Mugwump wrote:Good analysis, Skids, and I broadly agree with the conclusions, though a few quibbles with the argument :Skids wrote:Isn't it ironic that the government is now trying to slug the banks?
Why they ever sold OUR assets continues to baffle me. Thanks Paul!
The privatisation of the Commonwealth Bank was a financial disaster for the Australian public, although investors in the float did very well indeed. The capital structure established prior to the sale of the first tranche of shares in 1991 involved the issue of 835 million shares. Although the par value for the shares was set at $2, the relevant consideration for valuation is the issue price which was set at $5.40. This implies a valuation of $4.5 billion for the Bank as a whole, (or about $5 billion valued in 1995-96 dollars0. The procedure for the sale of the second tranche of shares in 1993 ensured that the government received an amount close to the market price of the shares at the date of sale, which turned out to be around $9.50, implying a valuation for the Bank as a whole of $7.9 billion, or about $8.5 billion in 1995-96 dollars. The final share offer for the Bank was announced in June 1996. The sale price was around $10 per share, also implying a valuation of $8.5 billion in 1995-96 dollars. The total proceeds from the three stages of the sale amounted to about $7.8 billion in 1995-96 dollars.
Average real annual profits over the period 1988-93 (which covers a complete business cycle) were around $560 million. Computing the present value of this stream of profits at a discount rate of 5 per cent yields a value of $11.2 billion for the Bank as a whole. Therefore, even if profits had not increased after 1993, the public would have incurred a loss of around $3.5 billion from the privatisation. In fact, primarily because of the removal of restrictions on the monopoly power of the banks, profits have soared. Profits for the three years from 1998 to 2000 totalled $5.4 billion, or more than half the total sale proceeds received by the Australian public.
Financial deregulation has been similarly disastrous. Since the advent of financial deregulation, banks have raised fees and charges, cut services and exploited their collective monopoly power whenever possible.
http://www.uq.edu.au/economics/johnquig ... ion01.html
1. I do not know how much of the expanding profitability of the CBA relates to increasing efficiency and cost control in private ownership. All banks tend to bloat, but government enterprises tend to do so especially. So if it had stayed in government hands it may not have been as profitable.
2. Bank profitability in Australia since 2003 relates partly to a housing bubble driven by excess credit creation (see Prof Steve Keen on this) and profitability is probably illusory. When the chickens hit the fan, private shareholders will presumably bear a large chunk of the cost, rather than the taxpayer.
3. Ultimately, the price paid for the CBA when it was sold was set in the market, so it s hard to argue that it was "worth" more than it was sold for.
Nonetheless, I continue to be mystified by the reverence shown to Paul Keating. He presided over the sale of national assets, led us into an appalling recession, and contributed greatly to the toxic atmosphere of public life, with his lowbrow rhetoric.
On banking, yes, a new public digital bank with simple vanilla mortgage offerings and savings products, including ultra-low fee super investments, would be a good thing for a visionary government to set up. Reasonable levels of senior management remuneration and a ban on incentives and the "selling" culture would exert real pressure for the banks to clean up their stale and exploitative oligopoly.
The highlighted points...
1 - It may have.
I'd argue that, if it stayed in the publics hands, more people would have stuck with it and made the sector more competitive.
2 - Prior to 2003.
The return on private investment had already been surpassed.... WE would be way infront before then, what, almost 2 decades ago?
3 - Really?
