State Bank/State Debt
Wednesday, 17 May 2017
The Hon. R.I. LUCAS (17:01): I move:
That this council notes the level of total state debt in South Australia since the early 1990s and the factors that have influenced that level of state debt.
In speaking to this motion, I want to trace the history of the issues that relate to the level of the state's debt, going back to the period of the early 1990s, and look at some of the factors that influence that debt. In doing so, at the outset, I seek leave to incorporate in Hansard a statistical table in relation to the level of non-financial public sector debt from 1992 through to an estimated debt in 2019-20.
Similarly, I seek leave to incorporate in Hansard without my reading it a statistical table on general government net operating balance from the year 2003 through to estimated for 2019-20.
In incorporating those two statistical tables in Hansard, it outlines, in the first instance, in relation to the level of the total non-financial public sector debt, so not just the general non-government sector debt (or budget debt, as the current Treasurer would like to refer to) but the total public sector debt, which includes organisations like SA Water and a variety of other public authorities that are not included in the general government or budget sector.
That table shows clearly that, back at the time of the State Bank financial disaster of 1992-93, the level of state debt was $11.6 billion. It steadily declines over the period through to the change of government in 2001-02, and at the time of the change of government the level of state debt was in and around $3 billion; in 2001-02 it was $3.3 billion; and in 2002-03 it was $2.6 billion. So, the level of state debt during that particular period declines from $11.6 billion to around $3 billion.
For a period of time it then further declines and then steadily increases over the majority of the years of the current state Labor government—the 15 years of the state Labor government—with its latest forward estimate being that it will peak at about $14.1 billion in 2017-18 (next year). Again, in summary, at the State Bank it was $11.6 billion, it declines to about $3 billion at the time of the transfer of government to a Labor government and is now increasing to just over $14 billion.
In looking at that second table I have tabled, which is, in essence, a measure of the net operating balance—which is a technical term for whether or not we are in surplus or deficit in terms of our annual expenditure—that shows that, under the 15 years of this state Labor government and with the benefit of the GST deal that was signed in 2001-2 by the former government, the rivers of gold that flowed into the state from that particular period, 2002 onwards, together with, to be fair, the massive boom in property tax as a result of the property boom during that period of 2002 through to 2007 or 2008, we saw some significant surpluses during that particular period—surpluses over six budgets, on the back of the GST and the property boom—a total accrued surplus in that period of about $2 billion.
Since 2008-9, in six of the eight budgets, we have seen significant deficits. In two of those years we have seen surpluses, in 2009-10, on the back of the federal government bailout of the states—the massive grants that they made to the states post GFC—and as a result of that we had a modest surplus in 2009-10, and then again a surplus in the last financial year that has been concluded—2015-16—of $300 million on the back of the proceeds of the Motor Accident Commission privatisation, which, in total, will add up to about $2½ billion; not all of which impacts on the measure of the net operating balance, but enough to help generate the surplus.
In the six of the other eight years there have been significant deficits, which add up to about $2½ billion. What we have seen is, in part, the growth in the state debt has been as a result of annual over-expenditure; that is, not being able to manage your annual expenses. It is related to the current debate that is going on at the federal level, where there is the debate about what supposedly is good debt and what is bad debt: the definition of good debt being debt which is used to help finance productive infrastructure, for example the building of roads or ports or utilities infrastructure, and the bad debt is the debt that is used to pay your annual operating expenses and bills.
Under that scenario, that $2½ billion over the last eight years is very clearly in the bad debt category. It is the result of government and Treasurers being unable to manage their annual operating expenses and revenue and generating huge deficits which add to the level of debt that the people of South Australia have inherited and will have to continue to pay off for many a year.
Looking at this particular issue, I am minded, as I look at the parliament, both in this chamber and another chamber, that there are only two members of parliament left who were actually here at the time of the State Bank financial disaster: one on the opposition side and one on the government side—the Speaker of the House of Assembly, Mr Atkinson, from the government side, and myself from the opposition side. There has been a huge turnover of membership of the parliament—in particular over the last six to 10 years—in what would appear to be a relatively short period of time, but is not, when one goes back to the early 1990s. It is quite clear that virtually all the members of this parliament, state and federal, were not here and did not live through, in a parliamentary and political sense, the trauma of the State Bank financial disaster and the impact that it had.
