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Suncorp in GFC: insiders reveal 10 tense days for bank in financial crisis

FOR 10 perilous days in October 2008, Qld’s biggest financial firm - and other Aussie banks - faced pressure to sell out or somehow survive. Insiders now reveal those critical days.

AS the world financial system convulsed during 10 days of dread in 2008, the chairman of Queensland financial giant Suncorp grimly joked about the upcoming death of Australia’s banks.

Banks, especially Suncorp, were starting to choke. The financial hoses that supplied their equivalent of oxygen were sealing shut. Big institutions were reluctant to give banks finance, but customers wanted deposits back and borrowers wanted to draw down loans. These pincers meant banks could cease operating.

Amid these clouds, John Story, Suncorp’s lanky chairman, talked on a Friday in October 2008 with John Laker, head of Australia’s banking regulator.

“By Monday you’ll be able to downsize,” Story sombrely joked to the regulatory boss. “(You’ll) only have one bank to regulate.”

The gallows humour, revealed today by QBM, alludes to only the massive Commonwealth Bank surviving the storm. But it also broaches the deeper picture of how precarious things were for Australia’s finance system and in particular Brisbane-based Suncorp, whose bank accounts and insurance policies covered 2.8 million households.

Those 10 days in October were when Queensland’s biggest company stared over the precipice.

Suncorp was under the pump, with its bank about to be sold or become one of the first Australian institutions to be snuffed out in the world’s financial blackhole.

QBM, via interviews with insiders and examination of company documents, can detail untold stories of those 10 days in which Suncorp managed to survive.

FUNDING COLLAPSE

This October 12 marks 10 years since the Rudd Government guaranteed our banks, protecting people’s deposits and big institutions’ funds with the lenders. It eliminated a disease strangling financial lifelines.

What had started as a seemingly localised US blight in 2007 — subprime loans, basically questionable lending with little oversight — had mutated into an influenza of dodgy investments that were killing massive corporations. By September 2008, UK lender Northern Rock had been nationalised, New York investment bank Lehman Brothers had collapsed and only an $US85 billion ($A118 billion) government bailout saved US insurer AIG.

It sowed fear — who knew if anyone else, anywhere else would survive?

“Banks wouldn’t trust each other. You couldn’t know who could be trusted. So under those circumstances, the global wholesale funding base that Suncorp relied upon, had substantially dried up,” Story says.

Former Suncorp chairman John Story. (AAP Image/Josh Woning)
Former Suncorp chairman John Story. (AAP Image/Josh Woning)

That funding flaw was in Suncorp’s DNA. Suncorp was a welding in 1996 of a stockmarket-listed lender, a State-owned insurer and a State-backed business bank. But the business bank relied heavily on funding from wholesale markets — think superannuation or investment funds or wealthy private individuals — rather than customer deposits.

Even by May 2009, Suncorp only funded 43 per cent of loans from customer deposits. The Big Four, comparatively, funded more than 60 per cent of loans from deposits.

So Suncorp was exposed to these increasingly nervous wholesale investors. At first, the prices to obtain their finance grew more expensive and ultimately price didn’t matter. Some just didn’t want to invest.

“It was like a train coming down the tunnel … there was nowhere to run,” recalls Stuart McDonald, Suncorp’s then head of strategy.

DRAWN-OUT SALE

The squeeze intensified with jittery Suncorp customers withdrawing deposits. QBM can reveal they withdrew almost $1 billion — about two-thirds was by everyday people — between September and when the guarantee finally came in on October 12.

“It was significant,” says David Foster, who had just been appointed Suncorp’s banking chief. ‘Historically we’d … seen strong deposit growth.”

The problem was not unique to Suncorp. “Regional and smaller institutions (suffered) outflows to the major banks,” noted a confidential 2008 briefing from the Reserve Bank of Australia and Australian Prudential Regulation Authority, obtained via Freedom of Information laws.

