simply think they can do this because customers are sticky. If they were not, they would not be quite so fast to do this. BTW one assumes they were making a profit on the bid/offer before the rise - so increasing in line with the RBA would still afford them almost the same profit.

alphaman -laziness won't get you a better deal. But accepting that bank customers are sticky and doing something about it, is not so different to implementing compulsory super. In some areas we already facilitate change.
Mofra - good point. But only begs another question - if a system is too big to fail, why are the shareholders afforded the implied free insurance and why are they the only ones to gain from the monopoly/duopoly status. Perhaps the gov should have a few shares!
medicowallet - you seem happy with the idea that we all take personal responsibility for ourselves. I agree with you. Would you apply this logic to all areas - compulsory super, universal healthcare, education. We're just drawing lines in the sand here, why stop with banking?
Julia - At no point did I imply that the banks were bailed out by taxpayers. I boldly stated that my belief is that one would have been if it were necessary and I admit I could be wrong! I don't share your confidence, even in hindsight, that there was no likelihood of it being necessary. If the GFC had killed demand for raw materials, the Oz economy had faltered, just maybe Oz house prices (some of the highest in the world) could have fallen - then I imagine the banking sector would not have looked quite so rosy. Furthermore, the Australian Government at the time offered a guarantee of customers funds. This guarantee has a value not only to the customers, but also the banks themselves, and a cost. 

What I would prefer? I don't think I'm qualified to offer a sensible structure. I would certainly like to see what a completely free financial market would end up looking like, we might end up back where we started, we might not. Facilitating a simple 1-click moving of banking services from one bank to another would be a good starting point.

I reiterate I'm not suggesting that the banks have any responsibility to do anything. But I am interested to know, does everyone else think the Oz banking sector is as efficient as it gets? Is $20bn profit a fair price tag to pay for what we get? Would you leave everything as is, or would you like to see some sort of change?


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## alphaman (3 November 2010)

SIGI, no one forced the consumers to be "sticky". If consumers choose to stick with the big 4 and ignore better alternatives, the inefficiecy is caused by the consumers, not the system. Making the system the scapegoat is not going to help the inefficient consumers.


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## prawn_86 (3 November 2010)

alphaman said:


> SIGI, no one forced the consumers to be "sticky". If consumers choose to stick with the big 4 and ignore better alternatives, the inefficiecy is caused by the consumers, not the system. Making the system the scapegoat is not going to help the inefficient consumers.




From a marketing perspective ad spend plays a large part in loyalty (or 'stickiness'). This is called Double Jeopardy, meaning those that spend more can attract and retain more customers, and those who cannot afford to spend as much, due to not being as big, struggle to get their message heard.

So it's unfair to solely blame consumers. Yes there are alternatives out there, but they need to be sought out, as opposed to large salient brands who can spend a lot on marketing


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## Kremmen (3 November 2010)

moXJO said:


> Do you own bank shares:




Especially here, that should be *the* question. If you think a company is making unreasonably high profits, surely you should be investing in them? If you can find better investments elsewhere, then how "evil" can the banks really be?



Macquack said:


> The thing with banks is that by default, they have a *monopoly over all industries*.




We have more than one bank. It's not a monopoly.



SIGI said:


> A cartel is nearly always bad for consumers, in this case it certainly is.
> 
> If you want a competitive capitalist environment, you must have competition, the more competition, the better for the consumer (regulation of the market is another story).




This is just totally untrue. There are huge economies of scale and advantages of few participants regarding efficient interactions between them. Competition is good, up to a point, beyond which it becomes totally counter-productive and inefficient.

I've never paid any fees on any deposit/debit accounts in my life. If customers don't like the fees but aren't prepared to change, they have little grounds to whinge.



SIGI said:


> You are quite right there are more than 4 banks in Oz - but the point is whether the dominance of the big 4 is beneficial to consumers




Absolutely. There are huge advantages.



doctorj said:


> Would you prefer a small number of large banks controlling a significant share of the market, or a large number of small banks each controlling very little?




Definitely a small number of large banks. Let's compare with the USA, which has thousands of small banks.

