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Storm Financial Group

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Frank Ainslie said:
Hi Doobsy,

I'm not sure what you are disagreeing with in the context of what I have written? Please quote the remarks you disagree with in relation to the margin loan ratio! Thks.
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Okay Doobsy!

I can now see where you are coming from! Distracted by the cricket, I'm afraid!

I have written here on the issue of agency and therefore things should be read in that context. My contention with regard to the May 2007 agreement is that it is not an extension of the original margin loan agreements for the reasons stated. Therefore, the issue here is not with regard to the margin loan ratio which I contend the banks are allowed to alter if circumstances demand, but rather with its affect upon the margin loan agreements between the CBA's Storm customers and the CBA and its affects on the way the CBA and Storm acted in the latter stages of 2008. I will elaborate on this particular aspect in a future posting.

At the same time I will be commenting on the exceedingly high levels the CBA's margin loan ratios were set at when commenting on prudent banking.
 
Solly said:
More by Elisabeth Sexton @ smh.com.au
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Hi Solly,

Here's an article from 1998 which demonstrates just how incompetent Government can be and the fact that despite what has happened in the past, very few lessons are learnt!

By Simon Longstaff – June 1998

"One of the products of the 1980s was a joke that went something like this:
Question: What have you got with eight Australian entrepreneurs up to their necks in sand? Answer: Not enough sand!

I mention this because the fact that this joke was popular in places as far away as the New York Stock Exchange tells us something about the way in which a considerable amount of business was done, in Australia, during the last decade.

Alas, the Alan Bonds and Christopher Skases of the world (Bond is in gaol in Western Australia, Skase is still hiding, from the Australian authorities, in Spain) could not have indulged their own particular craving for excess unless they had enjoyed the steady patronage of a number of financial institutions. Indeed, a number of Australia's leading banks were severely embarrassed by the losses incurred through imprudent lending. However, they have, for the most part, restored their dignity and balance sheets (if not their popularity). Yet, as some of you may recall, not all of the financial institutions survived their own brand of folly during this period.

Let me outline just one powerful example:

The State Bank of Victoria – a government owned bank – owned a subsidiary merchant bank called Tricontinental. When Tricontinental suffered an AUD2.5 billion dollar collapse, the State Government of Victoria ordered a Royal Commission to investigate the circumstances of the bank's failure. Tricontinental was not the only catastrophe to emerge from the 1980s – but it was one of the worst. As Joe Nagy argues, in his book 'In Over Our Heads: lessons from the excesses of the '80s':
It serves as a textbook case: for directors, who should have been aware that Trico was not being managed the way a financial institution should be managed; for auditors, who should have been aware of administrative and control deficiencies; and for governments, who should have avoided getting involved in a high risk business which they knew little about. For a time, it was the nation's largest and fastest-growing merchant bank, a feat remarkably accomplished with the skimpiest internal controls. Incredibly, its parent, the State Bank of Victoria did not conduct any internal audits.

The Managing Director of the State Bank of Victoria was Bill Moyle. He also served as a Director on the Board of Tricontinental. Whatever he may have thought in private, all of his public comments were supportive of Tricontinental and its CEO, Ian Johns. Yet in May 1989, the bank 'self destructed". Again as Joe Nagy argues:

'That this happened should not have come as a surprise to anyone who understood the lending business. What was astonishing was that an experienced banker like Moyle and a reputable accounting firm like Peat Marwick failed to detect the warning signs and take appropriate action.' Later, there would be no shortage of admonition...It subsequently came to light that loans were quickly approved on rubber-stamp credit analysis procedures, even though the borrower was, in some cases, in default.

Corporate governance was another weakness. Confusion existed whether Ian Johns, Tricontinental's Managing Director, was reporting to his board chairman or to Moyle.
The Woodward Royal Commission appointed to investigate the collapse, came to a similar conclusion. In relation to the board it found that:

'The board deliberately accepted high risk in the pursuit of high reward'. The theory was that the high risk would be confined within acceptable limits by skilled managers and staff, and by appropriate supervision by the board. In the event, the performance by both management and board was less than adequate for the strategy which the board had endorsed.

