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"Storm did not act on danger loans, hearing told"

"Storm Financial failed to warn its clients about possible margin calls as the sharemarket started to plummet in late 2008, despite weeks of communication and calls to action from Commonwealth Bank of Australia's margin loan risk department."

Read more by Michelle Singer in the The Australian Financial Review of October 28 2009.
 
A bunch of financial advisers telling clients to borrow money against their home and then using that cash to buy shares - well, show us a financial adviser or planner that doesn't recommend utilizing the 'dead equity' in your home.

In fact the one thing that does surprise us about the Storm Financial fiasco is that everyone seems so surprised at what happened.

It's as though the finance reporters feel cheated that their heroes in the finance sector and business world have betrayed them.

So, whose fault is it? Is it the regulators fault?

ASIC is copping a lot of the blame for allowing Storm Financial and Opes Prime to happen. In reality, we can't blame them entirely. And no, it's not because they are underfunded, it's because it just isn't possible for a regulator to do anything about it.

Regulators can't prevent things from happening when they don't know what's happening. And they also can't prevent things from happening when they don't know what will happen.

But if we ignore Storm and Opes for a second, you only have to look at the regulation of the banks. APRA are labeled as heroes for their tight regulations. If that's the case how is it that Australia's banks came within a whisker of collapsing last year?

As I've written before, if it wasn't for the retail and wholesale funding guarantees and the manipulation of the property market, Australia's banks would be on their knees right now.

Not that they're in any better shape for it. Arguably they and their customers are in worse shape. But we'll leave that for today as we plan on scouring through the NABs results later on today. I'll let you know tomorrow if there's anything worth looking at.

Anyway, so if we can't blame the regulators for the collapse of Storm Financial who can we blame?

Although I said we can't blame ASIC entirely, we can shift a bit of the blame their way.

You see, the existence of ASIC or any regulator creates more problems than it solves. It's similar to the moral hazard argument. You know the one, that's where banks take risks because they know the government will bail them out.

It's the same with regulators. Regulators don't reduce risks for investors, they actually increase the risk to investors.

The most due diligence 99% of Storm Financial clients would have done is to check the firm had an Australian Financial Services Licence (AFSL). Once that box is ticked the investors would have been happy.

After all, if Storm is regulated by ASIC then it must be OK.

But when these collapses happen, the kneejerk reaction is to insist on more regulation. All that does is ensure a bigger blow-up as more investors do even less due diligence based on the fact the regulations are tighter than before.

What could possibly go wrong?

The fact is there are only three things that can reduce the odds of an unsuspecting investor being caught out: free markets, a free press, and freedom of speech.

Now, that doesn't guarantee investors will be saved from crooks. Whether you have regulators or not, there will always be dodgy characters that will rip off money from investors.

That's just a fact of life, and it can't be stopped.

The problem is, cases such as Storm, Opes Prime, Bernie Madoff and Sir Allen Stanford have happened where there are regulations. What they have also shown is that regulations actually get in the way of the crooks being caught.

As far as we can recall, in these four cases at least, it wasn't the regulators that caught them out, it was the market.

In each case it was either investors becoming suspicious and sounding the alarm, or the complicit banks finally deciding they'd made as much money out of it as they can and they didn't want to play anymore.

Only then do the regulators ride in to try and claim the spoils.

But this is where the mainstream media are also coming up short. Rather than fawning over RBA governors, CEOs, analysts and advisers, they should be grappling with them to find out what's really going on.

