Do you have a parachute in a bad rare event and what colour is it?
Green is safe, Grey is very average, Blue is danger, Black and Blueis extremely dangerous. Frank transparent and wise investment information for careful investors.
Stephen Johnston is from a humble background is self educated expects all investors to seek independent financial advice.
My mission statement is to always make aware to my friends on this website that keeping your capital safe is most important.
You cannot ignore infrequent rare events that can bankrupt the best blue chip investment.
High leverage and high debt investments we keep far away from.
Johnston Choice is always looking for that bad invisible rare event that can put a hole in your parachute.
So my friends let’s get started on some invisible investment time bombs.
How safe are our banks?
Ignorance is the start of true wisdom Johnston Choice does not understand every detail of the bank’s balance sheet as an outsider so excuse my humble assessment.
How Johnston Choice calculate the liquid assets or banks capital.
Total shareholders equity minus expected dividends minus all intangible assets minus capitalised software computer costs minus deferred tax and minus capitalised expenses etc, you get the idea most of these assets are really expenses and cannot be reach as real cash. Banks liability are always 100% never change, the real problem comes when a bank reaches for those real liquid assets in an emergency and find out how much these assets are really worth.
Capital of the banks is not exact science on total shareholder equity you can subtract anything from 45% to 60 % for expenses.We support Keynes observation ‘’I would rather be vaguely right then precisely wrong.’’
If only 3% of total assets for all the banks are write downs and bad loans this will wipe out all the banks shareholder capital a very low margin of safety.
Write downs for volatile trading in derivatives, Insurance, bonds and loan book the black swans, going forward example Financial Storm, Centro, ABC Child Centres,etc
Example is Commonwealth Bank total shareholder equity or $26,137 billion minus expenses real capital of $13 billion over 50% loss of shareholder equity for real liquid assets.
Let’s start with Commonwealth total derivatives $1.426 trillion ($1426 billion dollars)
Total capital $13 billion dollars.
Total leverage 109 times on one dollar of capital in derivatives.
Total assets $487,572 billion.
Total real capital $13 billion dollars.
Total leverage 37 times on total assets.
Total Loan book $361,282 billion
Total leverage 27 times on loan book.
Margin of safety for bad loans is 3%.
Example laymen’s term high leverage that’s like buying 109 houses with 1% deposit or 37 houses with all your assets at 3% deposit.
Our assessment is the Commonwealth bank has quite low capital and has not factored in a cycle of bad loans and bad recession.
Blue for the commonwealth bank.
Macquarie Bank has the most extreme leverage of all take into account loss in asset values in equity to partnerships.
The derivative exposure in assets is over 20 billion dollars and capital base is four times smaller than the major banks.
Low capital for a black swan event.
Biggest disadvantaged for Macquarie Bank its a investment bank and does not have a strong Australian retail deposit base.
The Australian Government will bail out the big four banks to protect savers deposit, however they know from the USA Bush government experience bailing out overpaid investment bankers, throw out of power very quickly.
A quote from the Banking White Paper Weiss research lessons learnt.
It was also a grave error to allow companies to market themselves as "safe" despite high- risk investment portfolios know to be of questionable value.
In the short term,the penchant for secrecy and rose-colored pronouncements by officials in power may quell or postpone a negative reaction by the public.But sooner or later,the truth comes out,and in democratic,information-savvy society,it's often sooner.
Typically,when pent-up truths are finally revealed,the bad numbers are worse,the shock is greater,and the reaction of the public is more panicked than it might have been otherwise.
By attempting to delay or block full disclosure, the authorities inadvently create the very panic they're seeking to prevent.
Panic is not always irrational,Quite the contrary,in most historical examples of banking and financial panics,where there was smoke,there was fire.Panicky reaction by the public,although sometimes prompted by false rumours,is usually motivated by verifiable facts.
Please Senator Nick Sherry shortsellers are not the problem.
We need to clean out the financial elite power brokers immediately send a clear message no big money is to be made in high debt and high leverage investments.
Albert Einstien "We can't solve problems by using the same kind of thinking we used when we created them".
Same financail elite getting special treatment of taxpayers money to gamble on more high risk investments is just going to prolong a major economic depression.
The good people of this country will eventually say enough is enough.
Claw back all bonuses, share options and personal assets of directors responsible for weak zombie companies.
Maybe a tax rate for CEOs of 90% for bonus money and all share options cannot be sold for 10 years and a tax rate of 70%.