Indeed, the report finds that the Managing Director of Trico treated the board as a group of men to be “placated and manipulated”.

It is worth quoting one other of the Royal Commission's findings before moving on. Unlike the case of Nick Lesson, at Barings, most of the losses suffered by Tricontinental were not the product of deliberately dishonest behaviour by the leading figure, Ian Johns. The Royal Commission found that:

All those decisions of Mr Johns which directly brought about the huge losses suffered by Tricon were made by Mr Johns in the belief that they were in the best interests of the group. He backed his judgement without consulting others; he made reckless decisions on inadequate information; he put his faith in many apparently successful businessmen who proved unworthy of his confidence; and when they seemed to be failing him he was unwilling to admit the possibility of losses. These were the faults of an over-confident gambler, not a criminal.

This is an extremely important point. Major ethical failures are not usually caused by greedy or dishonest people. Instead, the vast majority of these failures are produced by the actions of inadequate or incompetent managers and directors."


This all sounds too familiar. In my years spent in management, I found that the number one factor when a company failed was always 'mismanagement'. The end result was always the same: the companies lost money and the employees were the first casualties.

For those that say we were simple-minded to place our trust in financial institutions, it appears that we are not alone! Many have done so before us and many will follow What's more, many of those have been (and will be continue to be) professional business men and women with far more financial acumen than anyone on this forum. My point is that this can happen to anyone! To believe otherwise is to deny the facts.
 
Frank Ainslie said:
My point is that this can happen to anyone! To believe otherwise is to deny the facts.
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No, what happened to you couldn't just happen to anyone Frank. We have gone over this ad nauseum. The only one denying the facts is you I am afraid. There is so much more to this that what the banks did and didn't do, and you know it. It may not suit your push for justice and more importantly compensation, but that is the unfortunate fact.

At the risk of repeating myself, a high percentage of people who saw Storm saw enough in their strategy to know to steer clear. You have admitted that you waited for written assurances from Stuart Drummond which never came, yet you proceeded anyway. You admitted that you saw no value or benefit in borrowing against your home, yet you did it anyway. YOU DOUBLE GEARED! And as a result, a falling market magnified your losses. And you chose to do all of these things.

The strategy screwed you before the banks did Frank. A SIMPLE, EASY TO UNDERSTAND STRATEGY, which you accepted as being conservative and low risk because thats what Stuart Drummond told you, even though a bit of independent thought and research would have told you the complete opposite. This wasnt some black box, it was a ridiculously simple, yet highly risky strategy. While the relationship between the banks and Storm may not be transparent, a double gearing strategy, using index funds, certainly is.

If only you had have been half as thorough in looking at the strategy before you ploughed your money into it as you are now that you have lost it all.

To borrow your words, "to believe otherwise is to deny the facts".
 
Actually, SJG1974, if the past to be any guide to the dangers of the recent past and present - which seems to be the thrust of the post by Mr Ainslie - it was laid out in an article by Robert A Ferguson in 1994 on the Dangers of Leverage and volatility.

Just a small snippet from the article:

"Leverage [read Debt] increases positive expected returns but it also magnifies volatility. Downside exposure and the chance of disaster are increased."

I suppose in one way it is saying "Respect debt else you will be smashed big time."

A pity that the then advisers to these former Storm clients didn't have that respect.
 

There are (and always have been) plenty of studies/research papers etc. available that show the dangers of leverage if people are/were prepared to look hard enough.
 

The above is a post from exactly 3 years ago.

It would be good if hart2hart could post again to give us an update.

Storm put them into a leveraged margin with Macquarie from the looks of it, and with the meltdown of Storm in the last 3 months of it's existence, these poor folks nest egg went down the gurgler.