Take the following stories from The Australian newspaper. In November 2007, journalist Tim Boreham wrote:

"Unlike its rivals, Queensland-based Storm works on the notion that, like companies, clients should leverage their personal balance sheets and gear up to the extent they sensibly can, and buy up big during market troughs... According to founders, owners and joint CEOs Emmanuel and Julie Cassimatis, Storm enjoyed record inflows in March, when the local market tanked on the back of the Shanghai stock exchange, and then in August when the sub-prime stuff hit."
But then he goes on to write:
"While we can't really see how Storm or its clients would fare any better than others in a prolonged bear market, Storm has so far managed 100 per cent average annual growth... Criterion urges caution on Storm. Call us old-fashioned, but we're unsettled by any growth-through-gearing mantra and the industry buzz is that Storm's fees are a tad on the high side. We're not contending the offer lacks merit, but perhaps there's not enough value to justify rushing the IPO. We'll avoid and have a another look after the December 13 listing."
Boreham could have had a scoop on his hands. "100 per cent average annual growth" is surely something worth following up on for an investigative journalist. But Boreham seems more worried about their fees being "on the high side."

Of course it's easy to say in hindsight. And you could say, "Well, where were you then smarty pants?"

That's a fair call too. We've being trying to catch bigger fish by calling out the banks as institutionalized fraudsters. But the mainstream press doesn't even have that as an excuse.

So, what is their excuse? We don't know for sure. But our guess is they like the kudos of interviewing CEOs and analysts and experts. They like being invited to lunches and corporate functions.

Anyway, less than two months later The Australian wrote:
"The Australian reported last month that the corporate regulator was investigating Storm Financial after hundreds of investors were left owing millions of dollars to margin lenders when the stock market tanked... The Australian Securities and Investments Commission claims 300 Storm clients owe their margin lenders a total of $20 million, with many investors liable for more than the value of their portfolios, it was reported."
It's a perfect example of how it's not possible for regulators to prevent incidents like this from happening.

At what point does the financial advisory firm go from providing high risk investment advice to breaking the law? It's impossible for any regulator to be that close to a company that it can pick that precise moment.

In the case of Storm it was only after everything had hit the fan that ASIC came to the rescue.

But another line from Boreham's story reveals more:
"Storm suffered an odd last-minute hiccup last week when Macquarie Bank withdrew as underwriter."
You have to wonder whether Macquarie withdrew because they were worried about being left with a truckload of unsold stock, or whether they were more worried about being left with a truckload of worthless stock when everything came out into the open.

Look, as I say, it's easy to use Harry Hindsight two years after the event. But the fact remains that if the mainstream press and regulators think the likes of Storm Financial are isolated events then they're kidding themselves.

There's much bigger fish out there waiting to be caught, only they'll only be caught after the event.

Because when you think about it, there's very little difference between what Storm Financial was doing for its clients and what the banks do to their clients - the savers.

I'll have more on that tomorrow!

Cheers.
Kris.

source: Money Morning
http://www.moneymorning.com.au/
 
"Storm's loan practices questioned in 2006, court hears"

"LOAN practices of a Townsville bank for Storm Financial customers were questioned as early as 2006, two years before it collapsed, a court has heard.

Bruce Auty, Bank of Queensland's group executive for group risk, told the Storm Financial public examination in the Federal Court in Brisbane today."

More by Angela Harper from AAP in The Australian here;

http://www.theaustralian.news.com.au/story/0,25197,26271991-12377,00.html
 
clayton4115 said:
"... You see, the existence of ASIC or any regulator creates more problems than it solves. It's similar to the moral hazard argument. You know the one, that's where banks take risks because they know the government will bail them out.

It's the same with regulators. Regulators don't reduce risks for investors, they actually increase the risk to investors.

The most due diligence 99% of Storm Financial clients would have done is to check the firm had an Australian Financial Services Licence (AFSL). Once that box is ticked the investors would have been happy.

After all, if Storm is regulated by ASIC then it must be OK. ..."

Yes, the same as our experiences in managed funds, at the time we made our respective investors, we all seem to have a belief that the regulator would protect us.

"... The problem is, cases such as Storm, Opes Prime, Bernie Madoff and Sir Allen Stanford have happened where there are regulations. What they have also shown is that regulations actually get in the way of the crooks being caught.