Suncorp’s concern about funding had started earlier in 2008 and an option arose to neutralise the threat: sell the bank.

It led to talks with ANZ, which hoped to balance out its Asian expansion with an Australian acquisition, yet the panic freezing over funding markets from September accelerated the need for a solution.

By the weekend of October 4, Suncorp staff flew to Sydney with orders to prepare paperwork for a Melbourne-based ANZ buyout. The deal, however, stalled. (In one version, ANZ feared a potential ratings-agency downgrade with the purchase. Several sources say the RBA was roped in to try and help. Other sources dispute that account.) Staff returned to Brisbane, watching from the airport as the Melbourne Storm, ironically, was crushed in the rugby league grand final that Sunday afternoon.

Suncorp confessed to the sharemarket the next morning that predators desired its banking and wealth management businesses. The hares went running. But while Suncorp spoke to NAB and Commonwealth Bank, ANZ proved the only serious suitor.

‘END OF DAYS STUFF

That week, then Federal Treasurer Wayne Swan was visiting the US for an International Monetary Fund meeting. He’d already seen worrying trends in Australia — like abnormally long ATM queues — and America flashed danger signs too.

“We’re in the middle of Manhattan, and (one senior finance figure) said: ‘All the hundreds of hedge funds over there, they’ll be gone in the next couple of days’,” Swan tells QBM. “It was just end of days stuff.”

The Queensland politician and other regulatory sources say funding threats were long on their radar. In early 2008, Swan says, then Treasury secretary Ken Henry had warned a seismic financial shock could mean “the blood would stop flowing through the veins of the economy”.

Some Australian banks already looked vulnerable. One was Bankwest, which was fire-sold to CBA for $2.1 billion.

Wayne Swan, Australia’s Treasurer during the GFC 10. (AAP Image/Steve Pohlner)
Wayne Swan, Australia’s Treasurer during the GFC 10. (AAP Image/Steve Pohlner)

“There was a worry about Suncorp because of its size in the Queensland market, and its exposure in the greater southeast Queensland, but no more than there were concerns about Adelaide and Bendigo Bank, or what was going to happen with Bankwest,” Swan says.

Over at major bank ANZ, deposits were still flowing in and its then chairman Charles Goode says he was not overly worried about any domino effect tumbling from smaller Australian rivals.

“There were some weaker players but the major four were big enough to take them over if requested by (regulators),” Goode tells QBM.

But ANZ noticed other countries — such as Ireland and Germany — were guaranteeing their banks.

“We would have continued to do well (obtaining funds) internationally, except other countries started to guarantee their banks,” Goode says. “We asked for (a guarantee) only … to have a level playing field.”

Suncorp was also lobbying regulators about a guarantee. But QBM can reveal Suncorp had further garnered former Prime Minister Paul Keating to argue their points politically — Keating was then chairman of Lazard, corporate advisers for the Queensland institution. At one Sydney meeting room crammed with Suncorp people, Keating’s iconic voice boomed through a BlackBerry speaker, discussing the financial system.

PROJECT PROTEA

Nothing was certain as the week progressed. The Government had still not committed to guaranteeing banks and ANZ was yet to table its offer, internally dubbed Project Protea, which is a flowering plant.

Suncorp people, led by managing director John Mulcahy, were pulling shifts to 2am, working out funding, writing board papers, examining submissions about the bank. Some slept in a hotel next to Suncorp’s Sydney office. Even with events rolling in minute to minute, people generally did not lose their heads, McDonald says.

But a doomsday scenario — if the funding crisis rapidly intensified — was nagging away. “The regulator can just force you into a marriage,” one Suncorp source says. “We were heading towards that outcome.”

More worryingly, a shotgun sale could possibly ensnare the insurance business because Suncorp’s corporate structure legally named the bank as its parent company.

By the weekend, ANZ had lobbed a confidential offer. Accounts differ about the value — from $3.4 billion for the bank and wealth management arm to as little as $1 billion for the bank and potentially 25 per cent of Suncorp’s general insurance arm.