Our big four Banks did the right thing, paid billions of dollars in taxes average tax rate of 25%, Macquarie paid 1.7% taxrate few million dollars in taxes.
Bermuda tax havens and politics of "envy" does not cut the open wound of your average aussie battler on a taxrate of 30%.
If Macquarie wants taxpayers bail outs, should paid more taxes AAA rating of your average aussie taxpayer is not an entitlement, it's a privilege and come election time Macquarie may learn this lesson.
CEOs and directors have taken dangerous big risks to get the share price up,make the big bonuses in share options, then move on quickly leave the financial mess for the long suffering taxpayer to clean up.
In otherwords get the big losses on the table, don't sweep them under the carpet, don't bail out overpaid investment bankers, we all know the Japan and American results it only encourages more worst financial meltdowns. Macquarie Bank should never had the Australian Government support gaurantee to raise capital funds using AAA rating of taxpayers money!
The Road to Serfdom is here right now! Black and Blue for the Macquarie Bank.
Westpac Bank total derivatives $1.526 trillion
Total real capital $11 billion
Total leverage 139 times on one dollar of capital in derivatives.
Total assets $401,717 billion.
Total capital $11 billion.
Total leverage 36 times on total assets.
Total loan book $294,676 billion
Total leverage on loan book 27 times
Margin of safety for bad loans 3%
Grey for the Westpac Bank.
Again low capital for downsize risk in bad loans.
Of the big four banks Westpac has taken the less risk has the smallest asset base in loans.
In a falling asset market this may be strength for Westpac.
However in derivatives trading and exchange rate trading Westpac is an aggressive player and this increases the banks risk.
National Australia Bank total derivatives $2,609 trillion
Total capital $18 billion.
Total leverage 145 times on one dollar of capital derivatives.
Total assets $604,622 billion dollars.
Total capital $18 billion dollars
Total leverage 33 times on total assets.
Loan book total $342,537 billion
Total leverage on loan book is 19 times.
Margin of safety for bad loans 3%.
Blue for National Australia Bank
A strong culture of taking large bets on the market evidence is $2,609 trillion dollars in derivatives.
Johnston Choice finds NAB most risk of all because has taken on the most assets.
Some of these assets are spread throughout the world and in a falling share and property market will affect NAB capital base extremely.
Australian New Zealand Bank total derivatives $1,727 trillion dollars.
Total capital $12,500 billion.
Total Leverage 138 times on one dollar capital derivatives.
Total assets $438,355 billion.
Total leverage 35 times assets on assets.
Loan book total $317,718 billion.
Total leverage on loan book 25 times.
Margin of safety for bad loans 3%.
Aggressive player in derivative bets.
Again evidence is clear low capital for bad loans and ANZ is a global player in many areas from financing gold mines in poor South East Asia countries to bond holders in America.
Blue for Australia New Zealand Bank
St George Bank
Total capital $4 billion.
Total assets $136,309 billion
Total leverage 34 times total assets.
Loan book $93,636 billion
Total leverage on loan book is 23 times.
Margin of safety for bad loans 3%.
The derivative exposure is very small compare to the big four banks and very little investment overseas this will be a great advantage when overseas toxic assets are mark down.
Very low total assets big bonus in a falling property and share market.
St George is a regional bank for mortgages on property and its capital may come under stress if we have a strong housing downturn in NSW.
However that will be Westpac problem by then and at the moment ST George is the safest bank because has fresh capital injection from Westpac in takeover bid and it has very little exposure to the big losses going forward in toxic assets overseas.
Green for St George Bank.
Johnston choice evidence and assessment of the Banks in Australian is different to what the Bank CEO, government and financial media is saying that they are well capitalised, safe and are well prepared for a down turn in the economy.
Small mistakes can wipe out your capital in an extreme environment of falling asset values.
Notice I have made bold derivative exposure simply because the leverage is well over one hundred times assets and this is extremely dangerous under 1% of derivatives counter parties defaults and you can wipe out your shareholder capital.
A 3% margin of safety is razor thin for bad loans and total asset write downs, maybe a big cut in dividends payments to increase capital for bad loans going forward.
Example of a conservative bank overseas a leverage of 10 to 15 is reasonable and here in Australian leverage is over 27 higher leverage means you have taken on more risk and if the bank has not factored in a bad recession then shareholder capital maybe in trouble.
All Australian banks are highly leverage has low reserves for bad loans have not factored in a bad recession going forward NAB and ANZ taken big risks in overseas markets.
