Big four may lose $1bn loan to US firm

Big four may lose $1bn loan to US firm

Scott Murdoch | January 11, 2008

THE four major banks stand to lose most of the nearly $1 billion they invested in a troubled US mortgage group after agreeing to lend the money without any form of protection.

The Commonwealth Bank and National Australia Bank pumped $300 million each into Countrywide Financial and were joined by ANZ with $150 million and Westpac with $120 million.

Banking sources confirmed to The Australian yesterday that the loans were given without security because they were made to Countrywide as a company and not against its troubled mortgage book. Sources said the fact that the major rating agencies claimed Countrywide was "investment grade credit" shored up the deal struck last year.

The unsecuritised nature of the deal means that if Countrywide collapses, the Australian banks would have to join a long list of creditors and repayment could take several years.

Wayne Swan, who held his first discussion with US Treasury Secretary Henry Paulson yesterday, said Australian banks were not as deep in the sub-prime quagmire as their US counterparts.

"I have been advised by officials that they are not necessarily as exposed as many institutions are in the United States," Mr Swan said. "I had a discussion with Treasury Secretary Paulson about these matters in the US. We are well placed to ride out the turbulence that flows from events in the United States but we are not immune from it and that is what we are talking about now."

Shares in Countrywide slid a further 6 per cent in the Wall Street trading session on Wednesday, after plunging 30 per cent the previous night.

All of the banks involved except ANZ refused to comment yesterday. ANZ said it had liaised with the US group. "Based on this (Countrywide statements) and ANZ’s discussions with the company, ANZ is not currently anticipating any material issues that would warrant stock exchange disclosure in relation to its relationship with Countrywide," the bank’s spokesman said.

Countrywide has denied market speculation that it had sought bankruptcy protection and said it was pleased with its progression in "navigating the challenging environment".

The loan deal was heavily criticised by sharemarket analysts yesterday, particularly after the major banks claimed higher US funding costs had forced the recent rush of unofficial interest rate rises.

MME Capital managing director Tom Elliott said the funding agreement was risky and offered the Australian banks no attractive rewards. "This is not their business but they have done it because sometimes banks agree to bail each other out," Mr Elliott said. "It’s like a boys’ club.

Wilson HTM banking analyst Brett Le Mesurier said the credit crisis was just emerging when the banks made the loan to Countrywide. "Looking back this does not look like a very smart decision," Mr Le Mesurier said.

http://www.theaustralian.news.com.au/story/0,25197,23035656-20142,00.html