* Here: Ubiquitous free bill-paying with BPay. USA: Total shambles, most of it costing fees, with many small institutions still sending "electronic" payments by physical cheque. (Why do you think Paypal exists?)

* Here: Ubiquitous cheap or free direct credit to other bank accounts. USA: Total shambles, again.

* Here: Direct deposits into your account happen reliably same night. USA: Depends on the bank. Might be tonight. Might be tomorrow night. Maybe the next day.

* Here: Simple ATM use all around the country. USA: Various cross-usage schemes. Again, shambles.

* Here: Every bank that I am aware of (apart from INGDirect and similar) is on SWIFT and can directly send/receive money to banks overseas either in AUD or another currency, overnight. USA: Many small banks don't bother, so the only way to get money in/out internationally is through an intermediate bank in USD, which involves extra fees, delays and manual intervention.


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## medicowallet (3 November 2010)

SIGI said:


> medicowallet - you seem happy with the idea that we all take personal responsibility for ourselves. I agree with you. Would you apply this logic to all areas - compulsory super, universal healthcare, education. We're just drawing lines in the sand here, why stop with banking?




Off topic,

but here I go:

The overarching theme in the above is a fair go for the masses, ensuring them a minimum standard, so that all have a social safety net and access to opportunity, regardless of social class. The difference is for the three you list, the alternative is not appealing in the social context we come to appreciate in Australia.

and for the record, NO, Mcmansions should NOT be the norm.

1. For healthcare for the masses there is little choice for them, as they cannot afford expensive medical bills. This is a social service highly subsidised by higher earners, which on the surface seems fair for all.

People CHOOSE to take out a $400k mortgage, their other option, and a perfectly viable one, is to rent.

2. Compulsory super - this is an insurance policy so that future generations need not subsidising the pensioners of tomorrow (like the coming ridiculous BB generation social dependent masses). It also ensures that people will have adequate living standards when they retire (and yes, on super, so much could be done to improve it)

3. Education - as a community we should NEVER allow our talent to be confined to just those with parents who had the money to send their kids off for the best education. Just imagine the minds in places like America, india, china etc that could be harnessed if they had the same opportunity we have here.


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## nioka (3 November 2010)

Kremmen said:


> Especially here, that should be *the* question. If you think a company is making unreasonably high profits, surely you should be investing in them? If you can find better investments elsewhere,




Huge profits by a company does not mean that the average shareholder gets the benefit from owning that companies shares. This especially applies to the big 4 banks.  There are definitely much better investments elsewhere.


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## SIGI (3 November 2010)

alphaman said:


> SIGI, no one forced the consumers to be "sticky". If consumers choose to stick with the big 4 and ignore better alternatives, the inefficiecy is caused by the consumers, not the system. Making the system the scapegoat is not going to help the inefficient consumers.




"Force" comes in many guises. Ad spend as noted by prawn_86 is a biggie, the complexity of moving institutions is another, lack of financial education is another (not everyone has access to the net or would know what to do with it if they did!). The consumers are sticky - that's not my opinion, it's just how it is. My point is that, if we know, then we can choose to do something about it. We may choose to change the system in ways to help inefficient consumers. Just because some people are financially astute, is it fair to assume everyone else is, or for that matter could be if they tried? 
As I said we already tweak the system in other walks of life, like compulsory super. Why not tweak other sectors (like banking) where we see the opportunity, to see if we can all get a better service for less money, not just the savvy/smart, but for everyone?


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## prawn_86 (3 November 2010)

SIGI said:


> Why not tweak other sectors (like banking) where we see the opportunity, to see if we can all get a better service for less money, not just the savvy/smart, but for everyone?




Personally i think the answer to this is that most of the finance industry is built on being opaque, and the more transperancy, the less profits.

So its a delicate balance of keeping people employed, earning enough cash for shareholders, and keeping people stupid enough to make enough money...