In discussions that I have with many new MPs on both sides of the political fence I know that they have little or no knowledge of what actually went on during the State Bank financial disaster. Yes, they know that it was huge and that billions of dollars were lost; yes, they know that it impacted on our debt; yes, they know that it had a traumatic effect on the psyche of the South Australian community, both financial and social. They are aware of those general things, but they do not realise the detail of the financial atrocities that were committed by both the bank and those who were meant to be in charge of the bank, and that was the then Labor government. My purpose in speaking to this motion today is to place on the public record again—for all those members, who, as I said, have little or no knowledge—what actually went on at the time of the State Bank financial calamity.
In summary, on Sunday 10 February 1991 was the first public acknowledgement by the government—by then premier Bannon—of the financial disaster of the State Bank. It did not indicate the final extent of the financial disaster and the bailout that was required—ultimately, that came to be $3.15 billion, and it was not revealed until much later, but it was nevertheless monumental in terms of its impact on that particular Sunday.
It is interesting in looking back; when you look at the history of the time you see that the Premier was squeezing the final details of how he announced on behalf of the government the state bailing out the State Bank while at the same time was busily engaged in the launch of the Adelaide Crows, which was occurring in and around that time of February 1991. History shows he was juggling public announcements in relation to the Crows with private briefings in terms of what he should say and would say in terms of the State Bank bailout. One can certainly say that the Crows have gone from strength to strength over a period of time; subsequently, the impact of the State Bank on South Australia cannot be viewed in the same way.
The first questions in relation to the State Bank financial disaster were raised in February or March of 1989, just prior to the 1989 state election and about two years prior to the first public announcement of the bailout. Having been in the parliament at the time, what occurred within the opposition at that stage was that advice was provided to the leader of the opposition's office—the leader of the opposition at that time was John Olsen. That information came from a prominent person in another bank within South Australia, who gave a briefing in terms of their view of the problems the State Bank was confronting.
At that particular time there had been publicity about the first of some major non-performing loans or investments of the State Bank, in particular in relation to investments in a company called Equiticorp and a couple of other companies as well. At the time banking circles were rife with rumours about what had been the approach of the State Bank in South Australia since the late eighties in terms of its lending practices.
One of John Olsen's senior advisers at the time, Mr Richard Yeeles, who I am delighted to say has come back on board in terms of assisting the Liberal Party at the moment, and the then leadership group decided that the information was so important that the issue needed to be pursued by way of questions in the parliament. The then shadow treasurer, Jennifer Cashmore, the member for Coles, commenced the first of a series of questions on behalf of the Liberal Party in relation to the State Bank.
As you would expect, knowing Adelaide and South Australia, the proverbial hit the fan. It raised a furore in the business and banking circles, in media circles and in political circles. There was quite undisguised anger at the fact that the Liberal Party had raised questions about the lending practices of the State Bank. There was anger from the board level and management and public relations department at the State Bank directed at the Liberal Party. There were calls to the leader of the opposition and to Jennifer Cashmore and to other Liberal members at the time.
There was anger expressed from me at the media in terms of the questions that were being asked. There were significant business people in South Australia and significant donors to the Liberal Party who rang the then leader of the opposition and other members of the parliamentary party telling the Liberal Party to pull their heads in, and that there were not to be any questions raised or asked about the financial performance of the State Bank.
It is a credit to the leader of the opposition at the time, to Jennifer Cashmore and to others that, in the public interest, they were prepared to continue to ask serious, carefully researched questions about the performance of the State Bank and the exposure that the taxpayers of South Australia had at the time. It might have been very easy to have cowered under the avalanche of criticism that descended upon the Liberal members of parliament at that time and to decide not to further pursue any questions for the sake of an easy life.
Of course, that attack was championed by the Labor Party in South Australia. On 13 April 1989—so immediately after those questions were raised in February and March—the later-to-be premier Rann, but then MP Mike Rann (I forget which electorate he represented at the time; it might have been Ramsay), moved the following motion:
"That this house condemns the opposition for its sustained and continuing campaign to undermine the vitally important role of the State Bank of South Australia in our community."
In moving that motion, Mr Rann made the following statements:
"…the State Bank is one of South Australia's greatest success stories.
No-one of significance in the Australian financial community would not acknowledge that the success of the new bank is, in a large part, due to the brilliance of its Managing Director, Tim Marcus Clark. His appointment in February 1984 was a major coup that stunned the Australian banking world; it was a major coup for this State.
There is hardly any aspect of South Australia's social, cultural and economic life which is not touched by and is not better off because of the activities of the State Bank.
Our bank is entrepreneurial and aggressive as well as careful, prudent and independent."
It is interesting to note that, in one of his reports, the State Bank royal commissioner noted:
"The Member of Parliament who proposed the motion condemning the Opposition for attacking the Bank spoke in glowing terms of the Bank's role and performance, so praiseworthy indeed as perhaps to cause the State Bank Centre to blush to a deeper shade of pink."
