Banksia Financial Group bites the dust

[baby_swallow]

Another one bites the dust....

http://www.news.com.au/business/com...-financial-group/story-fnda1bsz-1226503478426

 

[ASICK]

http://www.portstephensexaminer.com.au/story/424934/banksia-investors-wont-lose-the-lot/

"The Saturday Age believes a sudden realisation by a new management team about a long-term decline in the quality of loans, rather than a single large event, triggered the decision to freeze assets."

Maybe I misunderstand what a single large event is, but I would have thought a "sudden realisation" is in itself a single large event.

Darn, double speak is hard to decypher.

http://www.smh.com.au/business/untimely-death-clouds-banksia-probe-20121101-28mxn.html

Only the tip of the iceberg.

 

[ASICK]

Banksia: The Tip of the Iceberg

http://www.theaustralian.com.au/bus...nd-banksia-crash/story-fn91wd6x-1226507012584

"A second mortgage fund controlled by Banksia, the Cherry Fund, was swept into receivership yesterday, leaving another $10 million of ordinary investor funds in limbo following the collapse of $650m stablemate Banksia Securities last Thursday. ... The Cherry Fund was placed in administration because the company was unlikely to be able to meet an expected run on redemptions following the collapse of Banksia Securities, Mr McGrath said. A third fund, the $158m Banksia Mortgage Fund, remains afloat."

and

"Directors of Cherry Fund and auditor Mr Sinnott also signed off on the group's accounts late last month, raising no concerns about its financial viability. According to Cherry Fund's accounts for the year to June, it held $10.8 m of investor funds, was owed $11.3m from entities to which it had lent money and had equity of $1.7m."

What a surprise !

"Analysis suggests Banksia Securities was holding $84m worth of repossessed properties at the time of its collapse and the value of those properties had not been adequately recorded in the group's books. A further $105m worth of loans were overdue, $74m by more than three months. However, the company appeared to have a provision for bad and doubtful debts of just $2.3m."

When they go, it seems to be always like this !

http://www.smh.com.au/business/let-down-by-banking-on-banksia-20121102-28pqr.html

The solicitors' trust accounts - money going to waste (no interest) - yes, of course a number of solicitors saw opportunity - and of course, banks closing country branches.

Banksia's predecessor business was started by Patrick Godfrey in 1968, called Kyabram Housing Investments. In 1999 this merged with several small investment companies to form the Banksia Financial Group.

One of the companies involved in the roll-up was Statewide Secured Investments, formerly Goulburn Valley Housing Loans, set up by Kyabram law firm Dawes & Vary. Another was Hedon Investments, a finance group set up by Ballarat law firm Heinz and Partners.

''It started with a solicitor's office,'' said Michael Polan, a councillor and former mayor of nearby Shepparton. ''People felt secure with that. It wasn't so much about chasing a higher interest rate. It was about personalities and relationships that built up over time.''"

and:

''Back in those days, the end of the Earth was Essendon. The law firms saw an opportunity to be able to provide housing finance,'' he said."

Other solicitors saw opportunities elsewhere:

http://moneymagik.com/trilogy_history.php

 

[ASICK]

ASIC - The Corporate Undertaker

http://www.businessspectator.com.au...-report-pd20121102-ZN757?opendocument&src=rss

"“On the conduct side, we’ve undertaken intensive surveillance of the industry, particularly over the last 12 months," he said.

"In relation to Banksia they were one of the entities we had been surveilling. We had been proactive with the trustees.”"

Trouble is, ASIC is NOT a prudential regulator - for ASIC, it's form, NOT substance. When ASIC says it's been monitoring an entity, it means "ASIC is monitoring the compliance of the entity, NOT the substance (profitiability/value) of the entity".

Sad thing is that investors in Managed Investment Funds' ("MIFs:/"schemes") mostly all fall for the commonly held (and false) belief that the industry is well-regulated. The truth is that the industry is not well-regulated and ASIC does not have the mandate nor the interest to concern itself about investor losses.

