Hedging bets on the future
From Griffith REVIEW Edition 25: After the Crisis
© Copyright Griffith University & the author.
Written by Margot Saville
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In 1985, I was a very junior lawyer in a blue-ribbon Sydney law firm. Over expensive cocktails at a function, the head of an overseas bank – the recipient of a freshly minted banking licence – flashed his gold Rolex and boasted that he had ‘plenty of money' to spend and his company would revolutionise not just Australian banking but the whole country. Later, the party continued back at his harbourside penthouse, but I was tired of him and went home. He was an obnoxious, materialistic little man. Little did I know that the city would soon be full of them.
That year, Treasurer Paul Keating had granted sixteen foreign banking licences. Suddenly, Sydney was bursting with expat bankers and foreign capital. Australian businesses no longer had to go cap in hand to their local bank to get money to expand; they had a choice. The city, thanks to the reforms implemented by Premier Neville Wran, was already changing – and this new money, which arrived with the Keating-led program of financial deregulation, was the accelerant that transformed it.
While Melbourne has taken pride in being a sober, serious city, Sydney has always been in love with fast money and good times: its ethos came from convicts and the Rum Corps; even now, its government depends on the revenues from the hoteliers and registered clubs stuffed with poker machines. Gambling and gaming is in its DNA; former premier Robert Askin and chief magistrate Murray Farquhar consorted with known criminals. It's a city known for its love of bending the rules.
Like the local crims, the Australian banking system had always functioned as a cosy cartel, but by the time Neville Wran entered the New South Wales Parliament, in 1970, it had begun to open up. It's hard to imagine now, but the first credit card, the now-superseded Bankcard, was launched in the mid-'70s and for the first time people could buy things they didn't have enough cash for without applying for a personal loan. A young Paul Keating, the opposition spokesman on minerals and energy, called for the introduction of foreign banks, because the local banks were ‘unresponsive' to the challenges and rewards of the mining industry. The Australian Financial Review approved his stand. In late 1977 it quoted him and called for an inquiry, describing the current banking system as ‘quasi-socialist in that it is effectively run by the Reserve Bank but retains the worst features of oligopolistic capitalism'.
Keating had first-hand experience of the workings of banks. In 1965 his father's company, Marlak Engineering, won a contract from the Malaysian government to build a bridge, but the local banks would not lend against the contract and the loan application was rejected. Marlak lost its chance and Paul Keating found a mission. He told me: ‘That was the way they were. Deadbeat institutions run by deadbeat executives.' In Keating: The Inside Story (Viking, 1996) his former economics adviser John Edwards attributes Keating's fundamental understanding of markets and prices to his involvement with his father's company. Thanks to the rigid banking rules, Marlak missed the opportunity to expand and was sold to ANI eight years later.
PAUL KEATING LOVES HIS home town, declaring with characteristic bravado in 1993, ‘If you're not in Sydney, you're camping out.' He claims credit for the city's massive demographic changes – as a result of the reforms he implemented, Sydney split into two cities: the affluent, internationally focused suburbs that cling to the harbour and the sprawling tracts of suburbia beyond.
In 2007 he said, ‘When I was Treasurer, I made Sydney the financial capital. Before I opened up the financial markets in 1984, there was a $30,000 limit on borrowing, and even then you had to crawl to the bank manager. Now, any two butchers can go across the road, buy five blocks, develop them and sell off the plan. In a world awash with liquidity, anything buildable is bankable.'
Being the nation's financial capital has a downside in a global financial crisis. When Lehman Brothers collapsed the global banking system ground to a halt, and within a week its Australian branch was tipped into voluntary administration, owing up to $800 million. Immediately, local financial institutions – spooked for much of the year as companies including Allco, Rubicon, and Babcock and Brown hit the credit wall – started shedding staff; within weeks there was a panic sufficient to force the government to guarantee all bank deposits, and profoundly change the finance sector.
If you want to see what life is like when the finance sector is no longer at the top of the tree, head to Double Bay, five kilometres east of the CBD: there are dozens of empty shops; many of those still operating are free of shoppers, though plastered with sale signs; if you hang around long enough, someone will sell you their car. Postcodes 2027 and 2028 still report the highest incomes in Australia, but when the financial tsunami washed over Wall Street, the wave did not take long to hit.
For the first time in decades, Sydney house prices led the market down. In the residential heartlands of the banking and finance sectors, in the harbourside eastern suburbs and lower north shore, prices fell through the parquetry. Australian Property Monitors reported that prices in Double Bay dropped by a quarter in the year to the end of March 2009 on a low turnover. For the first time in recent memory the most expensive houses recorded the biggest falls. ‘The top end of the market has always been seen as a bit of a safe haven and has generally been immune to downturn,' the RP Data senior research analyst Cameron Kusher said, but the global financial crisis ‘really impacted hard on high-income earners'.
Everyone knows someone who has been affected, but trying to find one who will talk publicly about it is not easy. John McGrath has been selling top-end houses for decades: ‘There has definitely been an increased number of people electing to sell below the radar. They either want to save face or don't want people to know that they are in trouble.' The saving grace is low interest rates, which have ‘enabled people to rearrange their debts and avoid too much forced selling'.
Since the mid-'80s the gap between the top and the middle has widened in Sydney, skewing the local ecology. Whole suburbs are now at the mercy of one sector, and when that goes down it takes almost everyone with it. In the past year 20,000 local jobs in banking and associated industries have been cut – high-paying jobs that demanded degrees, devotion and long hours. These in turn financed an ancillary army of service providers: decorators, builders, cleaners, trainers, caterers, hairdressers and nannies.