The royal commissioner also commented about the period during which this motion was moved, as follows:
"In the second half of the year, for those who wished to hear, or to ask questions so that they could hear, the noises of impending disaster were reaching a crescendo."
That was the political environment at the time in the late eighties and the early nineties where, as I said, there was an avalanche of criticism of Liberal MPs for raising issues in relation to the State Bank financial performance. During that period there was a massive expansion of lending. You will hear now from bankers—although I am not sure how openly all of them were saying it at the time—that it was quite clear that a number of their customers to whom they would actually say, 'No, your banking proposition or your investment is not bankable, it's too risky, we're not going to provide you with finance,' would immediately turn on their heels and march across to the State Bank and immediately get funding and finance from the State Bank for the exact same deal.
The royal commission highlighted some of the financial practices of the State Bank at the time. At its height, the bank had branches in London and New York, it had tax havens in the Cayman Islands, it was financing ventures such as the new Rundle Mall Myer complex, the renovation of London's Wembley Stadium, mezzanine financing of apartments in New York, office blocks in Sydney and Melbourne, as well as holiday resorts on the Gold Coast.
There was also reference to the management of the bank and the board having access to a lavish Gold Coast apartment for recreation and for business purposes, and access to an $850,000 luxury yacht moored somewhere off Western Australia for some bizarre reason. Again, management and board had access to recreational use of that particular luxury yacht.
In terms of the losses that the bank incurred, there was the Adsteam Group, $83 million; Collinsville Stud Group, $31 million; the Hooker Group, $78.5 million; the REMM development, $290 million written off, plus provision for $129.5 million; the Oceanic Bank, $84 million; UBS, $123 million; together with a range of others. The bank had a 50 per cent interest, subsequently converting to full ownership, in a stockbroking firm, SVB Dave Porter and Co. It had a 50 per cent stake in a private real estate company, Myles Pearce and Co. Pty Ltd in November 1986. It built the State Bank Centre, and the royal commissioner noted:
"Despite advice raising 'significant' concerns about the feasibility and negative financial impact of the State Bank Centre, the govt & Treasurer pressured the Bank to proceed w the project…
the decision to finance the project off balance sheet meant the project was immune from public & Govt scrutiny…
'Although, as events will show, the project turned out to be a commercial failure, if not a disaster, criticism of the Govt can be made even without the wisdom of hindsight.'…"
In relation to some of the overseas investments, the royal commission noted:
"No one, it seems, from the Treasurer downwards, paused to inquire how such operations in London and Hong Kong were of benefit to the people of the State.
'The Treasurer indicated he was enthusiastic about the possibility of an expansion of overseas activity'…"
That is a brief summary of some of the investments. There were many more, obviously, that went bad in relation to the government's handling of a variety of those, in particular some detail in relation to the Cayman Island investments, the disaster of the REMM Myer complex and others, but I will not go through all the detail of those. Certainly, the royal commission report makes them available.
In relation to looking at the issues of responsibility for the State Bank, two general themes applied at the time and even since then have applied in relation to political responsibility or accountability for the State Bank financial disaster. The first general theme is essentially that this was an independent body or bank and responsibility was significantly the responsibility of the board and the management. The government operated in a hands-off way and ultimately, whilst the state government was held to account, that was a bit unfair because essentially it was an independent body.
The second theme is essentially that the government did have responsibility, as the ultimate guarantor, for prudential oversight of the operations of the State Bank, and this particular theme does highlight—and I want to highlight in my contribution—many examples of where, when it suited the purposes of the then Labor government, they very much put their hands on and did not adopt the hands-off attitude that would appropriately relate to an independent banking authority. They intervened when it suited their particular purposes.
The nature of the recommendations of the royal commission report was that the royal commissioner certainly supported the second general notion that I have just outlined, and that is that the government did have responsibility for prudential oversight, which it did not, in the end, fulfil.
For example, in the first royal commission report, retired Supreme Court judge Samuel Jacobs QC, in November 1992, said Mr Bannon, also the state treasurer, 'failed to listen to the messages of doom' as the bank headed toward disaster, branding his hands-off attitude 'myopic'. He said Mr Bannon was 'dazzled' by Mr Marcus Clark and a 'plethora of signs of impending peril' in the 1989-90 financial year 'failed to evoke an appropriate reaction' from Mr Bannon.