It would appear that Storm let them down and Macquarie finished their nest egg off.

What a bloody shambles for these poor folk.

They seem to realise their mistakes, and their poor investing skills, but surely ASIC and the Federal Government owe them some help in recouping any losses from criminal behaviour by either their adviser or the lender.

gg
 
Agree GG I'd be interested in hearing from hart2hart again.

I know there are many others in exactly this position. To be left with nothing in retirement is just heart breaking. The majority of us now know what mistakes we made. Our first mistake was trusting those we thought we could trust. Our other mistakes have been pointed out to us many times on this forum.​

We have learnt to live with this as best we can, however, a good friend said to me recently "you've changed since this happened, you no longer smile and it's although a light has gone out " and I know that's true. It's soul destroying to be ripped off by those you thought you could trust and then told by so many that's it's all our fault because we're greedy mongrels.
 

I would agree with you Harleyquin.

I was ripped off by a Financial Adviser when I was young and starting out, and was devastated.

Luckily I was young and able to recover.

Since then I don't trust anyone giving me advice on my finances, any banks, brokers, suits, governments or agents.

I'm sorry to hear it has affected you so.

Try and regain your spirit.

gg
 
Thanks GG. I wish we'd been young when it happened. It's impossible to recover financially and look forward to doing all the things in retirement that we'd planned. Now it's just basic survival. I no longer have all down days though.

Judd I wish the storm advisors had done their research, after all, thats basically what we were paying them for.

SJ if I'd known that we couldn't rely on a financial advisor, I would have done my own research and just relied on my own knowledge. We found this out too late.
 

Heartless as this comment may seem, it's no use wishing things were different because that will not change anything. Due to recent personal experience you can trust me on that one.

As for the advisers, I would hazard a guess that most would have been aware of the "potential" danger of debt but dismissed it as irrelevant because the culture of Storm appears to have filtered down from the head of the organisation. And that person probably was aware of the research, but then maybe they held a view that they were so much smarter than anyone else in matters of finance, why take heed of those lesser mortals.

Just as an aside, and addressed to no one in particular, conmen do not get you to trust them. They get you to trust in your own judgement. Always be on the alert.
 
Harleyquin said:
It's soul destroying to be ripped off by those you thought you could trust and then told by so many that's it's all our fault because we're greedy mongrels.​
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I can't recall even one post that accused you or any other Stormer of being a 'greedy mongrel'.
Nor can I recall any poster saying 'it's all your fault'. ​
 
I wasn't referring to a post on ASF Bunyip. If you read all media reports, and public comments, from the time this happened you'll soon see that what I'm saying is true.
 

From the above it looks very much like it's the responsibility of clients to monitor their margin call situation.
And that any client who signed the aggreement was giving a committtment to do exactly that.

Whatever the situation in that regard, the fact is that Storm clients had already suffered catastrophic losses well before their accounts reached margin call.
These massive losses were caused by a combination of heavy gearing and plunging market.
 
Harleyquin said:
I wasn't referring to a post on ASF Bunyip. If you read all media reports, and public comments, from the time this happened you'll soon see that what I'm saying is true.
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Fair enough.

Now that I think of it, I do recall one poster on here by the name of 'pilots' who was very vocal in blaming you Stormers 100% for what happened.
Fortunately he hasn't posted on here for a couple of years.
 
Harleyquin said:
SJ if I'd known that we couldn't rely on a financial advisor, I would have done my own research and just relied on my own knowledge. We found this out too late.
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The whole global economy is based on someone selling you something, whether that be physical goods or services. And the job of the seller is really to make the consumer believe they need what it is they are selling. If the consumer doesn't feel they need it, they won't buy it. I guess needs and wants can become blurred sometimes as well.

So really in any form of business, the seller has a vested interest in you buying their product or service. And because of that, there remains a risk that their representations will be tailored around getting the sale, rather than what is best for you. Yes this is conflict, but it unfortunately exists (even though in financial planning it is supposedly being stamped out).

