Storm Financial Group

Solly said:

bunyip, I have had quite lengthy discussions with one Stormer about their understanding of the Storm strategy. What became very apparent to me was that they truly believed that they were not in a high risk strategy and that there were safeguards in place to cover any market corrections that happened. They explained to me that they believed that the Storm strategy had worked in previous market corrections.

They had confidence in the advice that the company was giving and the banks involved. They believed that the banks would not lend the money if the strategy was flawed, especially when housing loans, margin loans and Storm badged funds all fell under the umbrella of the one of the most respected banks in Australia.

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Solly - I think it's pretty clear that Stormers went into a business they didn't understand, without doing sufficient research first.

If I employed a manager to run my business, I'd still make sure I knew something about the business myself, regardless of how competent I thought my manager was.
Knowing something about my business, it would be clear to me if the manager was doing a shoddy job, and I'd step in to save the situation. Under no circumstances would I sit back and do nothing while an incompetent manager allowed my business to go broke.
Stormers could have and should have done that too - stepped in and taken control from their clearly incompetent manager while their situations were still salvageable.

They explained to you that they believed the Storm strategy had worked in previous market corrections. Had they done their research properly and looked at the 1987 crash, they would have realised that the strategy would not cope with a similar market slump.
The fact that some of them believed they were not in a high risk strategy is further evidence of their lack of research and understanding of their business.
Large margin loans invested in the stockmarket is definitely a strategy that involves significant risk - particularly when neither they nor their manager took defensive action once the market turned bearish.

The banks lent the money because the strategy was OK while the market kept rising. If the market turned bearish, then the nature of margin loans meant that the banks pretty much had themselves protected.
I believe the bank's assessment was that the strategy wasn't flawed - they had themselves covered from all angles, so it was good lending business from their perspective.

Solly said:

shiftyphil, Are you suggesting that Stormers deliberately misrepresented their income on their loan documents?

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Maybe not deliberately, but they allowed Storm to do so on their behalf.

(IMO their's plenty of blame to go around on all sides - the clients should not have swallowed Storm's flashy sales pitch, the banks should have verified what they were told, and Storm should never have tried to pass off "leverage to the max and cross your fingers" as a conservative investment strategy.)

Mash said:

Bunyip ... did u read the post by cascade..... December 2008.... that really is no surprise..... that's when the proverbial hit the fan..... as has been pointed out adnausium..... those loans could only be serviced by the income from the investments.... once the investments went south then no more income ...... sorry wasting my time trying to explain to your ilk

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Ah Mash - I see you've lost none of your talent for being rude and obnoxious.
And as usual, you imply that those of us who were savvy enough to avoid being snared by Storm are completely stupid, whereas you Stormers were not, but were merely victims of circumstance and of other peoples actions.
As usual, from your perspective it's all someone else's fault, but never your own.

Perhaps I should remind you that you had a wealth of 12 million dollars through your Storm investments, but were not switched on enough to remove a substantial portion of that wealth to safe investments.
OK - you made an error of judgement, as we all do sometimes - but please refrain from implying that everyone who is critical of the Storm situation is stupid, but you're not.

The market fell for a further four months after December 2008. Storm clients were in margin calls that weren't being met. How much longer do you think the banks should have carried you?
The market could have fallen for another year, it could have fallen another 50 or 60% - those were unknown factors at the time. How long do you think the banks should have kept those loans going? Their money was at risk. They're public companies that are answerable to shareholders.
The US market lost about 90% of its value in the 1929 slump, and took 25 years to recover those losses. That's the situation the banks were faced with - the possibility of the same thing happening again this time, leaving them with massive losses if they took no action to recover their loans.

You have a think about that next time before you before you criticise the banks for taking moves to recover their loans, and before you go taking a shot at 'people of my ilk'.
People 'of your ilk', Mash, need to open your eyes and realise that you yourself bear a significant degree of responsibility for the situation you got yourself into with Storm.
It is not all somebody else's fault.

bunyip said:

Solly - I think it's pretty clear that Stormers went into a business they didn't understand, without doing sufficient research first.

If I employed a manager to run my business, I'd still make sure I knew something about the business myself, regardless of how competent I thought my manager was.
Knowing something about my business, it would be clear to me if the manager was doing a shoddy job, and I'd step in to save the situation. Under no circumstances would I sit back and do nothing while an incompetent manager allowed my business to go broke.
Stormers could have and should have done that too - stepped in and taken control from their clearly incompetent manager while their situations were still salvageable.