In terms of looking at the examples of where the government intervened, I turn to the particular issue of the government's role in intervening in the setting of interest rates at politically sensitive periods in the late 1980s. Commissioner Jacobs found that the treasurer was willing and anxious to sacrifice profit-oriented decisions of the bank for the short-term political advantage of his government on the occasion that he influenced the bank's decision to freeze interest rates in September 1985.
Subsequently, the commission looks at similar interventions in 1987 and 1989, and I want to look at those particular interventions in some detail. The royal commission's final report, under the heading of 'Interest rates', states:
"As noted in the Commission's First Report, the topic of proposed rises in retail interest rates was one of routine notification to the Treasurer. The Commission investigated three different occasions on which the Treasurer possibly exerted influence to keep interest rates down pending an election.
The first occasion was the State Election in December 1985.
In evidence, [before the Commission], both Mr Clark and the Treasurer confirmed that [in light of the election due on 7 December 1985] the Treasurer had asked the Bank not to raise its rates until after Christmas, unless forced to do so by inexorable pressure of market forces.
The Commission found in the First Report that the Treasurer's involvement then was in marked contrast to the way he had previously approached the issue of interest rates, and in even greater contrast to the equanimity with which he accepted the Bank's decision to increase rates soon after the election.
While the Commission considered it to be an 'irresistible conclusion that the Treasurer temporarily forsook his "hands off" rule and his perception of a commercially independent Bank' the Commission did not suggest on the evidence that the Treasurer gave any specific direction or made any explicit request to the Bank to adopt that interest rate freeze. In addition, there was at the time public reporting referring to the perceived role of the Treasurer in having so acted.
The second occasion was about the time of the Federal election in 1987. The Treasurer confirmed in evidence that in mid June 1987 he urged the Bank not to continue with a proposed interest rate increase until after the Federal election on 11 July 1987. He gave as his reasons that he did not want the Bank to be seen to be taking a political stance by increasing home loan interest rates immediately before a Federal election. As noted in the First Report:
It is difficult to understand or justify his reasoning because his request inevitably did require the Bank to take such a stance.Whatever the validity of that reasoning, it is the view of the Commission that it did represent the basis upon which the Treasurer communicated to the Bank on the topic, and so long as that reason was genuinely held it does not give rise to the prospect of proceedings, even if the consequence also in fact involved some political benefit.
The third and most significant occurrence of an interest rate freeze related to a $2 million interest rate subsidy paid to the Bank by the Government in exchange for the deferment of an interest rate increase until after the State election on 25 November 1989. The circumstances surrounding this subsidy were dealt with extensively by the Commission in its First Report and there is little point in repeating all of the details here. In brief, there is evidence before the Commission that:
On 15 September 1989 Mr Clark advised the Treasurer that the Bank could not contain its housing loan interest rates at the current level.
On 26 September 1989 the Treasurer requested the bank to hold down its housing loan interest rates for a time (although whether the relevance of the oncoming election was mentioned at the time was not clear).
On 28 September 1989 the Board decided to defer increasing interest rates for a time 'pending satisfactory arrangements with the Treasury'.
The possibility of compensation from the Government was raised with the Bank. The Bank at that time was unable to cover the cost of funds borrowed to provide housing loans. The matter was raised following the Reserve Bank decision which, to some extent, provided a competitive advantage to non-State banks, and the compensation proposed was presented on the basis of getting compensation for the consequences of that decision.
On 2 October 1989 the Treasurer agreed in principle to the Bank receiving a subsidy to compensate for revenue foregone by holding interest rates at their existing level, leaving it to the Bank and Treasury to complete discussions on the topic.
Mr Clark and the Under Treasurer discussed the quantification of the Government's subsidy at a meeting on 31 October 1989. Shortly after this an arrangement was made for the Bank to receive $2 million as compensation.
In a letter to the Bank dated 24 November 1989 the Under Treasurer proposed that $2 million of the Bank's indebtedness to SAFA be foregone.
On 13 December 1989 the Board resolved to increase its interest rates from 1 January 1990.
The Commission commented in its First Report:
It is plain…that, whether or not the election had been announced, Mr Simmons and Mr Clark and the Board all understood that the Treasurer's comments at the meeting of 26 September 1989 were in the context of an imminent election, and that their understanding was shared by Mr Bannon's advisers.
The evidence does not warrant an affirmative finding that Mr Bannon himself made a proposal at this meeting in terms of a categorical request for political favours. But he knew that the proposal to hold interest rates involved the Bank acting to its financial detriment in a way which would avoid political odium and might well attract support to his Government; and he could not have failed to realise that the Bank Board was alive to that implication.