As far as we can recall, in these four cases at least, it wasn't the regulators that caught them out, it was the market. ..."


From a video about the guy who complained to the S.E.C. US about Madoff

"... How many times did you send material to SEC? --- May 2000, October 2001, October, November, December 2005, then again June 2007, and finally April 2008.

Despite everything that you did, it still ended up in disaster? --- I feel horrible about the results in this case, it's been a total disaster for the victims.

How long did it take you to know that something was going wrong? --- It took me five minutes to know that it was a fraud. It took me another four hours of mathematical modeling to prove that it was a fraud. What I found out about my dealings with the SEC over eight and a half years is that their people are totally untrained in finance, they're unschooled, most of them are merely lawyers without any financial industry experience.

So, if they're not trained at securities work, then what are they trained at? --- How to look at pieces of paper that the securities laws require. They can check every piece of paper perfectly and find misdemeanors and they'll miss all the financial felonies that are occurring because they never look there. Even when pointed to fraud, they're incapable of finding fraud.

In a bad economy, Madoff's lies simply collapsed under their own weight. No one was investigating Mr. Madoff at the end.

So he turned himself in before anyone in authority began a serious investigation? That's typically how the SEC does it.

They come in after the crime has been committed, they toe-tag the victims, count the bodies, and try to find out who the crooks were after the fact, which does none of us any good.

In each case it was either investors becoming suspicious and sounding the alarm, or the complicit banks finally deciding they'd made as much money out of it as they can and they didn't want to play anymore.

Only then do the regulators ride in to try and claim the spoils. ..."
Click to expand...
 
I have been following this thread since it started and still find it fascinating.

Being 50+ years of age I have been through and experienced a number of market cycles.

I would have to say the most successful of my aquaintances and from what I have seen of those with "REAL" money are those who admit to "selling too early".

As they say, "I might have missed the last 15%+, but I was there for the first 30%+, and not there for the final crunch so by buying back in at my exit point did well am now back well in front".

Seems a simple enough strategy doesn't it? And based on well known observations of market cycles.

It is the old Pareto Principle in action again. 20% of the players retain 80% of the profits.

Landy
 
"Norris regrets Commonwealth Bank's Storm link"

"THE head of the Commonwealth Bank says he regrets the relationship his bank had with Storm Financial and takes some responsibility for what has happened to clients of the former financial planner.

About 54 former Storm clients will settle their claims against Commonwealth Bank today, and about 40 claims per week are expected to be settled from now on."

More by Lucy Battersby in The Age here;

http://www.theage.com.au/business/norris-regrets-commonwealth-banks-storm-link-20091028-hl3m.html
 
"CBA chief under fire over Storm debacle"

"Commonwealth Bank of Australia chief executive Ralph Norris came under attack from a parliamentary committee last night for the bank's "inexplicable" delay in contacting clients of Storm Financial facing margin calls.

Read more by Duncan Hughes in The Australian Financial Review of Octpber 29 2009"

"Contrite Ralph sets record straight"

"Flanked by four senior executives, Commonwealth Bank of Australia boss Ralph Norris was determined to get on the front foot when he appeared before a parliamentary inquiry in Canberra last night to explain the lender's involvement in Storm Financial."

Read more by John Kerin in The Australian Financial Review of October 29 2009
 
Solly said:
"Storm victims say banks should pull heads out of sand"

"Storm Financial victims are calling on banks to pull their heads out of the sand and settle claims for loans that were struck by ``con men''."

More from AAP in the Townsville Bulletin here;

http://www.townsvillebulletin.com.au/article/2009/10/29/90241_news.html
Click to expand...

The quote frm that article Solly, thanks for posting , was

Mr Scattini today likened the tactics used by Storm to those of con men.

``Con men don't force you - they trick you (and) Storm were a pack of con men,'' Mr Scattini said.

He also called on the Macquarie Bank and Bank of Queensland to look at the example set by the CBA.
Click to expand...

gg
 

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