One source described it as a low-ball offer akin to “rape and pillage”, involving clawbacks on any losses on Suncorp’s increasingly troubled loan book. Story more diplomatically says “we weren’t entirely happy” but ANZ’s offer recognised value for the bank. “At no stage … did we look at giving the bank away,” Story insists.

HENDRIX GUARANTEE

On the final Sunday, Swan dialled from Washington into Cabinet discussions about the banking guarantee. Due to technical problems, the only secure connection was in the basement bedroom of an Australian official’s teenage son, whose wall was adorned with a Jimi Hendrix poster.

Swan says the guarantee was brought in that weekend because problems were reaching a fever pitch.

It was not just about Suncorp, he says. “It was our view that even the most rock-solid financial institutions would be in trouble without the guarantee,” Swan says. “The executives of the strongest banks said this: ‘That if one fell, they’d probably all fall.’ And that was probably correct.”

Story believes regulators had initially been reluctant to bring in a guarantee because they wanted to brag. “I think the regulators were keen to see the Australian banks come through this without the need for any government intervention. And I think they were hoping to be able to say in the global corridors of power that Australia didn’t need any intervention,” he says.

But sources with knowledge of regulatory thinking say any initial reticence was due to other factors: should taxpayer funds be placed at risk? Would offering a guarantee send a bad signal that Australian banks were in trouble?

Eventually deeper concerns pushed the argument in favour of the guarantee, sources say. That included fears about any impact of a systemic funding freeze on the broader economy, or simply that the guarantee would show depositors their money was just as safe with a regional lender as it was with a major bank.

By Sunday morning, people knew something was up. Suncorp’s McDonald remembers waiting at a Sydney building for ANZ counterparts to arrive for due diligence. They never showed. “(ANZ’s) political insight was greater than ours,” he says.

Kevin Rudd announces the bank guarantee in 2008.
Kevin Rudd announces the bank guarantee in 2008.

Hours later that afternoon, then Prime Minister Kevin Rudd, wearing a blue striped tie, proclaimed the guarantee. He didn’t mix words: “This Global Financial Crisis has entered a new and dangerous phase.”

Suncorp’s Foster was in a Brisbane car park when he took a relieving phone call about the guarantee. The crisis had raised concerns about staff, shareholders or customers, he says. But the guarantee resulted in almost $600 million in deposits flowing back into Suncorp within eight days and alleviated wholesale funding pressures. “(It) bought us some time to address issues,” Foster says.

CLEANING UP

On October 14, Suncorp officially called off sale talks and ANZ’s offer withered. Story thinks ANZ “simply got to the point” where they could not proceed with the deal anyway. Other banking sources say ANZ was serious, but the guarantee allowed Suncorp to reject its offer.

In the aftermath, a key issue became offloading what the market dubbed Suncorp’s “bad banking” division. Before the GFC, lending had expanded rapidly, and money went to controversial borrowers who later crumbled, including investment bank Babcock and Brown. Suncorp would write off $1.8 billion in bad loans and quit financing corporations or big developers.

Suncorp also raised capital at the cut-price rate of $4.50 a share by February 2009 (stock was above $20 in 2006), but the cost was Mulcahy’s resignation. While praised by colleagues during the crisis, he had fallen out of favour with investors.

The financial system eventually stabilised and banks became far less reliant on wholesale funding. Suncorp also fixed its corporate structure so a problem bank can’t swiftly topple the whole company.

Still, Story cautions against lazily thinking Australia’s financial system has been rendered invulnerable.

Stability is vital, he warns.

“You have to be continually vigilant,” he says. “The history of banking over a long period of time has been of recurrent systemic crises.”

Original URL: https://www.couriermail.com.au/business/suncorp-in-gfc-insiders-reveal-10-tense-days-for-bank-in-financial-crisis/news-story/fcdf283d40a3709cc886bda13e7c6661