After careful consideration of all of the circumstances surrounding the influence of the Government on the Bank in relation to the holding down of interest rates, the Commission does not consider that those findings disclose a deliberate or wilful decision to act in a manner inconsistent with the respective obligations of the Treasurer and Under Treasurer as public officers. Their actions may be open to political criticism but they do not amount to 'wilful neglect' as that concept applies under the law. The Commission accepts that both the Treasurer and the Under Treasurer acted in the honest and reasonable belief that they were entitled to act in the way that they did, bearing in mind their perception of public interest in holding down interest rates."
That was a summary of the final report of the royal commission. On the way through, in the early report of the royal commission, the royal commissioner said (and this is in relation to the 1985 arrangements in relation to deferring interest rates, prior to the 1985 state election):
"But, whatever the attitude of the Bank, the rationale for the Treasurer's intervention is clear. It is not and cannot be suggested on the evidence that he gave any direction or made any explicit request, but it is an irresistible conclusion that the Treasurer temporarily forsook his 'hands off' role and his perception of a commercially independent Bank. Contrary to his expressed desire on other occasions that the Bank's decision-making should recognise the advantage to the State of profit-oriented decisions, he was willing and anxious on this occasion to sacrifice that advantage in the short term for the political advantage of his Government."
The royal commissioner was saying that it was quite clear, from the decisions treasurer Bannon was taking in that period just prior to the 1985 state election in relation to interest rates and the discussions he was having with the bank, that he was willing and anxious on this occasion to sacrifice that advantage in the short term for the political advantage of his government.
In relation to the interest rates decision of 1987, which was prior to the federal election, the royal commissioner's findings are as follows:
"It is plain from the above that:
The Bank reversed a commercial decision to increase housing-loan interest rates, and deferred consideration of the proposed increase until after the July 1987 federal election at the instigation of the Treasurer."
It is quite clear. To continue:
"The formal Executive Committee minutes are misleading about the reasons given for that decision, or at least do not tell the full story.
The Treasurer requested the Bank to review its decision on the expressed grounds that he did not want the Bank to be seen as taking a political stance. It is difficult to understand or justify his reasoning because his request inevitably did require the Bank to take such a stance. By postponing its decision to increase rates, it avoided the risk of electoral damage to the Government then in office in Canberra, which was of the same political persuasion as Mr Bannon's Government. For the Bank to take a political stance in private if it perceived such a stance to be to its advantage may well be justifiable; it is much less so if taken at the behest of the political ally of a government in office, and in conflict with an earlier decision.
As a postscript, the Bank did in fact reduce some home-loan interest rates shortly after this election. This lends some credibility to the reason for postponement that appears in the Executive Committee minutes, but it does not invalidate the finding that the whole of the evidence compels: that the Bank responded to an initiative taken by the Treasurer to avoid the risk of electoral damage to a particular political party.
But the doozy of the lot is the state election in late 1989 and the conclusions of the royal commissioner. I seek leave to conclude my remarks at a later stage.
Leave granted; debate adjourned.
I rise to conclude my remarks in relation to this issue. When I concluded, I was about to address the detail of the issue in relation to interest rate manipulation in the period leading up to the state election of 1989. I refer to the final report of the Royal Commission into the State Bank of South Australia. On page 290, I refer to the following comments:
"As shown in earlier chapters, the issue arose in the context of a State election in 1985, and a federal election in 1987, when the Treasurer's information and advice led the Bank to defer any change to home-loan interest rates until after the elections.
A State election was again due towards the end of 1989, or at latest in early 1990. It was in fact held on 25 November 1989.
At the six-weekly meeting on 16 May 1989 the Bank, in the report routinely provided for such meetings, commented that interest rates were likely to stay high until December and might well rise by 0.5% before December. That prompted the Treasurer to remark that such a move would be 'very bad in the December quarter'. It is difficult to identify any factor other than the prospect of an election during that period, which could have prompted the remark. Mr Prowse understood that the Treasurer was seeking to discourage an interest rate rise in the December quarter.
A passing reference to the topic in the Bank's routine report for the six-weekly meeting of 28 August 1989 again excited attention. The Treasurer was then told that the Bank was borrowing money to fund housing loans at rates above its housing lending rate, and that the position would not improve until after December 1989. Again, the Treasurer expressed concern at the prospect of an increase in home-loan interest rates.
On 15 September 1989 Mr Clark—"
that is Mr Marcus Clark—
"wrote to the Treasurer at the Board's direction advising him that continuing high interest rates were having an adverse impact on the profitability of the Bank, especially as the Bank was now having to borrow at 18.5% and lending for housing in South Australia at between 16.25% and 16.5%. The letter indicated that, at the current lending rate of $50 million per month, the loss on housing loans was increasing at the rate of $12 million per year, so that the Bank would soon be forced to increase its rates to 17% in line with other banks. The letter concluded that the Bank did not believe it could continue to subsidise home loans at a level of loss which would dramatically affect the Bank's profitability."
