Investors seek $25bn rescue

Nicola Berkovic, Siobhain Ryan | August 08, 2009
Article from: The Australian

HUNDREDS of thousands of investors remain unable to access about $25billion of their savings, which are fully or partially frozen in funds that were locked down at the height of the global financial crisis last year.

Experts warn the lockdown, which has thrown the investment plans of 250,000 people into chaos, could continue for a further four years.

The crisis prompted calls yesterday for the Rudd government to either put an end to its guarantee on bank deposits -- which triggered the lockdown last year -- or to intervene in the industry in order to create liquidity.

More than 30 mortgage and property funds were frozen in October last year after the announcement of the federal government's bank deposit guarantee prompted a stampede of investors seeking to withdraw their money and shift it to bank deposits which were protected.

As National Seniors Australia warned of a backlash from retirees if the issue was not resolved, the finance industry urged the government to step in to help alleviate the freeze.

The guarantee, provided free for customer deposits of up to $1 million, covered Australian banks, building societies and credit unions, but excluded investment funds.

Some funds had collapsed or were frozen many months before, some as a result of poor lending exacerbated by the downturn in property construction.

But research by funds ratings agency Morningstar reveals the number of funds that have either suspended redemptions -- some indefinitely -- or taken partial steps, such as introducing quarterly withdrawals subject to liquidity, has reached at least 70.

As markets stabilise, some of the country's biggest lenders have backed funds' calls for a rethink of the unprecedented government intervention. The Investment and Financial Services Association has urged the government to invest temporarily in mortgage funds to provide much-needed liquidity and to roll back the bank guarantee as quickly as possible.

IFSA chief executive Richard Gilbert said that, if the mortgage trusts sold down assets in the current market, all investors would take a "haircut".

"Going forward, the bank guarantee which caused this needs to be wound back as early as it possibly can," Mr Gilbert said.

"There is no magic solution here, other than exogenous intervention or patience. With no exogenous intervention it will take three or four years for the funds to run out and for people to be paid their money."

Soon after the guarantee's introduction, Westpac chief executive Gail Kelly urged Canberra to wind the deposit threshold back from $1m to as little as $100,000 as soon as possible to avoid further distortion of financial markets.

ANZ has taken up the call, pushing for the retail deposits guarantee to be replaced by a financial claims scheme with a lower cap. National Seniors Australia chief executive Michael O'Neill said seniors had been patient for almost a year but, as the rest of the market started to pick up, they would exert more pressure to obtain access to their funds.

"I expect mounting pressure from folk who are in this situation," Mr O'Neill said.

He said the freeze had hurt both pensioners and self-funded retirees. "For folks who are quite reliant on the pension and have just put a little aside, it's a real hit ... not being able to access the little they've got really does hurt," he said.

Mr O'Neill said self-funded retirees had been hurt by plummeting shares and dividends, as well as lower interest rates.

"It's one more impact, so people may not view it as significant in isolation, but when you put it with all the other hits it's significant," he said.

Asked whether the Rudd government would step in to help alleviate the situation, Wayne Swan said: "The global financial crisis and global recession have had various impacts across the Australian economy. However, the government's decisive actions have helped ensure stability, underpin business activity and support jobs."

Morningstar manager of fund analysis Christopher Douglas said it was tricky for funds to treat all investors fairly -- selling assets to create liquidity for those who wanted out, while not accepting depressed prices for those who wanted to remain in.

The company's head of research Anthony Serhan said businesses seeking commercial credit had also suffered as mortgage funds stopped writing new loans because of the pressure for redemptions.

"When the government had to move to put the guarantee in place, the world was a very different place ... there is some scope to review the position in light of the environment now," Mr Serhan said.

Zenith Investment Partners senior investment analyst Dugald Higgins said a staged removal of the government's bank guarantee would help, but would not solve the problem. He said many people had been burnt and if the funds unfroze investments they would be hit by a rush of investors heading for the door.

He said many of the larger funds were still paying solid distributions, but the freeze had hit seniors who needed a lump sum of money for a bond on a retirement home or medical expenses.

To help people hardest hit by the freeze, the Australian Securities&Investments Commission last year agreed to bend the law so that investors meeting hardship guidelines could pull $20,000 plus half the remaining balance from their funds.

An inquiry into the bank deposit and wholesale funding guarantees by the Senate Economics Committee is due to report on September 15.