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## SIGI (3 November 2010)

Kremmen: you are quite right - I overstepped the mark with the "cartels are always bad", fingers moving faster than brain. There are indeed areas where it makes sound economic sense for there to be few players. 
Retail banking in Oz however, could tolerate a lot more competition before we start seeing the inefficiencies you have noted in the US system.
I stand by the point that the profits of the retail banking rector in Oz indicate that there should be efficiencies to be made. See previous thread re: sticky nature of customers. The perceived competition is not as great as it would seem.
The fact that the US system had not got it right does not, I believe, preclude a better system from operating in Oz. Bpay/credit link/direct deposit/multi access ATMs can all function with 20 banks rather than a dominant 4. What's more it might turn out to be cheaper!
On another note look at the UK system, not a great deal of competition after all the consolidation, but with the arrival of the supermarkets, more accessible competition and it's all good for consumers.

prawn_86: You've hit the nail on the head there "sunlight is the best disinfectant".


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## alphaman (3 November 2010)

prawn_86 said:


> From a marketing perspective ad spend plays a large part in loyalty (or 'stickiness'). This is called Double Jeopardy, meaning those that spend more can attract and retain more customers, and those who cannot afford to spend as much, due to not being as big, struggle to get their message heard.
> 
> So it's unfair to solely blame consumers. Yes there are alternatives out there, but they need to be sought out, as opposed to large salient brands who can spend a lot on marketing



I agree, but I fail to see how that's inefficient. Advertising and size are both costly, and do not guarantee success. If you can execute a good advertising compaign, if you can get your message across, of course you deserve to be rewarded. 

And yes, people do need to seek out the alternatives. I'm stunned that people seem to think that they can just sit on their butt and government would give them all the bargains on a platter. This is really about laziness, not about market inefficiency at all.


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## medicowallet (3 November 2010)

I sigh at the suggestions that we need to "tweak" the financial system to help those who were too naive and full of bravado, pulling on $400k loans on $60k income.

Give me a break. They are beyond help.

Let the banks deal with the bad debts, and let the consumer learn the lesson that there is not a guaranteed windfall in gearing to the hilt and purchasing property.

Any tinkering with real market forces, actually dumbs down the general public, and makes our economy weaker going forward. People need to learn about risk and reward, which is not being helped by constant government bailouts.

The govnent have already shown incompetence with Kevin Rudd and his cash grants/bailouts and wasteful wanton destruction of national wealth. Let us not feed the fire any more.

THAT is what interest rates do, or used to do before people became naive to the reality of risk and reward.


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## alphaman (3 November 2010)

medicowallet said:


> Any tinkering with real market forces, actually dumbs down the general public, and makes our economy weaker going forward. People need to learn about risk and reward, which is not being helped by constant government bailouts.



Amen to that.


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## prawn_86 (3 November 2010)

alphaman said:


> I agree, but I fail to see how that's inefficient. Advertising and size are both costly, and do not guarantee success. If you can execute a good advertising compaign, if you can get your message across, of course you deserve to be rewarded.
> 
> And yes, people do need to seek out the alternatives. I'm stunned that people seem to think that they can just sit on their butt and government would give them all the bargains on a platter. This is really about laziness, not about market inefficiency at all.




I would argue that it is about market inefficieny as the big 4 have been protected for a long time (relative to smaller banks/lenders etc), hence have more power and revenue in order to spend more on advertising.

As you implied before, a true capitalist market, should have little to no regulation. If this was the case then the big 4 wouldnt be in th eposition they are today.


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## alphaman (3 November 2010)

prawn_86 said:


> I would argue that it is about market inefficieny as the big 4 have been protected for a long time (relative to smaller banks/lenders etc), hence have more power and revenue in order to spend more on advertising.



Exactly what protection are you talking about? Anyway that's probably irrelevant.

My observation is that even within the big 4, you can find good deals if you look. But people don't even try to shop around within the big 4. 

By the way a true capitalist market does not exclude regulation. If the regulation promotes honesty and transparency, it obviously enhances market efficiency. But if you are talking about government price control, then that does contradict. A lot of people talk about free market but they don't really mean it, they just want the government to bring down the price.