I interpose to reinforce the nature of that part of the commissioner's report. It is saying that treasurer Bannon was placing pressure on the bank in that period from May through to September. There was an election on 25 November. On 15 September, he was told that the bank was lending at 16.25 and 16.5 per cent and was actually having to borrow money at 18.5 per cent. It was undercutting its lending rates to the extent of almost half to three-quarters of a per cent at that particular time. The treasurer was being told that the bank was making very significant losses as a result of the decisions that they were taking and that the treasurer was urging them to take. I return to the report:
"The Treasurer's response, almost certainly prompted by the letter, was to have his Economic Adviser, Mr Woodland, speak to Mr Simmons on 22 September 1989 and again on 25 September 1989 to express the Government's concern, and to endeavour to have Mr Simmons speak directly to the Treasurer on the topic. It is noteworthy that Mr Woodland spoke to the Chairman, Mr Simmons, rather than to Mr Clark who was the author of the letter and the appropriate person to speak for the Bank on such matters.
In the face of an accumulating trading loss of some $12 million per year on such business, there was no legitimate commercial reason to challenge what Mr Clark had said. The Bank, which was expected to be competitive, was shouldering the burden of additional unprofitable assets at the rate of $50 million per month or $600 million per year."
The advice was that there were unprofitable assets of $600 million per year as a result of the policy that the treasurer in the Labor government was urging upon the State Bank. Continuing:
"Section 15 neither provides nor implies any mandate or authority for such a policy: quite the reverse. The other major banks, which were charging more realistic rates, would shrug with surprised content in observing the plight of their competitor."
Further on, the report says:
"On 26 September 1989 the Chairman and Mr Clark met the Treasurer for a routine six-weekly meeting. The topic of interest rates was on the agenda. There is a range of emphases among those present at the meeting about how the topic was discussed, but it is clear on all accounts that Mr Clark vigorously stressed the need for the Bank to raise its interest rates—"
this was about three months before the state election—
"if it was to act commercially, and that it had to act commercially. It is also clear that the Treasurer requested the Bank to hold down its housing-loan interest rates for a time, consistent with the comment he had made at the meeting on 9 May 1989. It is a fair conclusion on the whole of the evidence that this made Mr Clark angry, and that indeed may be an understatement.
There are only two issues in real contention about what transpired at the meeting: the extent to which, if at all, the Treasurer's comments were made with some explicit reference to the anticipated election or to political sensitivities, and the extent to which, if at all, compensation was offered to the Bank to hold down its interest rates.
Mr Simmons said that he was told by the Treasurer at the meeting that an interest rate rise would be politically undesirable—"
This is the chairman of the bank saying, at the meeting, that treasurer and premier Bannon was pressuring the bank, even in light of the fact that they were losing money hand over fist during that particular period, to say that an interest rate rise was politically undesirable for the Labor government of the day—
"and that he (the Treasurer) would like the Bank to hold its rates 'for a couple of months'—"
he clearly had the election in mind, which was on 25 November 1989—
"that he (Mr Simmons) was responsive to the request despite Mr Clark's attitude, and that he told the Treasurer he would take the request to the Board. Mr Bannon in evidence did not agree that he had used such words, or that their import should be attributed to him and he specifically denied that he had commented about the forthcoming election at all. He said that he had not then fixed the date of the election, which could still have been held in the first quarter of 1990. Mr Simmons' clear recollection was that the possibility of compensation was also adverted to at that meeting and Mr Clark confirmed Mr Simmons' recollection on this aspect, but Mr Bannon did not recall the issue of compensation being raised. Mr Woodland, however, did recall the issue of compensation—"
I interpose here: Mr Woodland was actually Mr Bannon's economic adviser, his own staffer—
"arising this time prior to the Reserve Bank's announcement of a subsidy for the nationally operating banks, made on 28 September 1989, and he described the meeting as being an 'argument' about whether the Bank should put up rates at that time. He did not recall the election being mentioned, although it was of concern to him and he knew it was of concern to the Treasurer."
