A GOOD part of the reason the financial world is in turmoil is because of a collapse in trust. Not only is the trust of the public in their financial institutions splintering, but trust between banks and financial institutions has failed, strangling liquidity and confidence in every transaction. That leaves regulators having to step into the breach.
Governments and regulators can, in good part, blame themselves for their predicament. Their job is to regulate. They allowed Wall Street and powerful financial lobbies around the world to believe they had things in hand with their leverage, that they did not need regulation.
Such was the Byzantine complexity of the structured finance deals and assorted high-finance transactions that corporate watchdogs, the world over, simply went missing in action. They could not cope. Cowed by the apparent brilliance of the investment banking fraternity, they barely tried.
Such is the crisis of confidence that it would be likely the Australian Securities and Investments Commission and the disturbingly low-profile Australian Prudential Regulation Authority must be contemplating the prospect of having to broker a deal for the likes of Commonwealth Bank to ride to Macquarie's rescue. Essential infrastructure assets are at stake, plus the superannuation of an entire nation.
As the once-mighty financial engineers fall apart and ASIC uselessly chases rumour-mongers it reckons are destabilising Babcock & Brown and Macquarie Group, research from RiskMetrics Group drills to the heart of the problem — neglect to the point of complicity.
ASIC and the ASX let these paper-shufflers and their fast imitators, Allco, MFS and Centro, get away with whatever they wanted in pursuit of their fast buck. They granted myriad waivers from normal disclosure and, even as financial stocks began to get the death wobbles, have refused to force them to produce management agreements over their satellite stocks.
In a study released in April last year, RiskMetrics found externally managed entities (satellite stocks such as Macquarie Airports, Macquarie Infrastructure Group and Babcock & Brown Infrastructure) accounted for 14.3% of waivers granted in the study period (July 2005 to December 2006).
Macquarie and Babcock entities accounted for 10.4% of waivers granted. The top 10 waiver seekers in the study period included: Macquarie Media Group (No. 1), Spark Infrastructure (2), Challenger Infrastructure Fund (4), DUET Group (6), Babcock & Brown (9), and Babcock & Brown Wind Partners (10).
In its latest research, RiskMetrics shines the torch on the regulators' failure to demand disclosure of pre-emptive rights over the underlying assets controlled by the financial magicians, the constitutions that are fundamental to shareholders' rights, and information on how a manager can be removed — including the impact on debt covenants.
An example in the report is Babcock & Brown Infrastructure (BBI). Its price is 24.5¢ a unit versus net tangible assets of $1.28. In a normal situation, where the regulatory largesse of myriad waivers had not occurred, a takeover bidder could come on the scene and restore BBI's price.
Had the regulator insisted that no special conditions applied, the unit prices of these sorts of things would have been sustained at higher levels simply on the prospect of a takeover. No such luxury for investors.
The report notes, for instance, that the Macquarie satellites MAP, MIG, MCQ, MMG and MCG all required waivers from ASX Listing Rules 6.8 and 6.9 (the "one share, one vote" listing rules) as all entities incorporate special voting shares giving the manager the right to appoint a majority of the directors of the companies within the structure.
The principle of one share, one vote is essential to the efficient functioning of markets but it seems the ASX was more interested in appeasing the investment banks that promoted these schemes because they delivered large turnover to the exchange and therefore profit.
Despite the concern in the corporate governance community and in some parts of the media, ASIC (Macquarie's tenant at One Martin Place in the heart of Sydney's central business district) did nothing.
Clearly the Government needs to stop dithering and politicking in the face of this full-blown financial crisis and breakdown of regulatory framework. It needs to get bipartisan support and quickly set up an inquiry staffed with the best minds available and briefed on how to best handle the avalanche of collapses that is upon us. New laws, new regulators, new people and a new approach are required to meet the greatest challenge to the financial system since 1929.