 

[ASICK]

Mezzanine Lending?

http://www.theaustralian.com.au/bus...-latest-disaster/story-e6frgac6-1226509487836

"Based at Kyabram in regional Victoria, the company's modus operandi was similar to the raft of other property mortgage organisations that have collapsed in recent years. It borrowed at rates significantly more attractive than term deposits and lent to property developers.

A large number of investors, many of them unsophisticated when it comes to finance, believed their money was being invested in real estate, or at least secured over real estate.

To a certain extent that was true. But if the experience of its collapsed competitors is any guide, the loans ranked way down the list, often as second or third mortgages which essentially made them high-risk mezzanine finance."

(emphasis added)

I guess things aren't looking good, and wlll probably be looking quite a lot worse if the funds have bank facilities. Repayment of bank facility in today's market would doubtlessly mean more losses if impairments are inadequate (which so often is the case). I'd also guess that since two of the funds are so troublesome, the third fund is probably going to follow along on the same path to disaster.

Geez, the investors must feel relieved the auditors were in there looking after their respective interests .. phew !!!

 

[ASICK]

ASIC: Coporate Undertaker

http://www.asic.gov.au/asic/asic.nsf/byHeadline/Banksia-Securities-Limited?opendocument

Taskforce (hohoho - really quite a funny term when applied to ASIC):
http://www.asic.gov.au/asic/asic.ns...egulation+of+unlisted+debentures?openDocument

The Undertaker:

http://www.smh.com.au/business/more-powers-but-is-asic-up-to-the-job-20100604-xkta.html

"Talk to people at ASIC and you become familiar with D'Aloisio's metaphor of ASIC's role being one of attending a car crash.

"In any situation, I often use the example of the car accident or the train crash, where you turn up, you have a look at it, and clearly people have been hurt; there was a crash," he said.

"You can then look at focusing on who to blame, who did the wrongdoing, etc, but you also have got to look at those that are injured and how you can assist them, particularly retail investors.""

Typo passes auditor:

http://www.heraldsun.com.au/news/vi...dog-investigates/story-e6frf7kx-1226507012610

Worth a look:

http://www.youtube.com/watch?v=uw_Tgu0txS0

Harry Markopolis (who found out about Madoff) couldn't convince the SEC (US ASIC equivalent) about Madoff - describes the SEC as coming in after the crash and taking away the 'bodies' .. really worth a look:

http://www.youtube.com/watch?v=PG8sIAsT-bg&feature=related
http://www.youtube.com/watch?v=iR1ctcYXx7c&feature=relmfu

More links:

http://www.search.news.com.au/relat...?us=ndmnews&sid=2&as=NEWS&ac=search&r=related

 

[ASICK]

http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Our role

ASIC's role.

"The laws we administer give us the facilitative, regulatory and enforcement powers necessary for us to perform our role. These include the power to: (I've highlighted ASIC's main actions)

- register companies and managed investment schemes
- grant Australian financial services licences and Australian credit licences - register auditors and liquidators
- grant relief from various provisions of the legislation which we administer
- maintain publicly accessible registers of information about companies, financial services licensees and credit licensees
- make rules aimed at ensuring the integrity of financial markets
- stop the issue of financial products under defective disclosure documents
- investigate suspected breaches of the law and in so doing require people to produce books or answer questions at an examination
- issue infringement notices in relation to alleged breaches of some laws
- ban people from engaging in credit activities or providing financial services
- seek civil penalties from the courts
- commence prosecutions - these are generally conducted by the Commonwealth Director of Public Prosecutions, although there are some categories of matters which we prosecute ourselves."

ASIC's Statement of Intent:

http://tinyurl.com/b59egf7

Information for Consumers:

http://www.asic.gov.au/asic/asic.nsf/byheadline/ASIC-and-consumers?openDocument

ASIC is not interested in whether an investment is succesful or not - it's not interested if a manager is negligent, hopeless, or even incompetent. The manager will get along nicely with ASIC providing it complies with applicable laws.