"At the Board meeting on 28 September 1989, the Board decided to freeze housing-loan interest rates for a time which ultimately was to 31 December 1989…"
Conveniently, one month after the state election in November 1989. Without quoting all of the minutes, the section of the minutes states:
"It was agreed that the Group Managing Director should again contact the Premier and advise that where any two major banks, being ANZ and NAB, Westpac and Commonwealth, were to increase their rates, then State Bank would also increase its rates. The Bank would, however consider deferring any increases pending satisfactory arrangements with the Treasury and on the basis that an appropriate proposal be in place by 10 October 1989…"
Clearly, that is a reference to the issue of compensation being paid by the government to the bank to keep their interest rates down at least until after the state election in November 1989. Further on in the report the commissioner says:
"On 2 October 1989—"
so this is now about seven weeks before the election—
"Mr Clark met with the Treasurer and Mr Woodland to discuss the possibility of the Bank receiving the suggested subsidy to compensate it for revenue that would be forgone by holding interest rates at their existing level. By then there was little risk of the major banks needing to increase their lending interest rates, which were now 'cushioned' by the Reserve Bank's decision.
The Treasurer agreed in principle to the Bank's proposal and refer the matter to Treasury to negotiate a solution.
On 26 October 1989—"
about four weeks before the election—
"the board considered a paper dated 20 October 1989 presented by Mr Clark, headed 'Profit 1989/90 Year'. The paper, in discussing the fact that Bank was operating below budgets, specifically stated that one factor affecting the bank's profitability was its inability to cover the cost of funds borrowed to provide 'below margin' housing loans. It noted that the Bank's failure to increase interest rates on home lending was founded upon the Bank's mandate to provide affordable housing to South Australians and political sensitivities approaching an election..."
So, this is actually in a board paper and it is referring to the fact that the reason they were going on losing money in terms of their lending practices was because of political sensitivities approaching an election. He continues:
"On 31 October 1989 Mr Clark met with Mr Prowse and discussed, among other things, the quantification of the subsidy for not increasing housing interest rates. The timing of this meeting was important as Mr Clark, implementing the Board's decision, was conscious of the need to have some arrangement confirmed with Treasury prior to the election on 25 November 1989. His note of the meeting is quite explicit:
I also explained to Mr Prowse that from the housing loan issue, the Bank is in a very strong position to see this matter resolved in the next few weeks, but has no bargaining power once the election is over."
The bank is making it quite clear that it is looking for a secret payment from the government in the period leading up to the election to help the government out by keeping interest rates low, or lower, during the election of 1989, but that they knew they only had leverage whilst it was a period leading up to the election and they needed this deal to be sorted out before the election was held because their bargaining power would be gone once the election was held. He continues:
"Shortly thereafter, an arrangement was made for the bank to receive $2 million as compensation.
On 13 December 1989—"
soon after the election—
"the Board considered a paper presented by Mr Paddison dated 11 December 1989 upon which it resolved—"
"to increase interest rates from 16.5% to 17% effective from the 1 January 1990. The paper contained the following assertions:
This matter was discussed at the Board meeting of 28th September 1989. As a result of that discussion and given the sensitivity of the issue in the context of the then forthcoming State Election, it was agreed not to increase interest rates at that time…
With the State Election now completed it is appropriate for the Bank to reconsider its housing rate. We have held our rates at 16.5% for approximately five months longer than our major National Operating Bank competitors. This is causing us to forego approximately $300,000 of interest per month.
In the current profit environment and with little immediate prospect of a further fall in interest rates, it is considered essential that we achieve market parity immediately. Interest funding costs are not dropping and home loans are currently being written at a marginal loss to the Bank."
So, immediately after the election of 25 November, or two or three weeks after the election, the board, on 13 December, votes to increase interest rates and in the board paper and the minutes notes that they had held the interest rate increases down as a result of the forthcoming state election and political sensitivities at the time. The royal commissioner's findings continue:
"Mr Simmons agreed that these assertions were correct, and although the minutes cannot of themselves be held to bind Mr Bannon to the Bank's version of the events, there is ample support in the evidence of the contemporaneous events for the substantial accuracy of the minutes.
It is plain from the above that, whether or not the election had been announced, Mr Simmons and Mr Clark and the Board all understood that the Treasurer's comments at the meeting of 26 September 1989 were in the context of an imminent election, and that their understanding was shared by Mr Bannon's advisers.
The evidence does not warrant an affirmative finding that Mr Bannon himself made a proposal at this meeting in terms of a categorical request for political favours. But he knew that the proposal to hold interest rates involved the Bank acting to its financial detriment in a way which would avoid political odium and might well attract support to his Government; and he could not have failed to realise the Bank Board was alive to that implication. The intense interest of his Economic Adviser, Mr Woodland, supports that view, and Mr Emery's specific recollection that the political implications were mentioned also tends to confirm that view of the facts. To the extent that differing versions of the conversation are inconsistent with that finding, they simply reflect the different perspectives of the individuals concerned.
