Coming soon — GloboBank

by Anna Pha

When cracks appeared in one of the "Four Pillars" of banking last 
month, the other three looked on anxiously. The NAB's estimate of 
its likely foreign exchange losses has already risen from $185 
million to $360 million, and could even go higher. The NAB — the 
biggest of Australia's four major banks — is now in damage 
control mode, trying to unwind what it says are dealings in 
unauthorised foreign currency options.

It appears that four NAB traders, since suspended, took out large 
currency options (a form of speculation or betting on future 
currency prices) that relied on the Australian and New Zealand 
dollars weakening against the US dollar. Unfortunately for them, 
the US dollar fell in price.

Accusations are flying about whether or not management knew, how 
long traders had been taking such risks and whether risk 
management protocols have been breached.

Regardless of the detail, the massive losses raise a number of 
serious questions about the finance sector:

Transformation of banks

Traditionally the source of bank income was from interest. The 
banks lent money at a higher interest rate than they paid on 
people's saving deposits. The gap between the two interest rates 
covered the costs of providing a service (staff, branch offices, 
etc) and the rest was profit.

While banks still hold savings and lend money, in many instances 
interest is only 30-40 percent of the source of their income. A 
similar percentage is raised through fees, such as for services 
over the counter, the issuing of statements, and advisory 
services.

Some banks are making as much as 30 percent of their income from 
what is best described as gambling in currencies (as did the NAB) 
and other products (eg derivatives on what are known as futures 
markets).

Many banks specialise in types of services offered and have 
investment and other types of subsidiaries providing customers 
with potentially higher returns on their savings — but at a 
higher risk. The bank itself does not take responsibility if the 
savings are lost. Some manage workers' superannuation and post-
retirement savings.

Privatisation

State and Commonwealth banks have been privatised. As a result 
their prime purpose has shifted from providing a service to the 
public (people, business and government) to one of making the 
largest profits possible for their private shareholders, 
regardless of consequences. Hence the branch closures, sackings 
of thousands of bank workers, attacks on bank workers' wages and 
conditions, and the multitude of fees as well as decline in 
service for many smaller customers. Privatisation brought an end 
to government guarantees.

Lack of accountability

The Australian Financial Review highlighted the problems 
for investors attempting to assess the levels of risk being taken 
by banks: "Their financial reports, while conforming to 
accounting standards, are virtually meaningless to outsiders." 
(Chanticleer, 21-01-04)

Monopolisation

Banks co-operate with each other where necessary to defend their 
common interests (eg lobbying politicians for deregulation). 
There is also fierce competition which results in takeovers, 
mergers, crashes and financial crises. This process has been 
facilitated by deregulation and privatisation. In Australia, the 
"Four Pillars" (NAB, Westpac, ANZ and the Commonwealth) with St 
George dominate the industry.

Up to now Australian governments have, in the name of competition 
policy, resisted pressure to remove all restrictions on foreign 
ownership, mergers and takeovers involving these banks. It is 
only a matter of time before the government adjusts its thinking 
in terms of the above banks — from competition between 
Australian banks to counting competition between transnational 
banks operating in Australia.

Monopolisation is taking place globally, with the biggest getting 
bigger every day, squeezing out more and more smaller banks.

Citigroup, the world's largest bank, made $6.2 billion in profits 
in the final quarter of 2003. It is prowling the globe, loaded 
with cash, in search of take-over targets.

JP Morgan Chase and Bank One are about to merge to form a US 
based bank with US$1.1 trillion in assets. They have announced a 
wage freeze and a minimum of 10,000 job losses.

This follows on from Bank of America's takeover of FleetBoston 
Financial last October.

According to The Wall Street Journal, Citigroup, Bank of America 
and JP Morgan account for 81 percent of loans arranged for 
investment-grade companies in the US.

Power of banks

The struggle taking place between banks (and also other financial 
institutions — particularly insurance monopolies) is for 
absolute power and global dominance. It is about control over 
hundreds of billions of dollars. These banks (and the big 
insurance companies) exert considerable control over other 
businesses — through loans, positions on corporate boards, the 
advice they give, manipulating money markets, trading on 
stockmarkets, and so on. These financial institutions are the 
most powerful centres of capital.

It is not clear how the NAB saga will unfold or if any other 
banks are in a similar position. If the NAB's position 
deteriorates, this might give the Government the excuse it wants 
to take the next deregulatory step and allow Citigroup or one of 
the other GloboBanks to "bail it out", i.e. begin the process of 
foreign takeovers.