So I don't think it is right to say you can't rely on a financial adviser, but i believe it is fair to say that given the wealth of information at our fingertips these days, you should not soly rely on the representations of any salesman selling you a relatively expensive product or service, without doing a bit of digging yourself. There are many good advisers out there who unfortunately have been tarred with the Storm brush. I think you will find that firms like Storm are the exception rather than the rule.

Certainly not trying to rub your nose in it HQ, and I feel for you given what you and others have been through, I really do, but given the forum has become a bit of a bank bashing exercise of late, just trying to add some perspective.
 
For those who think their situation re Storm is unique here are just a couple of extracts from current threads on this forum today:




 
Julia said:
For those who think their situation re Storm is unique here are just a couple of extracts from current threads on this forum today:
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These stories only verify my opinion that changes to legislation are not going stamp out dodgy investment schemes that separate the unwary from their money.

For example, how do you shut down licensed fund managers who don't have a clue how to make money, but still run managed funds anyway, all perfectly legally?
They're a dime a dozen, you read about managed funds disasters all the time, not only here but in other countries as well.
The only way to shut them down is for gullible people to stop investing in them. And that's just not going to happen - human nature being what it is, there will always be people willing to pay someone else to do all the thinking for them, while they the clients simply sit back and watch the money roll in. Except that so often it doesn't roll in - it evaporates into thin air instead
But that doesn't stop the next lot of punters from stepping up to lay their money on the table.

There are very few people who don't find some appeal in the concept of making money without having to think or work for it.
There will always be investment products to cater for these people, and many of these products will be legal. The incompetence of some of the people running these investments will continue to ensure that some investors will lose money.
But legislation will never make incompetence illegal.
 
I agree with bunyip's comments about not being able to legislate against incompetence.

However, Having said that, you have to weigh that up with the social cost that storm and other failed schemes have caused. The only way to prevent this from happening in the future for a large number of people is for investors to become more educated...
 

Yes, education is one way to equip people with the knowledge and skills to handle their own investments so they don’t get roped in by the rogues and incompetents.
But education itself poses problems too, not the least of them being ‘which education’?

There are plenty of spruikers who charge many thousands of dollars for educational courses about stocks, futures, currencies, options, and real estate investment.
These characters, just like Cassamatis, know that people will pay you big dollars if you convince them that you can make big money for them, or teach them how to make big money for themselves.
I’ve done a few of these courses and I found them to be almost useless. Fortunately I only spent $2500 on the dearest one. I know quite a few people who spent 25 grand on courses, and still couldn't make money from what they learnt.

The only finance and investment education I’ve found to be useful is my own reading and research, combined with trial and error by investing small amounts of money that I could afford to lose. Then increasing my investments as my competence level increased.
But for many people it will all seem too hard, and they’ll pay someone else big money to do it all for them. That’s great if it works out well, but so often it doesn’t – Storm Financial being a good example.
 




You’re wrong again Frank....it couldn’t happen to ‘anyone’, but it could and did happen to people like you who took a reckless gamble by committing hundreds of thousands or in your case millions of dollars to Storm’s strategy without even bothering to properly look into it.
What your ego just can’t accept, Frank, is that the vast majority of people who approached Storm were far smarter and more switched on than you were, and they walked away after reviewing the strategy and assessing the risks.

I’ve always maintained that research and common sense were the keys to uncovering the deadly risks in the Storm model. This research could have been much simpler than you think.

Let’s consider an investor who is reviewing the Storm strategy before signing up.
He’s debt free with a net worth of 1.1 million dollars....500k house, 100k cash deposits, 500k shares.
Storm suggests that he mortgage his home and borrow 400k to expand his market stake to 900k. Then use double gearing to borrow a further 900k against his portfolio.
If he goes ahead he’ll have a 1.8 million dollar market portfolio, with debts of 1.3 million.