We were told by the big four banks no exposure to subprime mess and a few months later a billion dollar loss was announce to the market and every time the banks swears to the investors,public, taxpayer and government no more big losses. How many more bad billion dollar losses are in old rusty filling cabinet deep in a dark basement somewhere in a bank?
Lets go back in history to 1992 when Westpac and ANZ loan money in the property boom and high leverage buyouts these great banks were brought to their knees.
These banks in the 1980s were making record profits and enjoying boom time’s sound familiar and this time around we have far more debt and more complicated financial instruments.
So please my friends read history consider the high risks and realise things can go wrong and get your share capital to safety.
You have a trillion dollar collapse in America we live in a global economy where all financial houses are lock together and to say that Australian banks are insulated is delusional.
Nassim Nicholas Taleb was ask a very good question how do you predict and detect a rare bad event example Iceland collapse and bank collapses in America?
Nassim told a story about a bank analyst meeting, showing him the Freddie Mac bank balance sheet and the extreme risks the banks in mortgage finance have taken, he immediately knew that eventually banks were going to blow up because of high leverage and low quality assets.
So Nassim backs up his predictions with evidence and then asks what if a bad rare event comes?
Nassim makes his big profits in rare infrequent events.
Iceland banks high leverage over 10 times the gross domestic product of the country no margin of safety for a major crash in asset values.
Some interesting figures from the Reserve Bank of Australian in Dec 1991 owner occupiers owe 62 billion dollars and investors 12 billion dollars.
Fast forward after 18 years of the greatest boom in history owner occupiers owe 528 billion dollars and investors 251 billion dollars.
Investment properties that's 21 times increase and in owner occupiers it's 8.5 times increase clearly not sustainable.
So it has been mass credit and borrowing from the banks that has cause this inflation in all property assets.
As unemployment rises and more people default on their mortgage loans banks solvency maybe tested.
After big painful losses the banks will become more cautious and close the debt window, house prices will collapse first home buyers grant from government will only cause more dangerous debt and more financial heartache for battlers.
Johnston Choice does not believe at this stage Australian banks are the next Freddie Mac Bank or a Iceland collapse.
Australian banks have a strong retail deposit base and low leverage in borrowing to gross domestic product if you compare it with Iceland banks runs and higher leverage.
Good guys are the savers live within their means have no debt and what does the financial elite do, keep interest rates at record lows for cash deposits and increase the profit margin on interest rate spreads by not passing on the rate cut to borrowers.
Example a bank has a 350 billion dollar loan book, just a small increase in the interest rate spread of 0.5% that's extra profit of $1750 million dollars!
Example 3% interest rate return on savers deposit, the bank loans at 6% that's a 3 % gross profit margin.
This large profit is thanks to the savers low return on cash deposits.
Banks should increase interest rates returns to get more cash deposits and then not rely on expensive overseas borrowing.
However to believe that Australian banks are going to keep making record profits is delusional, big losses will come if a rare bad event comes along.
We do not believe this is a good buying opportunity with the same destructive financial elite culture in control.
Geithner,Paulson,Bernanke and Greenspan have all wasted taxpayers money to enrich the few financial oligarchs at Goldman Sach,JP Morgan,etc
Destructive central planning is very dangerous it encourages civil disobedience, already we are seeing protests in USA outside CEOs homes and offices.
Would it be too extreme to call these guys financial terrorists and international security risk?
"Weapons of mass destruction hours away from a financial meltdown"
"We had an economic pearl harbour hit" same old comments put the naive public under duress.
The idea is to create mass panic,urgency, fear and exaggerate the financial crisis rotten big companies get more of taxpayers money this way.
The goal is to grab (under extreme duress) as much taxpayer money as possible to protect the asset rich investors.
The asset bubble must grow at all costs even if it destroys the real economy through large debt repayments of the working poor.
Why no mass sacking of the incompetent corrupt CEO's who cause this financial mess?
Why no criminal investigation into fraudulent accounting?
Honest, intelligent and competent CEO's would make transparent open accounting highest priority.
Thus discovering massive fraud and insolvent USA banks!
The truth must not be reveal at all costs.
So more debt,more bail outs will cause a bigger financial meltdown and extreme poverty for the working poor in debt.
Let's pray and hope our Australia leaders have the wisdom not to follow the road to serfdom,serf being in heavy debt and the financial oligarchs central planning the highest priorty. Johnston Choice advice is get into cash pay down all debt and live within your means and you will survive this dangerous time in financial markets.
