Australia: Financial
collapses devastate small investors
By Mike Head
12 June 2007
For the third time in 18 months, an Australian property investment
scheme has collapsed, leaving thousands of ordinary people, mostly
retirees, financially and personally devastated. The May 28 failure
of Australian Capital Reserve (ACR) means 7,000 small investors
face the loss of their life savings, totalling up to $330 million.
With the earlier collapses of Westpoint, in 2006, and Fincorp, in
March this year, almost 20,000 investors stand to lose up to $1
billion.
Worse could be yet to come. Tony DAloisio, recently appointed by
the Howard government to head the Australian Securities and
Investments Commission (ASIC)the agency that is supposed to
monitor the financial industrysaid last week that small investors
have more than $8 billion in about 83 high-risk, mostly
property-based, deposit schemes.
The financial ruin facing thousands of elderly people is one of the
consequences of the deregulation of financial services, which has
given property developers and others virtual free rein to exploit
vulnerable people. More fundamentally, it is the product of the
free market policies, implemented by conservative and Labor
governments alike, that have stripped working people of retirement
security and forced them to provide for themselves through various
private investments.
For years, all three investment schemes were permitted by ASIC to
conduct aggressive and slick advertising campaigns specifically
targetting retirees and featuring images of happy older couples.
The ads enticed them to inject money in return for high rates of
interest, with their investments supposedly fully secured against
first mortgages over property assets. The ads were designed to
tap into retirees fears about income insecurity, under conditions
where it has become impossible to live a decent life on the
governments $260-a-week aged pension.
These unscrupulous methods have been common knowledge in business,
government and media circles for years. Australian Broadcasting
Corporation commentator Alan Kohler last week described the modus
operandi of the schemes as follows: You set up a vehicle for
raising unsecured funds to put up a building, give it a secure
sounding name and then flog it to unsophisticated people, either
through slick advertisements or commissions to sales people who
masquerade as financial advisers.
A Melbourne Age editorial noted: Market experts and the regulator
could see the crashes coming years ago... Marketing was aimed at
older investors (Fincorp investors average age was 60) and played
on their faith in property. Many thought they were investing in a
form of mortgage trust and had no idea of the high risk.
In reality, the victims held only unsecured loan notes, while the
mortgages were held by the companies themselves, or by the banks
and other financial institutions that underwrote the lending. Once
the property boom of the past decade began to falter in 2004,
falling real estate prices spelt disaster for the schemes, which
were based on speculative housing developments and over-priced
valuations.
In April 2004, for example, a project called Sydneygate, owned by
ACRs parent company, Estate Property Group, in Sydneys inner
suburb of Waterloo, was valued at $120 million. The land had been
bought in late 2002 for $48.3 million, but Estate boosted its value
by producing an incredible master plan, according to a property
valuer, despite a downturn in the market for apartments. Such
methods kept ACRs assets ledger artificially healthy, permitting
it to hoodwink small depositors, even though regulatory officials
were well aware of its misleading practices.
ASICs DAloisio told a Senate committee last week that the agency
had had concerns about ACR for seven years, but had never launched
a formal investigation. ASIC raised concerns about the inadequate
disclosure to investors contained in ACR prospectuses, and
intervened nine times. But it took only ineffectual action.
From 2004 to 2007, ASIC issued four interim stop orders, yet
allowed ACR to keep soliciting for funds. Only in April did the
watchdog finally halt ACRs fundraising, making its collapse
inevitable. The reasons for the order included failing to inform
investors of risk levels, omitting to disclose changes in the
companys financial position, and overstating profits and net
assets from inflated property valuations.
Likewise, in March 2006 ASIC lifted a blocking order against
Fincorp, permitting that company to raise a further $72 million
from unsuspecting small investors before it went into receivership
on March 23 this year, owing $200 million to individuals and $95
million to banks and finance houses. An ASIC analysis of Fincorps
8,000 investors showed that only 150 had invested more than
$200,000, and that the average amount was about $200,000.
In an interview with the Age, DAloisio sought to justify ASICs
record, arguing that these statistics could indicate that many
investors knew of the risks, and had limited their exposure. In
fact, the figures confirm that the vast majority of the crash
victims were people with only small sums to invest, and who lacked
the inside knowledge that larger investors have of the ruthless
financial industry.
DAloisio also ruled out setting up a special taskforce to consider
the issues raised by the collapses of Westpoint, Fincorp and ACR,
saying they posed no systemic threat to Australias $2 trillion
financial market. He said ASIC was not signalling a move to stamp
out the types of lending on which the failed companies had relied.
Debentures were, for example, an efficient form of raising
capital.
DAloisios comments typify the callous indifference within
official circles towards the plight of retirees, and their
overriding concern to facilitate the operations of the
capital-raising markets. Similar contempt has been expressed in the
media coverage, with commentators routinely using pejorative terms,
such as unsophisticated mum and dad investors. Noticeably, Prime
Minister John Howard, Treasurer Peter Costello and Finance Minister
Nick Minchin have made no statements on the ACR scandal.