I'm posting this in the event Banksia investors come with a mind-set thinking that ASIC is able to ride to the rescure. ASIC may bring a legal action if loss has been caused by a breach of compliance or a fraud.

I think it's really necessary to keep driving home the message that ASIC is NOT a prudential regulator - ASIC is not concerned by mere loss of investments.

 

[prawn_86]

investigate suspected breaches of the law

This is where ASIC are generally hamstrung imo, due to lack of resources and often the financial laws are quite ambiguous. But yes, ASIC dont care if you lose money, only if the people who lost your money were compling with all the laws/rules throughout their time

 

[gav]

ASIC is not concerned by mere loss of investments.

And nor should they be

 

[ASICK]

Spot on Gav. Many of us come to these forums with a lot to learn. At first we wonder where is ASIC? We wonder why is it that we've done our dough and nothing happens to those who lost it for us? If investors in Banksia do wander onto the forum, then hopefully they'll learn the ropes quickly, and not waste time waiting for ASIC to come to the rescue.

 

[Smurf1976]

"The Saturday Age believes a sudden realisation by a new management team about a long-term decline in the quality of loans, rather than a single large event, triggered the decision to freeze assets."

Maybe I misunderstand what a single large event is, but I would have thought a "sudden realisation" is in itself a single large event.

A common theme to most disasters, financial or otherwise, is a "sudden realisation" of a risk or situation which has existed for quite some time.

I think it's just a human trait that we're quite good at denial and ignoring risk until it's too late, usually involving an assortment of "reasons" why the risk won't eventuate or can be mitigated.

Then somebody wakes up to the situation being far worse than most had assumed....

 

[Julia]

ASIC is not concerned by mere loss of investments.

And nor should they be

+1. Once again it's all about risk/reward.
If people choose to invest in non APRA regulated organisations in pursuit of higher returns, they need to clearly understand that they are taking on more risk. I can't think of too many instances where higher returns don't involve higher risk.

 

[prawn_86]

If people choose to invest in non APRA regulated organisations in pursuit of higher returns, they need to clearly understand that they are taking on more risk. I can't think of too many instances where higher returns don't involve higher risk.

Yes i guess in this case it comes down to if investors were legally made aware that they were investing in a scheme that was not APRA regulated.

I don't know if this is or isnt the case as i have not followed this story much

 

[ASICK]

+1. Once again it's all about risk/reward.
If people choose to invest in non APRA regulated organisations in pursuit of higher returns, they need to clearly understand that they are taking on more risk. I can't think of too many instances where higher returns don't involve higher risk.

Good for you! Well, the truth is that many investors who invested with these MIFs (including myself) didn't understand the risks. It's fine for you guys who have the wherewithall to understand everything about risk, but joe and joan public didn't understand . We thought the industry was well regulated and secure, but now we find it's not. Such is life.

 

[ASICK]

Yes i guess in this case it comes down to if investors were legally made aware that they were investing in a scheme that was not APRA regulated.

I don't know if this is or isnt the case as i have not followed this story much

Truth is that the tens of thousands of investors were just plain stupid? right? We didn't know about risk - we didn't know about APRA - how dumb of us, right? It was all our fault because there was nothing to lead us to believe the risk was so high, right? I don't argue that, I agree. Now, with that point well understood, time to move on to help those who are coming to grips with loss as we speak.

Here's some more links :

http://www.businessspectator.com.au...es-repo-pd20121029-ZJS3R?OpenDocument&src=rab

"... Banksia was permitted to continue raising money from investors because existing laws only required the company to disclose its lack of capital in a 31-page prospectus.

In its latest prospectus, Banksia reported an equity to total liabilities ratio of 3.6 per cent at the end of June 2011, which was significantly below the minimum equity ratio benchmark of eight per cent, as recommended by ASIC, according to the AFR.

