November 10, 2018 by admin
The banking regulator repeatedly warned the NAB that its treatment of a bundle of toxic subprime investments was inadequate, a court has heard.
As the global financial crisis hit in 2008, NAB was forced to write down the value of the parcel of collateralised debt obligations twice in the space of three months, taking a $1 billion hit to its bottom line.
An affidavit tendered to the Victorian Supreme Court this morning in a class action brought by NAB shareholders shows that APRA raised concerns about NAB’s treatment of the CDOs in January 2008.
NAB took first a write-down of $181 million against the CDOs in May that year, followed by a second provision of $830 million in July 2008 that sent its share price plummeting.
The affidavit, sworn by solicitor Andrew Watson of Maurice Blackburn, which is acting for the shareholders, includes extensive excerpts from internal bank emails about its dealings with the regulator.
In February 2008, APRA told NAB it had “failed in our basic credit credit analysis” of the CDOs, according to an email sent to bank staff by group chief risk officer Michael Hamar.
At a meeting with the bank, APRA officer Graham Johnson said the NAB had also been “almost totally reliant on ratings and on managers’ reports”, Mr Hamar said.
“He does not believe there has been adequate fundamental analysis on the underlying individual securities.”
The chief executive officer of wholesale banking division nabCapital, John Hooper, told staff there had been four discussions with APRA about the CDOs, also known as “conduits”, in the space of one week in early February.
“From these meetings it was clear that APRA felt we had been slow on recognising provisions against conduit assets,” Mr Hooper said in an email to other nabCapital staff.
During a teleconference later that month Mr Johnson told NAB its credit files on the CDOs “appear to lack extensive evidence of independent validation or review” by the bank, instead relying on information provided by credit ratings agencies and the group that arranged the deal.
And in March Mr Johnson sent an email to nabCapital executive Geoff Cullen setting out APRA’s “primary areas of interest/concern in relation to the conduit exposures”.
He again complained about NAB’s reliance on third parties, including ratings agencies, to assess the creditworthiness of the CDOs, and raised concerns ratings had not been adjusted quickly enough as the market turned.
APRA this morning asked the court to set aside a subpoena forcing it to produce records of its dealings with NAB over the CDOs, saying secrecy provisions in the APRA Act made it a crime to do so.
“You cannot answer the subpoena without the commission of an offence,” counsel for APRA Richard Niall, SC, told the court.
However, counsel for the shareholders, Michael Lee, SC, said APRA could authorise its staff to release the information.
“The notion my learned friend has advanced that APRA is somehow a locked box, a black box… is just wrong,” he told the court.
Justice Tony Pagone has yet to decide whether the subpoena should be set aside.
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