They explained to you that they believed the Storm strategy had worked in previous market corrections. Had they done their research properly and looked at the 1987 crash, they would have realised that the strategy would not cope with a similar market slump.
The fact that some of them believed they were not in a high risk strategy is further evidence of their lack of research and understanding of their business.
Large margin loans invested in the stockmarket is definitely a strategy that involves significant risk - particularly when neither they nor their manager took defensive action once the market turned bearish.

The banks lent the money because the strategy was OK while the market kept rising. If the market turned bearish, then the nature of margin loans meant that the banks pretty much had themselves protected.
I believe the bank's assessment was that the strategy wasn't flawed - they had themselves covered from all angles, so it was good lending business from their perspective.

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bunyip, my experience with the Stormers is that investing was not their core business and their primary skills lay elsewhere. But I believe that there was a lot of trust with what they were being told and especially in relation to that all the safeguards were there. Does this excuse them for where they ended up? Caveat Emptor.

But do they deserve the punishment that is being administered to some? I hope that the legal and regulatory régimes successfully resolves this issue.

I look forward to the end of May when Mr Tony D'Aloisio's team will add more clarity.

shiftyphil said:

Maybe not deliberately, but they allowed Storm to do so on their behalf.

(IMO their's plenty of blame to go around on all sides - the clients should not have swallowed Storm's flashy sales pitch, the banks should have verified what they were told, and Storm should never have tried to pass off "leverage to the max and cross your fingers" as a conservative investment strategy.)

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Ok shiftyphil I see what you mean.

Solly said:

bunyip, my experience with the Stormers is that investing was not their core business and their primary skills lay elsewhere. But I believe that there was a lot of trust with what they were being told and especially in relation to that all the safeguards were there. Does this excuse them for where they ended up? Caveat Emptor.

But do they deserve the punishment that is being administered to some? I hope that the legal and regulatory régimes successfully resolves this issue.

I look forward to the end of May when Mr Tony D'Aloisio's team will add more clarity.

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Solly - I think the trap that people fall into with the stockmarket is that they don't approach it as a business that has to be researched, planned and managed just like any other business.
For some reason they think that normal rules of business don't apply to investing in the stockmarket.
I was the same - the first stocks I ever bought, I had no idea what I was doing. I did no research, preferring to leave it to others. I practised no money management. Sometimes I bought on tips from other people. I had no business plan beyond burying and holding in the hope that what I bought would go up.
I lost money. Fortunately I only made small investments, and sustained only small losses. I tentatively dipped a toe in the water until I learnt what to do and what to avoid doing.
Where Stormers came unstuck was in going in too big, too fast, before they learnt their business.
Many of them were successful in other business before their venture into the stockmarket. The same rules they applied to achieve success in those businesses, should have been implemented in their stockmaret business as well.

'Caveat emptor' indeed.

bunyip said:

That's interesting, considering the numerous complaints from Stormers about banks advancing them loans that they couldn't afford to service.

Whether or not they could service their loans, it's the responsibility of every borrower - Stormers or otherwise - to ensure they'll be able to meet their loan commitments before they apply for a loan. Otherwise they shouldn't make the loan application in the first place.
If their loan application is successful, but they find themselves unable to meet the loan commitments, I think it's a bit rich if they then criticise the bank for lending them the money.

That's a bit like me asking a farmer to let me ride his horse. But then I blame the farmer when I fall off the horse and break my arm.

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Bunyip,

I certainly agree with you on principle, however feel maybe it is also either a little simplistic or not a reflection of the reality of many who take out loans. Although a different circumstance, I do wonder what will happen to the tens of thousands of 1st time buyers in say two years time if (and when) interest rates hit 10 pc plus as predicted. Did the banks have any responsibility to ensure these customers would be able to service a home loan at that rate compared to the less than 5 percent the customers "bought in at".

No doubt they (the banks), and most of us realised what the inevitable rebound would do to interest rates yet how clearly would this have been articulated to customers who may not be so financially savvy. It is not my intention to be rude or out of line here however your analysis appears to me to inadvertently imply that the banks have no responsibility to loan responsibly. Was the GFC not a direct result of ill-informed and uneducated customers receiving loans via irresponsible lending practices.

Having only relatively recently purchased our first home I certainly found it interesting that not one lender I spoke to attempted to demonstrate to me what an interest rate rise would cost, they made no effort to seek to clarify my understanding of financial systems, and most were very circumspect in their discussions about loan repayments. Did they have any obligations here ? The Banking code of practice certainly implies one however it is only “code of practice”.

They did however, some more aggressively then others, try to lend me what blind Freddy could see was a ridiculous amount of money. An amount that would not have been at all serviceable on the stated (and accurate) income I listed, with even the slightest of rate rises.