Receivers took control of Banksia on Thursday after its newly-installed chief executive launched a review that suggested losses on its portfolio of property loans would be higher than forecast...''

http://tinyurl.com/c5rhph6

''... The common goal is, and will remain, that investors can have confidence in securitised products, that the risks are both reasonable and reasonably disclosed, and that securitisation can then be an effective contributor to
economic growth....''

http://www.smh.com.au/business/unti...ksia-probe-20121101-28my6.html?skin=text-only

''... Banksia's collapse has put the spotlight back on a sector that is very risky and which has had more than its fair share of collapses in recent years.

It is not hard to see why. The sad reality is this sector of the finance industry is poorly regulated. It is regulated by ASIC and unlike the banks the funds don't have to comply with mandatory capital requirements.

As long as the funds disclose that they don't meet suggested capital ratios or liquidity levels in their prospectus that's OK, according to ASIC.

Put simply, if a debenture fund is undercapitalised, there is nothing ASIC can or will do if it has been disclosed in the prospectus.

Another problem is if an investor rolls over a debenture the fund isn't required to issue a new prospectus, which creates an even bigger information vacuum that the investor is operating in.

These funds can also use the word deposit as there is no law that prohibits the use of that term. The upshot is Banksia was able to offer ''at call'' deposits as long as it mentioned in its literature that it was a non-bank.

There is at least one other bank that is in trouble. Its defaults are high, its fees are high and it has been involved in reckless lending. The concern is that valuers may not be able to get PI insurance to write valuations for non-bank lenders. If that day comes, where will that leave the investors? ...''

http://www.theaustralian.com.au/bus...-spot-on-banksia/story-fn91wd6x-1226509496526

''... Mr Medcraft said the corporate regulator had done everything in its power to enforce the disclosure and conduct rules for debenture funds, including Banksia, and there was an obligation on investors to be careful about the products and companies they invested in.

"It is not a blind spot," he said. "There is a presumption that investors do read the prospectus, that investors do understand the risks that they are taking.". ...''

http://www.abc.net.au/am/content/2012/s3622213.htm

 

[McLovin]

Yes i guess in this case it comes down to if investors were legally made aware that they were investing in a scheme that was not APRA regulated.

I don't know if this is or isnt the case as i have not followed this story much

Was there a legal requirement to disclose that fact?

 

[prawn_86]

Was there a legal requirement to disclose that fact?

I have no idea, that is where ASIC comes in.

As i said, i haven't follwed this collapse closely

 

[Julia]

Good for you! Well, the truth is that many investors who invested with these MIFs (including myself) didn't understand the risks. It's fine for you guys who have the wherewithall to understand everything about risk, but joe and joan public didn't understand . We thought the industry was well regulated and secure, but now we find it's not. Such is life.

Sorry, ASICK. Like Prawn, I haven't followed all this closely and haven't read all your posts. Didn't realise you were an investor.

Banksia is simply the latest in a litany of disasters within the sector during the past six years that include names such as Westpoint, Bridgecorp, Fincorp, Australian Capital Reserve, Provident Capital, City Pacific and MFS.

from "The Weekend Australian".
And Banksia won't be the last.

The role of APRA became more widely known when the government introduced its guarantee of deposits in response to the GFC to counteract potential liquidity and lending problems.

The guarantee only applied to APRA regulated institutions, eg banks, building societies, credit unions.

I guess my main point was the risk/reward aspect, rather than specifically the APRA connection, in that when we choose the higher reward we need to understand that it's higher for a reason, i.e. it's less safe.

With falling interest rates, I won't be surprised if there are more failures to add to the list above.

(I did notice, ASICK, from the article in "The Weekend Australian" that it's possible investors may receive as much as 70c in the dollar back, eventually.)

Good luck. We've all made decisions with what we knew at the time that turned out to be less than great.