In his letter to the Bank of 24 November 1989 Mr Prowse—"
this is the day before the election—
"in dealing with a range of issues, proposed, for no attributed reason, that $2 million of the Bank's indebtedness to SAFA be forgone. Mr Simmons' letter in reply of 14 December 1989 is equally oblique. Mr Prowse's minutes to the Treasurer of 11 and 19 January 1990 are of parallel obscurity:
Within the wide-ranging discussions on the financial structure of the Bank it was agreed with the Bank—subject of course to your approval—that SAFA would now forgo $2 million of indebtedness, representing a 'remnant of an earlier transaction—[relating to restructuring of housing finance]—the details of which are not significant'."
This is Treasury-speak, which makes no reference, of course, to political sensitivities or anything. They were much more sensitive to the issues that were alive at the time than the State Bank board and the minutes were, clearly. Further on:
"Subject to approval by the Treasurer, that was 'our proposed resolution of one outstanding matter'."
The commissioner concludes:
"There are two important footnotes to this episode:
There is clear evidence before the Commission that in media statements and electoral advertisements and 'propaganda' prior to the election, it was the Government that claimed credit for holding down interest rates.
The manner in which the compensation to the Bank was agreed and paid can only be described as surreptitious. The Bank itself had stipulated 'no publicity' and the manner in which the payment was made was such as to minimise the risk, whether or not intentional, of public disclosure of the arrangement.
There is much, much more, and time does not permit me to go through all of that detail, but that is the brutal reality of what was going on at the time. I listed last week the examples of the 1985 state election and the 1987 federal election, but the most obscene example of political manipulation of an interest rate issue and responsibility in part for the State Bank collapse are as a result of those comments from the State Bank report.
Put in its most simple and most brutal fashion, we had a situation where interest rates were in the order of 16 per cent, 17 per cent and 18 per cent in the period leading up to the 1989 state election. From May through to November, treasurer Bannon, on behalf of the Labor government, was pressuring the State Bank of South Australia to not increase interest rates because of the political odium that would descend upon the then Labor government.
When the bank resisted that in the early stages, what was arrived at was a secret $2 million payment to the bank for them to keep quiet about it and for them to not increase interest rates in the period leading up to the election, only to increase the interest rates immediately after the election, and for all that period, premier Bannon, the Labor Party and the Labor government at that particular time claimed credit for keeping interest rates low in South Australia. That is the brutal reality of what was going on with the State Bank and the Labor government at the time.
I will not brook any of the attempts to whitewash the history in relation to the Labor Party's responsibility. I have heard some commentators and others saying that it was an independent body, they made these decisions unrelated to the Labor government administration, it just happened to be unlucky that the Labor Party was there at that time. We have all heard those stories in justification, attempting to whitewash the circumstances of the State Bank debacle in South Australia.
The brutal reality is that the dirty hands of the Labor Party and the Labor government were all over the State Bank in relation to these interest rate issues. The brutal reality was that the premier at the time, the treasurer at the time, senior advisers at the time and the cabinet at the time were actively engaged in trying to manipulate interest rates in the period leading up to the 1989 election, at the financial cost of the State Bank of South Australia, for the political benefit of the Labor government. The reality is that in today's climate such a circumstance would have ended up in front of an ICAC. An ICAC, of course, did not exist in those days.
As I said at the time, the issue of ministerial accountability is now being rewritten by Premier Weatherill, minister Snelling, minister Vlahos and others in refusing to accept responsibility in relation to Oakden and issues like that. In this case, the responsibility rested with the Labor government. Ultimately, because it became untenable, premier Bannon did resign his position and hand over to incoming premier Arnold. It was only when, eventually, it became too much that it was impossible for him to continue.
With the first announcement of the State Bank bailout, premier Bannon said he would fight on and continue to fight the battle on behalf of the government but, ultimately, the evidence was too overwhelming and he did accept responsibility and resign his position. At least to that extent he can be contrasted to the position of Premier Weatherill, minister Vlahos, minister Snelling and others in the current environment.
As I said at the outset, it has been many years since the State Bank. I have seen people and heard people trying to rewrite history. There are many members of this parliament who perhaps were not active, some perhaps not even born, at the time of the debacle of 1989, leading through to 1993. I want to place on the record for those new members, newer members and those to be elected in 2018, the sad and sorry history of this Labor government. That was the previous one; on other occasions and in other motions we can document the obscenities and atrocities committed by the current Labor government under Premier Weatherill.