GLOBAL economic uncertainty has forced the Federal Government into a $4 billion rescue of Australia's struggling non-bank lenders.
The Treasurer, Wayne Swan, announced the move last night in a bid to bolster competition in the home lending market, which has collapsed in recent months as funding for non-bank lenders dried up amid the credit crunch.
Mr Swan was immediately forced to defend himself against criticism he had unfairly lambasted the Opposition Leader, Malcolm Turnbull, for floating a similar idea last weekend.
Under the scheme, the Federal Government will buy $4-billion worth of AAA-rated mortgage-backed securities from small to mid-sized bank and non-bank lenders.
Non-bank lenders do not have access to a deposit base like banks do. Instead they bundle up loans and sell them on to other investors, a process known as securitisation, to fund their lending.
Mr Swan last night insisted taxpayers would be getting a "rolled-gold asset" like any other, which would deliver returns over time.
He rejected suggestions the Government had pinched the idea from Mr Turnbull, who floated the prospect of the Australian Office of Financial Management buying mortgage-backed securities in an interview last weekend.
Mr Swan said the Government had been working on the proposal for some time, pointing out that the Government had introduced legislation in June enabling the AOFM - which looks after the Government's liquid assets - to invest in a broader range of securities, including AAA-rated mortgage backed securities.
Mr Swan said the plan had been agreed to at a meeting of financial regulators a week ago. Last Sunday, Mr Turnbull said the Government could follow the lead of the US, which is in the process of establishing a $US700 billion fund to buy back bad debts.
"We've got the capacity to do that through the office of financial management," he said.
Mr Turnbull claimed this week he never meant for the Government to invest in bad loans, only AAA-rated ones.
The origin of the idea is often traced back to a paper released in March by Professor Joshua Gans and Christopher Joye, the head of Rismark International, who has been described as a protege of Mr Turnbull's.
Mr Joye told the Herald last night the Government's plan was identical to the plan put forward in that paper for an "Aussie Mac" style-institution. "We have repeatedly argued that the Government should use the AOFM to implement our Aussie Mac idea.
"Action of this nature will help to improve liquidity in the home loan market and assist in enhancing competition in the market and mitigating the risk of more non-bank lenders withdrawing from the market."
It is understood that Mr Turnbull, as shadow treasurer, sought repeated advice from the authors over their scheme. They have also met with the Government to discuss the plan.
The Australian Bankers Association, which told a parliamentary committee this week that banks had increased their market share amid the funding squeeze, said last night the Government should not be attempting to "pick winners".
The association also said the initiative "exposed taxpayers to the housing market" and warned that the mortgage securities bought could include the type of high-risk loans referred to in the United States as subprime.
