IT began as far back as the Global Financial Crisis (GFC) in 2008 but festered under the surface until erupting locally in October last year.
It was a virus of financial crisis that first claimed Banksia Securities, which went into receivership on October 25 and then spread to fellow non-bank debenture issuer Southern Finance, which had to sell to the Bendigo and Adelaide Bank last month.
The victims included more than 16,000 Banksia investors, who stand to lose up to half their money.
Also affected were 47 staff at Banksia’s 10 offices throughout Victoria, including those at the Warrnambool office, who have been made redundant.
Southern Finance investors appear to have been more fortunate, with the funds from the planned sale of the company to the Bendigo and Adelaide Bank appearing to cover the repayment of investments to 7700 account holders.
Not so lucky were about 30 staff at Southern’s six offices in western Victoria and Mount Gambier who have, or will, lose their jobs.
Other casualties include the directors and auditors of the failed Banksia Securities and associated Cherry Fund companies who are facing a class action legal case by the company’s 16,000 investors for damages for allegedly running the companies improperly.
Southern Finance was majority owned by its five directors, who included prominent south-west lawyers, and valued its assets before the sale about $290 million.
The sale price to the Bendigo and Adelaide Bank has not been disclosed, so whether the directors lost a significant amount on what their shareholding was valued before the crisis is unknown.
Southern got dragged into the crisis after a run by investors to withdraw their funds following the collapse of Banksia Securities.
The trustee for Southern, Sydney-based The Trust Company, stepped in and convinced the Federal Court to suspend investors’ access to their funds for four weeks.
The freeze enabled Southern to have viable assets to sell to the Bendigo and Adelaide Bank.
What’s left after the virus hit is a finance industry in Warrnambool without two companies that played a significant part in the local economy for decades and, in Southern’s case, since the 1890s.
So how did these financial losses come about?
A flippant answer would be to suggest there was a big gap between the misplaced trust of investors and the big risks being taken by the non-bank debenture issuers.
Both Banksia Securities and Southern Finance were the products of the mergers of the mortgage practices of legal firms.
Banksia evolved in 1968 from the mortgage arms of Morrison and Sayers in Kyabram, Warrnambool’s Maddens Lawyers, Ballarat’s Heinz and Partners and Geelong’s Harwood Andrews and Statewide Secured Investments.
Southern included the combination of the mortgage practices of the superseded Mackay Taylor firm with Taits Legal.
Law firms handle lots of money — money from estates, property sales and damages claims, some of which clients invested in the firms’ lightly-regulated mortgage practices.
Many of the Banksia investors The Standard spoke to said they invested in Banksia or its previous entities on the advice of people they trusted — solicitors or financial planners.
Many invested decades ago, rolling over the term of their debentures and pocketing the interest payments. Meanwhile, the debenture issuers continued to grow and take bigger risks.
While the Australian Securities and Investments Commission (ASIC) recommended that non-bank debenture issuers have minimum equity ratios of eight per cent, and 20 per cent if they were lending more than 10 per cent of funds for property development, both Banksia and Southern ignored the non-mandatory ratios.
The ratios are a buffer against loans that are not repaid and are a measurement of the difference between the amount of money received from investors and that lent out to borrowers.
Banksia had an equity ratio of 3.5 per cent in September while Southern, which was involved in financing property development, had an equity ratio of 1.99 per cent last March.
There have been no claims of impropriety made against Southern. But there have been plenty of concerns about Banksia’s operation.
Tony McGrath, from the receivers McGrathNicol, said he was concerned that Banksia Securities had lent money to “an internal vehicle” in the Banksia Financial Group rather than to the external third parties that investors believed it was being lent to.
“It comes down to a conflict of interest when they undertook those arrangements,” Mr McGrath said.
He believes Banksia might have been insolvent since the start of the GFC, when it had not kept pace with the drop in property values that crisis had caused. McGrathNicol’s report to investors on December 7 said most of the loans given by Banksia Securities and the Cherry Fund were through mortgage brokers and generally did not meet the lending criteria of “conventional” bank financiers.
Mr McGrath also said Banksia Securities’ merger with Statewide Secured Investments in 2009 had brought together the poor balance sheets of both companies to create a worse outcome, opening up the question of whether the directors had breached their responsibilities in backing the merger.
What is certain is that the virus has not yet finished claiming victims.
Apart from the class action against Banksia Securities’ directors for damages by Banksia investors, ASIC is also investigating the causes of Banksia’s demise. If it finds Banksia was trading while insolvent, it could attract criminal charges.
ASIC chairman Greg Medcraft said it had already pushed the existing regulation of debenture issuers “to the limit” and a taskforce it set up to investigate Banksia’s collapse might make recommendations for reforms to the present requirements for debenture issuers.
The tougher approach by ASIC follows a string of collapses by debenture issuers that are not listed on the stock exchange, not rated by a credit agency and lent against property.
A report in The Australian Financial Review in October said that of the 15 non-bank debenture issuers who had been identified as the most risky by ASIC in 2007, eight, including Banksia, had since collapsed.