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## IFocus (3 November 2010)

medicowallet said:


> I sigh at the suggestions that we need to "tweak" the financial system to help those who were too naive and full of bravado, pulling on $400k loans on $60k income.
> 
> Give me a break. They are beyond help.
> 
> Let the banks deal with the bad debts, and let the consumer learn the lesson that there is not a guaranteed windfall in gearing to the hilt and purchasing property.




Isn't that how the sub-prime evolved........


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## doctorj (3 November 2010)

SIGI said:


> I'm afraid that I don't see the direct correlation between the size of the B/S and the risk of a bank. Size is a factor, but there are may others.



  Size and market share are key rating factors for all the major international rating agencies (S&P, Fitch, Moodys, AM Best). All things being equal, a bank with 3% market share will have a lower rating than a bank with 10% market share.  In fact lower market share effectively places an upper limit on the rating (or makes the amount of capital required to attain a higher rating unreasonable).


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## medicowallet (3 November 2010)

IFocus said:


> Isn't that how the sub-prime evolved........




Exactly, by governments allowing banks to give cheap loans to people who could not pay for them.

All we do by allowing our fellow Australians to keep going deeper into the abyss is condemn them to further slavery to the banks and risk.


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## Julia (3 November 2010)

alphaman said:


> And yes, people do need to seek out the alternatives. I'm stunned that people seem to think that they can just sit on their butt and government would give them all the bargains on a platter. This is really about laziness, not about market inefficiency at all.



Exactly so.
We are becoming far too accustomed to adjusting everything to cater for the laziest in our society.  viz e.g. "My Super" for people who can't be bothered to understand how best to manage their Super options.



medicowallet said:


> I
> Any tinkering with real market forces, actually dumbs down the general public, and makes our economy weaker going forward. People need to learn about risk and reward, which is not being helped by constant government bailouts.



I absolutely agree, but wonder if we are here being a bit unfair in not giving adequate recognition to those who - despite all the urging and encouragement in the world - will never develop even the most basic financial comprehension?


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## Julia (3 November 2010)

prawn_86 said:


> I would argue that it is about market inefficieny as the big 4 have been protected for a long time (relative to smaller banks/lenders etc),



Can you set out how exactly the big four have been protected?


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## medicowallet (3 November 2010)

Julia said:


> I absolutely agree, but wonder if we are here being a bit unfair in not giving adequate recognition to those who - despite all the urging and encouragement in the world - will never develop even the most basic financial comprehension?




The shotgun approach is not the way to deal with this, as it eg in the case of the FHBG tripling, leads to bubbles / abuse from people who actually are smart enough to use this to their advantage.

It will come across as cold, but people who are constantly bailed out will never learn.  I would be hard pressed to find people who had been forced to sell their property who would approach the next investment with no greater analysis.

Perhaps these people should never be put into a position to ever purchase a house I agree.

I would however support the government doing such things as independent screening of loan application repayability for people who want to access the FHBG. This would actually be quite responsible of the government, but therefore will never happen (they don't even know if their own projects will show good returns)


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## Mofra (4 November 2010)

IFocus said:


> Isn't that how the sub-prime evolved........



Sub-prime evolved from the inadequate pricing of risk, nothing more. 
It was caused my market _inefficiency_, not the efficiency of the banking system.




Kremmen said:


> * Here: Ubiquitous free bill-paying with BPay. USA: Total shambles, most of it costing fees, with many small institutions still sending "electronic" payments by physical cheque. (Why do you think Paypal exists?)
> 
> * Here: Ubiquitous cheap or free direct credit to other bank accounts. USA: Total shambles, again.
> 
> ...



Excellent summary Kremmen, people tend to only focus on the negatives and not the positives of a strong financial sector in Australia. A spike in interbank lending rates decimated the industry in the US, our banks with greater control and greater levels of trust with one another fared much better.


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## IFocus (4 November 2010)

Mofra said:


> Sub-prime evolved from the inadequate pricing of risk, nothing more.
> It was caused my market _inefficiency_, not the efficiency of the banking system.




Understand your point but surely lack of regulation or enforcement had a part arla Ameriquest and others who raped the system.

John Mauldin posted a brief excerpt from  Michael Hudson's  book called The Monster about the Mortgage industry, and specifically Ameriquest and Lehman.



