By Jamie Freed and Colin Kruger
IN THE words of its chief executive, Mike Smith, yesterday was not ANZ's finest hour.
Two of the bank's most senior executives resigned "effective immediately" after a review of its securities lending business - including its relationship with the failed margin lender Opes Prime - found it failed to properly manage the risks to its finances and reputation that were involved.
The board and chief executive were absolved of responsibility in the report.
But ANZ's chief risk officer, David Stephen, the head of its institutional banking division, Peter Hodgson - both direct reports to Mr Smith - and six other employees left yesterday.
Others faced disciplinary action such as formal notes on employment records and pay cuts as a result of the review.
The review was announced in April after the Opes Prime failure revealed the extent of ANZ's exposure to the high-risk securities lending business and potentially serious losses.
The bank was left with big stakes in illiquid stocks and damage to its reputation as clients of the failed brokers claim misrepresentation and threaten to drag ANZ through years of litigation.
The report drew attention to a series of failings with the bank's securities lending and risk oversight divisions, but Mr Smith insisted that the report cleared ANZ with regard to its legal battles.
"Our advice is that we are in a strong legal position and this report has done nothing to alter our view," he said.
Like other banks, ANZ was involved in standard securities lending to allow large investors to settle short sales and to provide margin loans over blue-chip stocks to retail investors.
But its securities lending division also provided equity financing to brokers like Opes Prime and Primebroker which accepted any Australian-listed stock, no matter how tiny and illiquid, as security on extremely high loan-to-valuation ratios.
In turn, these brokers were able to provide margin loans to their clients, but ANZ kept the title to the shares in the event of a collapse. The failed broker's clients are suing, claiming they were led to believe they retained beneficial ownership of the shares.
In one of the most damning findings, the ANZ report pointed to a lack of understanding of equity financing throughout the bank, even by most staff in the securities lending division involved with the specific business.
"The bottom line is we were in a business that we never should have entered in the first place," Mr Smith said.
"The risks weren't understood and the risks weren't properly managed. Occasionally you get elements of a culture which … are a little rogue."
ANZ's equity financing exposure rose from $33 million in June 2002 to $771 million in March 2005, covering loans to a number of brokers. A review into equity financing by an ANZ risk officer in March 2005 led to it not taking on any new clients.
There was also a recommendation to impose credit limits on the existing clients. But the credit limits were not imposed for a majority of the brokers until mid-2006, and by then ANZ's exposure had doubled to more than $1.4 billion. It peaked at $2 billion in August last year.
The report also faulted ANZ's internal reporting of its exposure to equity financing. Mr Smith said it was common within the industry to report only 10 per cent of the total exposure to the most common type of securities lending - scrip lending, which is generally backed by cash.
But ANZ's securities lending division also applied that reporting to its equity financing division, which meant its $2 billion exposure in August last year was reported as $200 million of exposure in documents seen by senior management and the board. The report said the securities lending and equity finance businesses became an important source of revenue and profit for ANZ Custodian Services over time, and further expansions were encouraged by management.
But Mr Smith said the division was a tiny part of ANZ's overall business and it probably contributed less than $10 million to the bank's earnings last year.
He said ANZ remained on track to report $3 billion in profits and was one of only 18 banks in the world that still had an AA credit rating.