Do they have any obligation to check the serviceability of the loan, or should they instead aggressively loan to anyone and everyone secure in the knowledge that they stand to loose nothing when it all goes up the creek.

Are we in Australia headed for a repeat of the GFC in a couple of years, or will some of us just be lucky enough to find a glut of mortgagee houses hitting the market.

bunyip said:

Solly - I think the trap that people fall into with the stockmarket is that they don't approach it as a business that has to be researched, planned and managed just like any other business.

Where Stormers came unstuck was in going in too big, too fast, before they learnt their business.
Many of them were successful in other business before their venture into the stockmarket. The same rules they applied to achieve success in those businesses, should have been implemented in their stockmaret business as well.

'Caveat emptor' indeed.

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Again I agree Bunyip, however many many were not successful in business at all, with very little if any business knowledge and for some even the capacity to spend a long time researching was not their. And even if the did they may well have come to the conclusion as many did that this strategy was and is still heavily used by many very successful and now rich investors. Rather many existed much of or their whole working life in a PAYE environment.


They saw a financial advisor who they perceived was responsible for knowing the business". Much has been made here and in the media regarding the way the CBA, or more specifically CGI liked to be "seen" at Storm events often providing relatively healthy sponsorship. They were happy to attach their brand to this model and deliberately or otherwise this gave the impression to many that Storm could be trusted and dare I say, knew what they were doing.

For many, this endorsement in itself was sufficient, naively as it is, to feel secure going with this product.

The Ross Goodridge letter available on the SICAG site outlines the rudiments of an alternate plan to that of Slater and Gordon.

http://sicag.info/RIG ltr to SICAG 17 3 10.pdf

I am not a Commercial Lawyer or an expert in Margin Loan Law, however Goodridge's brief explanation of some of the points on which Stormers could challenge the banks, does make a considerable amount of common sense.

Damien Scattini has spent considerable time on Stormers behalf negotiating an agreement whereby they would maintain possession of their homes until death but lose their investment capital. For this he is to be congratulated.

I believe Manny is in favour of the Goodridge approach, under Levitt Robinson Solrs. This may argue against this avenue as Manny Cassimatis' judgement calls in the past have been proven to be "brave" in the extreme, and arguably led to this debacle.

These are difficult decisions for battered, many elderly and unwell, Stormers to make.

gg

Very interesting letter indeed.

What baffles me is why no one has actuallly taken this to litagation yet. Surely all this needs is one case to test it in the courts. Is everyone holding out for the ASIC report ? Surely the banks will show their true colours once this actually goes to court, and a few now ex cba employees are required to give evidence ? Throw in a few injuctions regarding the seizure of property etc...

specialed said:

Having only relatively recently purchased our first home I certainly found it interesting that not one lender I spoke to attempted to demonstrate to me what an interest rate rise would cost, they made no effort to seek to clarify my understanding of financial systems, and most were very circumspect in their discussions about loan repayments. Did they have any obligations here ? The Banking code of practice certainly implies one however it is only “code of practice”.

They did however, some more aggressively then others, try to lend me what blind Freddy could see was a ridiculous amount of money. An amount that would not have been at all serviceable on the stated (and accurate) income I listed, with even the slightest of rate rises.

Do they have any obligation to check the serviceability of the loan, or should they instead aggressively loan to anyone and everyone secure in the knowledge that they stand to loose nothing when it all goes up the creek.

Are we in Australia headed for a repeat of the GFC in a couple of years, or will some of us just be lucky enough to find a glut of mortgagee houses hitting the market.

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That's very disappointing behaviour on the part of the banks.
Did you challenge them on their attempts to lend you more than you obviously were able to service?

Certainly reinforces the need to take responsibility for our own decisions and never to assume anyone else has our interests in mind.

"Storm index fund wind up unlawful
New claims released"

"The Commonwealth Bank of Australia (CBA) may not have acted lawfully in winding up its Storm Financial (Storm) badged index funds, Sydney barrister Ross Goodridge has claimed."


More by Kate Kachor in Investor Daily here;

http://www.investordaily.com.au/cps/rde/xchg/id/style/8972.htm

Julia said:

That's very disappointing behaviour on the part of the banks.
Did you challenge them on their attempts to lend you more than you obviously were able to service?

Certainly reinforces the need to take responsibility for our own decisions and never to assume anyone else has our interests in mind.

