This week’s book review is Westpac: the Bank that Broke the Bank, by Edna Carew. Westpac started out as the Bank of New South Wales, Australia’s first bank in the early 1800s. By the 1980s, it had become Westpac, Australia’s biggest bank, with global aspirations, and a dominant position in many markets.
By the early 90s, it was a shadow of its former self, having narrowly escaped insolvency, (ironically rescued by AMP, which went through a very similar experience 10 years later). Edna Carew writes the story, having had huge access (but not authorisation) to most of the key Westpac players throughout the experience.
I read this book when it first came out, in the mid 90s, when I knew little about banking (just your average educated consumer, really) and enjoyed it then. But in the last few years, I’ve been educating myself fairly intensively about banking, particularly risk management in banking (as I think actuaries have a lot to add there), and thought it might be worth rereading. It didn’t disappoint.
I was astounded at some of the things that Westpac didn’t know about its risks. For example, it did not have a picture, across the whole organisation, of its total exposure to any given company. It was possible for there to be major loans from Westpac, its finance subsidiary AGC, and various other smaller subsidiaries, without anyone in each bit knowing about the others, let alone a central risk manager knowing about them.
It was also really interesting to read the culture of arrogance that Westpac had at the time. It took a lot for many of the Westpac senior people to believe that they didn’t know everything about their organisation. One anecdote that pointed this up was when Standard & Poor came in and started asking questions about Westpac’s total credit exposure to various companies. Westpac didn’t know, and the senior people started to realise that other companies would. But before that, if you’d asked them, they would have said that they were experts at managing credit risk.
It’s a lesson to any organisation that something that was world’s best practice 10 years ago isn’t necessarily best practice now. You have to keep on top of the latest thinking, and not be arrogant about what a wonderful organisation you are in. I do find that there are companies that are very arrogant about themselves, and I don’t think they are necessarily the ones that an outsider would say were the best in their industry.
This is probably only a book that would be interesting to someone in financial services. But to me, it was fascinating.
I worked for AGC for ~10 years. During that time, I was seconded to various subsidiaries, and noticed that exposures were not being aggregated. I discovered loans were being made by the Westpac merchant bank Bill Acceptance to clients of AGC and neither had a clue about the other. At the time I was in my 20s and incapable of convincing any of the much older and supposedly wiser managers of the obvious problems associated with this issue. The real problems for Westpac/AGC came when they didn’t take their own advice, and ventured into areas outside their skill set. For most of its commercial life, AGC was the standard by which other lenders were judged. They had always made a profit and always paid a dividend. They created the debenture which was used to fund their and most of their competitors’ operations for decades, and they were experts at lending under debenture, as one might expect. AGC were so profitable and well managed, senior AGC managers would sometimes comment to their Bank of New South Wales/Westpac peers that “You might own us, but we pay your salaries” and they weren’t far wrong. But AGC ‘diversified’ into property development, and destroyed most of their value and plenty of Westpac shareholder wealth, too. The remnants of AGC were sold to US-owned GE Capital, who wound down that operation (wholesale finance to the motor trade) during the worst of the GFC this year, abandoning an industry AGC had unswervingly assisted for more than 50 years. In a finance career spanning more than 30 years, AGC were far and away the best organization I ever worked for, but as so many have discovered during the past year or so, owning real estate and being highly geared can prove disasterous, even for the experts.
The stories of the State Banks (NSW, Vic, SA, WA (R&I)) at the same time would also be a good read, Tricontinental (Ian Johns MD) and State Bank of Victoria in particular.