> The new deal left her with a house payment of $1,069 a month””nearly all of her monthly income and twice what she'd been paying on the FHA loan before Ameriquest and Long Beach hustled her through the series of refinancings. She was shocked when she realized she was required to pay more than $1,000 a month on her mortgage. "That broke my heart," she said.


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## Macquack (4 November 2010)

Mofra said:


> Sub-prime evolved from the inadequate pricing of risk, nothing more.
> It was caused by market _inefficiency_, *not the efficiency of the banking system.*




Surely the buck stops with the banks as far as the pricing of risk is concerned (they did not have to lend the money).

If the Sub-prime debacle and subsequent Global Financial Crisis was not caused by an inefficient banking system, then who was to blame???


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## nioka (4 November 2010)

Discussion here reminds me of an address by the manager or one of Australias large companies that was delivered at a management seminar. His theory was;
 " keep the worker in as much debt as possible and help keep his wife barefooted and pregnant (actual words). That way you will have a workforce that will not be able to miss a days work, that will not want to leave the job and thanking you for letting him have a job. If his debt is over buying a house then he will also be tied to that place and find it hard to shift home".

That was in the early 60s. Now it would probably be "keep both partners working full time to earn sufficient to pay off a mortgage and etc."


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## Julia (4 November 2010)

IFocus said:


> Understand your point but surely lack of regulation or enforcement had a part arla Ameriquest and others who raped the system.





> The new deal left her with a house payment of $1,069 a month””nearly all of her monthly income and twice what she'd been paying on the FHA loan before Ameriquest and Long Beach hustled her through the series of refinancings. She was shocked when she realized she was required to pay more than $1,000 a month on her mortgage. "That broke my heart," she said.



So what did she do?


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## doctorj (4 November 2010)

Macquack said:


> Surely the buck stops with the banks as far as the pricing of risk is concerned (they did not have to lend the money).
> 
> If the Sub-prime debacle and subsequent Global Financial Crisis was not caused by an inefficient banking system, then who was to blame???



The buck stops, where ever the buck stops.  Banks didn't hold a lot of these mortgages on their balance sheets (well they did, but often not the ones they originated...).  Check out http://orgnet.com/cdo.html for a fun way to see how the contagion worked.


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## Mofra (5 November 2010)

IFocus said:


> Understand your point but surely lack of regulation or enforcement had a part arla Ameriquest and others who raped the system.



US Lenders were terrible and more lending regulation would have helped, but it was inadequate pricing of risk in the derivative instruments that led to the shutting down in very quick succession of the securitisation market that halted lending worldwide (and yes, even in countries like Australia where the standard of lending is much higher than the US and in many respects is world-leading). 
The complexity and depth of the secondary markets make it basically impossible to regulate (and Greenspan himself concedes this point on occasions in his post-Fed career).


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## Mofra (5 November 2010)

Macquack said:


> Surely the buck stops with the banks as far as the pricing of risk is concerned (they did not have to lend the money).
> 
> If the Sub-prime debacle and subsequent Global Financial Crisis was not caused by an inefficient banking system, then who was to blame???



An inefficient _pricing_ system, although pre-GFC we did just encounter a once in history shift in global demographics where something like 10% of the entire world's population switched from an agrarian to industrial existance from 02 to 05, which brought with it a greater saving and investment market as people who lived in the developing world and largely lived hand to mouth suddenly had some (albeit meagre) savings to place in deposit. 

As people from developing nations have a higher savings ratio than most other people (less likely to accept risk with investment), this precipitated a large scale drop in fixed interest securities which meant traditional bond holders found their yields wilting and chose other investments that produced higher returns, scewing the risk markets. The lower interest rates compared with historical booms exacerbated the situation when the crisis hit. 

In any case, the guilty parties were not retail banks, let alone the big Australian banks.


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## Calliope (5 November 2010)

Poll in the SMH today;



> *Poll: Will you switch your accounts from the Commonwealth because of this rise?
> Yes
> 62%
> No
> ...




Probably most of the clowns who responded to this poll don't even have an account with the CBA.