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Certainly agree with you Julia. The problem is that not everyone has the capacity to make informed decisions and we rely on the good faith, expertise and professionalism of others. When I buy a plane ticket I expect to travel safely, I'm able to fly small planes but when I hop on a Jumbo I am paying for someone to provide me a service, and hope the regulatory systems in place will offer added security. I should not have to research every pilot to check they are ok. I rely on the good name of the Airline. Does this mean, that when the plain crashes becauses of poor safety checks I shouldnt sue because I made an informed decision. The key is being able to be informed, and believiing what you have been told. Much of this storm fiasco appears to be about being informed, and acurately informed. Whlie there are many who used storm who were certainly new to investing and didnt research, there are also many who believed they were well informed, had at least a sound understanding on finance, but relied on the information sold to them by CBA and Storm. Any amount of research would have led many to the same conclusion, and they still would have invested. For many of the more informed the key to their security was the Margin call. This is front and centre of this debate. Again it is interesting noting the elements of the letter refererd to above that relate to margin calls



I didn't challange but should have challanged them . Would love to now reflect on their responses. Having said that it was within the last ten years that my bank encouraged me to upgrade from my Gold to a Platinum visa. Limit raise from 9 to 21 thousand. Nothing wrong with that except at the time I was back studying, living off a part time hospitality job, collecting Ausstudy and living with the folks. And they didnt want proof of income. This was one of the Big 4. After this nothing surprises me regarding the predatory nature of banks....

specialed said:

Bunyip,

I certainly agree with you on principle, however feel maybe it is also either a little simplistic or not a reflection of the reality of many who take out loans. Although a different circumstance, I do wonder what will happen to the tens of thousands of 1st time buyers in say two years time if (and when) interest rates hit 10 pc plus as predicted. Did the banks have any responsibility to ensure these customers would be able to service a home loan at that rate compared to the less than 5 percent the customers "bought in at".

No doubt they (the banks), and most of us realised what the inevitable rebound would do to interest rates yet how clearly would this have been articulated to customers who may not be so financially savvy. It is not my intention to be rude or out of line here however your analysis appears to me to inadvertently imply that the banks have no responsibility to loan responsibly. Was the GFC not a direct result of ill-informed and uneducated customers receiving loans via irresponsible lending practices.

Having only relatively recently purchased our first home I certainly found it interesting that not one lender I spoke to attempted to demonstrate to me what an interest rate rise would cost, they made no effort to seek to clarify my understanding of financial systems, and most were very circumspect in their discussions about loan repayments. Did they have any obligations here ? The Banking code of practice certainly implies one however it is only “code of practice”.

They did however, some more aggressively then others, try to lend me what blind Freddy could see was a ridiculous amount of money. An amount that would not have been at all serviceable on the stated (and accurate) income I listed, with even the slightest of rate rises.

Do they have any obligation to check the serviceability of the loan, or should they instead aggressively loan to anyone and everyone secure in the knowledge that they stand to loose nothing when it all goes up the creek.

Are we in Australia headed for a repeat of the GFC in a couple of years, or will some of us just be lucky enough to find a glut of mortgagee houses hitting the market.

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Specialed

Ah yes, the banks are notorious for aggressively pushing their products, but so lots of other businesses.
You go to MacDonald's (not that I have in the last eight years or so), order your meal, and then their well trained sales staff invariably ask 'And would you like drinks with that'?
And of course many people go 'ummmm - yeah, OK'.
It's an aggressive sales pitch to sell you more of their products, and it works more often than not.

Last time I bought a new pair of shoes, they tried to also sell me some outrageously priced U bute product to rub on them to keep them looking good. I told them no thanks, I have plenty of shoe polish at home. Then they tried to convince me that their product was far superior to regular shoe polish!
Three or four customers who bought shoes while I was trying on mine, all copped the same aggressive sales pitch.

Any woman whose been to hairdresser will be aware of how they push expensive hair care products to keep that new hairstyle looking 'just right'.

Banks are doing the same thing - pushing their product in an attempt to sell as much as possible.

It's an interesting question - how much responsibility do banks have to explain the possible consequences of interest rates rises?
Or for that matter, how much responsibility do they have to explain various other factors that could affect a borrowers ability to service their loan?

For example, when I borrowed half a million dollars to buy a rural property, did the banks have any responsibility to explain what effect a drought would have on my income, and thus my ability to meet my loan commitments?
Or did they have any responsibility to explain the possible consequences of a slump in cattle or wool or grain prices?

When a young couple apply for a home loan, do the banks have any responsibility to explain that the birth of a couple of kids a bit further down the track could take the woman out of the workforce, stretch their finances, and perhaps result in them struggling to service their loan?