 

[ASICK]

Well, actually, it's good luck to Banksia investors, in fact to all investors in screwed up MIFs. I did my dough in City Pacific's First Mortgage Fund (at 58), now the Trilogy Pacific Mortgage Fund ("PFMF"). I'm what some might regard as an early retiree (at 40) - heck I even went and got a law degree because I was bored - worked as a barrister for six months until boredom set in again - or perhaps it was becauase my master at the bar was 20 years younger than me. Nevertheless, I've never considered myself a stupid person - I know a lot about a lot of things, BUT ... none of it protected me from being gullible.

I thought the worse that would happen to me was paying $50 for a $5 camera to a spruiker on the streets of London, or that I might only break even on the sale of a property, but little did I know that worse lay in store for me. I believed that the legistative framework and regulation must be such that my investment would not be put at risk, but under than substrate of "security" lay an accident just waiting to happen. Heck, City Pacific used the Public Trustee of Queensland (PTQ) - that PTQ logo sure made investors feel secure. I've felt the anyst on the recognition that bad fortune had beset ME: It doesn't always happen to other people.

I now know that in many MIFs, valuations of assets do not hold when assets are sold, and I do know that in many MIFs, accruals (interest receivables) are, in many cases, unable to be recovered - yet, such valuations and accruals can appear in accounts year after year, and I do know that in many cases, managers are able to make fees on those inflated accounts, and I do know that in the end, it is investors who suffer. I know to read RG45 Annexure A Table "H" LVR ranges together with unit price - yes, I have learnt a lot.

In case it's escaped readers minds, many investors in these MIFs sunk their lives' savings in (I did not) because they NEEDED the income to live a self-sufficent life in circumstances when interest rates were tumbling. I guess I'm a little thin-skinned about the blame going to investors and the continual harping about risk, risk rising with return, and ignornace.

Yes, it's our fault, we know that -really, it's a given. I doubt whether there's a single investor who doesn't blame themselves - they know - some are probably very ashamed of what they did. Some have to come to grips with what's happened - to some it's a loss as severe in consequence as the loss of a life-partner.

When I was first caught up in the PFMF, I didn't know much about the Corporations Act or MIFs - in fact, I didn't even know that unitholders actually owned the fund. Unless one practices a particular branch of law, that branch can be as alien as a moonscape: Corporations law is much closer to earth for me today, much closer than before.

When Trilogy took over the fund, the rot continued. Even after a much-touted so called "Asset Review" which adjusted the fund's unit price from $0.64 to $0.48, the unit price continued to tumble at such a rate that it'll be a miracle if we end up with a cash return of $0.15/unit.

If one looks at the Equititrust - the (continually dropping) expected return [$0.16 - $0.23] is a drop in the bucket to what investors originally anticipated. http://equititrust.com.au/Pdfs/Receiver/Receivers Reports - 20121004 - 8th Report to Investors.pdf

I think LM investors are in for shock - a drop to about $0.50 is possible. The accounts are late and no RG45 has been disclosed. (although I note from experience, Trilogy is capable of worse)

You say they're anticipating $0.70 in Banksia - well, they might say that - but when the rubber hits the road, and asset recovery falls far short, and when costs are loaded in, I'd say $0.70 will be a fantasy figure (I say that from past experience, not from actual account knowledge).

And there will be more - there will be over 100,000 investors who'll lose big time - and while the government protected the (too big to fail) banks with $1m deposit guarantees (at that time, now $250k), it left the MIF sector fall to the wolves. I guess the goverment thinks it's best to have a "little" mess, not a BIG one.

So, sorry for being thin-skinned, but it's just the way the whole thing's made me.

 

[Julia]

Well, actually, it's good luck to Banksia investors, in fact to all investors in screwed up MIFs. I did my dough in City Pacific's First Mortgage Fund (at 58), now the Trilogy Pacific Mortgage Fund ("PFMF"). I'm what some might regard as an early retiree (at 40)

Apparently I was in error in concluding you were a Banksia investor.

I expect you're indeed over anyone commenting on risk/reward. Doesn't make it less relevant, however, as it doesn't seem to have occurred to some investors.