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## Julia (5 November 2010)

It was just a bit unfortunate for CBA that their announcement of large rate rise came when there was no other news, and while the government and the opposition are fighting for who can make the most meaningless noise about interest rate rises.

So we had considerable hysteria for about 36 hours.  Late night ABC Radio talkback in the small hours managed to register umpteen idjits who have no clues but think it's sport to engage in some bank bashing.

Then we have the Qantas engine debacle, and all the outrage turns to unsafe servicing of our flagship air fleet.

Then, some more people die as a result of a further eruption of the Indonesian volcano, and whacko, that's taken the place of all the local outrage on interest rates.

Meantime, the other big banks are wisely just pulling their heads in for now and will make their own announcements re rises at a smarter time than did the CBA.


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## Macquack (6 November 2010)

Julia said:


> Meantime, the other big banks are *wisely* just pulling their heads in for now and will make their own announcements re rises at a smarter time than did the CBA.




So *Wise* really means:- sneaky, cowardly, contemptible, deceitful, devious, disingenuous, furtive, guileful, recreant, secretive, shifty, slippery, sly, snide, stealthy, surreptitious, tricky, unscrupulous, untrustworthy and underhanded.


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## doctorj (6 November 2010)

Macquack said:


> So *Wise* really means:- sneaky, cowardly, contemptible, deceitful, devious, disingenuous, furtive, guileful, recreant, secretive, shifty, slippery, sly, snide, stealthy, surreptitious, tricky, unscrupulous, untrustworthy and underhanded.



Might as well manage the news cycle as long as the great unwashed are emotional and irrational.


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## wayneL (6 November 2010)

Macquack said:


> So *Wise* really means:- sneaky, cowardly, contemptible, deceitful, devious, disingenuous, furtive, guileful, recreant, secretive, shifty, slippery, sly, snide, stealthy, surreptitious, tricky, unscrupulous, untrustworthy and underhanded.




It depends on the circumstances.


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## Calliope (6 November 2010)

Macquack said:


> So *Wise* really means:- sneaky, cowardly, contemptible, deceitful, devious, disingenuous, furtive, guileful, recreant, secretive, shifty, slippery, sly, snide, stealthy, surreptitious, tricky, unscrupulous, untrustworthy and underhanded.




You are a *wise* old whale watcher Macq.


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## IFocus (6 November 2010)

Julia said:


> So what did she do?




The out come wasn't explored but I think she would have lost the lot 



> Like many older black women who owned their homes but had modest incomes, Pittman was deluged almost every day, by mail and by phone, with sales pitches offering money to fix up her house or pay off her bills. A few months after her heart attack, a salesman from Ameriquest Mortgage's Coral Springs office caught her on the phone and assured her he could ease her worries. He said Ameriquest would help her out by lowering her interest rate and her monthly payments.




Some thing along the lines of Mofra's comments



> For Ameriquest, the fact that Pittman couldn't afford the payments was of little consequence. Her loan was quickly pooled, with more than fifteen thousand other Ameriquest loans from around the country, into a $2.4 billion "mortgage-backed securities" deal known as Ameriquest Mortgage Securities, Inc. Mortgage Pass-Through Certificates 2004-R7. The deal had been put together by a trio of the world's largest investment banks: UBS, JPMorgan, and Citigroup. These banks oversaw the accounting wizardry that transformed Pittman's mortgage and thousands of other subprime loans into investments sought after by some of the world's biggest investors. Slices of 2004-R7 got snapped up by giants such as the insurer MassMutual and Legg Mason, a mutual fund manager with clients in more than seventy-five countries. Also among the buyers was the investment bank Morgan Stanley, which purchased some of the securities and placed them in its Limited Duration Investment Fund, mixing them with investments in General Mills, FedEx, JC Penney, Harley-Davidson, and other household names.
> It was the new way of Wall Street. The loan on Carolyn Pittman's one-story house in Atlantic Beach was now part of the great global mortgage machine. It helped swell the portfolios of big-time speculators and middle-class investors looking to build a nest egg for retirement. And, in doing so, it helped fuel the mortgage empire that in 2004 produced $1.3 billion in profits for Roland Arnall.


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