Where does the responsibility of the banks start and end in this regard? I don't have the answer - it's a grey area.
The banks would say, understandably, that it's the responsibility of borrowers to take into account all possible contingencies when applying for a loan.

My view is that when applying for loans, we need to be painstaking in our planning and research, make sure we know the facts and have allowed for all possibilities, don't rely on banks to point things out to us.
If we make a choice to borrow money for whatever purpose, then the onus is on us, first and foremost, to ensure that we can service the loan not only now, but also in the future when circumstances may have changed.

My parents had a saying...

Love all but trust few
Always paddle your own canoe

In the world of loans and finance and investment, 'paddle your own canoe' is a good policy to adopt.
Caveat emptor.

specialed said:

Again I agree Bunyip, however many many were not successful in business at all, with very little if any business knowledge and for some even the capacity to spend a long time researching was not their. And even if the did they may well have come to the conclusion as many did that this strategy was and is still heavily used by many very successful and now rich investors. Rather many existed much of or their whole working life in a PAYE environment.


They saw a financial advisor who they perceived was responsible for knowing the business". Much has been made here and in the media regarding the way the CBA, or more specifically CGI liked to be "seen" at Storm events often providing relatively healthy sponsorship. They were happy to attach their brand to this model and deliberately or otherwise this gave the impression to many that Storm could be trusted and dare I say, knew what they were doing.

For many, this endorsement in itself was sufficient, naively as it is, to feel secure going with this product.

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Specialed

Your post sums up the main reasons why Stormers got into trouble - naivety, lack of research, lack of experience.

There are any number of reasons for this. The bottom line, however, is that you'd better know what you're doing if you're going to seriously invest in something as volatile as the stockmarket, or for that matter, any other business.
If you don't know what you're doing, then poke in slowly with tiny investments until you learn the ropes.

The results of going unprepared and inexperienced into any business can be catastrophic, regardless of the reasons for your lack of preparation or experience, and irrespective of whether you run the business yourself or employ the services of a manger.

specialed said:

I didn't challange but should have challanged them . Would love to now reflect on their responses. Having said that it was within the last ten years that my bank encouraged me to upgrade from my Gold to a Platinum visa. Limit raise from 9 to 21 thousand. Nothing wrong with that except at the time I was back studying, living off a part time hospitality job, collecting Ausstudy and living with the folks. And they didnt want proof of income. This was one of the Big 4. After this nothing surprises me regarding the predatory nature of banks....

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We all receive invitations to upgrade our credit cards all the time.
We always have the choice of whether to accept such a suggestion, or to be realistic about what we can afford.

Julia said:

We all receive invitations to upgrade our credit cards all the time.
We always have the choice of whether to accept such a suggestion, or to be realistic about what we can afford.

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So true. And so it is with any loan, whether it's for market investment through someone like Storm Financial, or for a home loan or a car loan or whatever - we always have the choice of whether to accept what the lender is offering, or to be realistic about what we can afford.

People who are unrealistic about what they can afford, or simply don't know because they haven't done their homework, have to accept the consequences of their decision, not shovel the blame off on to someone else.

'caveat emptor' - a principle in commerce: without a warranty the buyer takes the risk.

To the best of my knowledge, the banks gave no warranty regarding the suitability of their loans for Storm Financial clients.

Again to the best of my knowledge, Storm Financial gave no warranty as to the suitability of their product to their clients.

In the case of both the banks and Storm, it appears to have been a case of 'caveat emptor'. Or in other words, 'Buyer beware, there's no warranty here - do your own research to decide if what we're offering is suitable for your needs.'

bunyip said:

'caveat emptor' - a principle in commerce: without a warranty the buyer takes the risk.

To the best of my knowledge, the banks gave no warranty regarding the suitability of their loans for Storm Financial clients.

Again to the best of my knowledge, Storm Financial gave no warranty as to the suitability of their product to their clients.

In the case of both the banks and Storm, it appears to have been a case of 'caveat emptor'. Or in other words, 'Buyer beware, there's no warranty here - do your own research to decide if what we're offering is suitable for your needs.'

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I suppose my questions is then..... whats all the fuss about ? why the resolution process, why does the CBA seem keen to aviod litagation, why the interest by ASIC, etc etc etc if it is simply a case of buyer beware ?

specialed said:

I suppose my questions is then..... whats all the fuss about ? why the resolution process, why does the CBA seem keen to aviod litagation, why the interest by ASIC, etc etc etc if it is simply a case of buyer beware ?

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You'd have to ask them.

I make no claim that the banks are blameless - my only claim in regard to the banks is that all the blame should not be levelled at them.