His most important consideration should be “How much money could I lose’? Not ‘how much can I make’? HOW MUCH CAN I LOSE’?
As US billionaire Donald Trump says ‘Look after the downside – the upside will look after itself’.

If the market crashed 25% in one day as it did in October 1987, his 1.8 million dollar portfolio would be down by a staggering $450,000 in a single day!
He’d lose 90% of his 500k of base capital.
He’d lose 49% of his original net worth of 1.1 million (when he includes the 91 grand he’d pay Storm in upfront fees.)
Storm’s ‘safety net’ of margin calls would have been useless in preventing these losses – at this stage he wouldn’t be in margin call.

Should he proceed with Storm if his figures revealed the potentail to lose almost half a million dollars in one day? Should he sign on with Cassamatis if it was possible that just one decent market plunge could wipe out nearly all his base capital and almost half his net worth in a single day’?
These figures show the Storm model was a disaster waiting to happen. Less than a minute doing some figures on a pocket calculator would have exposed Storm as liars in claiming they had a low risk and conservative strategy.

How about if the market had crashed 50% in just over a month (as it did in 1987). In just a few weeks his losses, including Storm’s 7% fees, would be 991 thousand dollars (almost twice his initial capital base of 500 grand). His original net worth would be down by 90%. And that’s without accounting for the fact that he’d be in margin call some time ago.
If he somehow managed to meet any margin calls, the money outlaid to do so would have increased the losses. If he sold some of his portfolio to meet margin calls, he’d take a huge loss on the portion sold.
If the margin call wasn’t met, his lender would sell down some of the portfolio at a big loss.
If he was in margin call but didn’t receive one, sooner or later part or all of his portfolio would be sold down for substantial losses.

Whichever way it went, even if margin calls had been made on time, he’d suffer huge losses due to the combination of heavy gearing and a collapsing market. Lack of timely margin calls may have added to the carnage, but the real damage would be done by heavy gearing in a bear market.

How about your own situation, Frank. The 140 grand you paid Storm in fees suggests that you had some 2 million dollars in the market. How long would it take you to work out that a 1987 style slump would lose you half a million dollars in in a single day?
2 million dollars divided by four would give you this information. How long to work out that simple calculation Frank...... ten seconds to work it out on a pocket calculator? 2 or 3 seconds to do the sum in your head?

Almost unbeleivable, isn’t it Frank, that just ten seconds of research, yes, 10 seconds, could have uncovered the deadly risk you’d be taking if you implemented the Storm strategy!

How about if the market went down 50% in a few weeks as in the ‘87 crash – your loss would have been 1 million dollars, plus margin calls and fees paid to Storm.
How’s that ‘low risk and conservative’ Storm strategy looking now?
Do you still claim you had now way of knowing the risks?
Do you still claim that even savvy investors couldn’t have avoided being caught by Storm?

You didn’t know that the ‘87 crash wiped 25% off the market in one day and 50% in just over a month? Well you should have known Frank, you were in your mid forties in 1987 and you witnessed the event through the extensive media coverage at the time, just like I did.
But if your memory failed you, then a quick search on Google would have given you the 1987 figures.
Prior to committing millions of dollars to Storm’s strategy, it would have been prudent, don’t you agree, to put a small amount of time and effort into finding out just what the market was capable of dishing out to you?
By failing to do so you took a big gamble that you could have easily avoided.

As it turned out, the 2007/08 crash was much slower than 1987, but even more severe in total with a fall of 56%.
But the time frame is irrelevant – a 25% fall is a 25% fall, and a 50% fall is a 50% fall no matter how long it takes.

Frank, the bottom line is that not just ‘anyone’ could have been caught out by Storm, but gamblers like you certainly could be, and were.
Ten seconds of research, or half an hour if you include Google time, could have warned you to avoid Storm like the plague.
 
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