The car­nage trig­gered a change of di­rec­tion for the na­tion


When Wall Street cracked early in the morn­ing of Oc­to­ber 14 (our time) I did not fully ap­pre­ci­ate the pro­found changes that would fol­low for the na­tion of Aus­tralia.

In the hours that fol­lowed there was car­nage on the Aus­tralian mar­ket and that night in Syd­ney I read about half the en­tire ABC-TV news (I was the ABC-TV busi­ness com­men­ta­tor).

A day later, back home in Mel­bourne, it was mid­night and the phone rang. I got out of bed and on the line was a com­pletely dis­traught Robert Holmes a Court. His ma­jor hold­ing was BHP but he had a range of stock both in Aus­tralia and over­seas. All his hold­ings had been ham­mered. It is not easy to go from be­ing one of Aus­tralia’s wealth­i­est peo­ple to close to bankruptcy in a mat­ter of a day or so and, un­der­stand­ably, he was not han­dling it well.

I am not sure why he called me but over the decades on sev­eral oc­ca­sions dis­traught chief ex­ec­u­tives have called just to get the cri­sis off their chest. At that time I thought Holmes a Court might be near col­lapse but I was wrong — he pulled him­self to­gether and never again men­tioned that phone con­ver­sa­tion. When I raised it ca­su­ally he couldn’t re­call hav­ing it.

At the time of the call Holmes a Court’s great hope was that his mas­sive cash rais­ing un­der­writ­ing agree­ment with Mer­rill Lynch would stick and he would then have the cash to take con­trol of BHP at its low point.

But he was wor­ried be­cause the un­der­writ­ing deal was not con­sum­mated. As it turned out Mer­rill Lynch still had let-out causes and Holmes a Court was in trou­ble, and BHP was saved. Had what was then Aus­tralia’s largest com­pany fallen to Holmes a Court, Aus­tralia would have been fun­da­men­tally changed.

But the dra­matic im­pli­ca­tions of the 1987 crash went far beyond the events of Oc­to­ber 1987 and ex­tended for an­other six or seven years. The big­gest of them was the sub­se­quent dra­matic fall in the prop­erty mar­ket, the mak­ing of the Com­mon­wealth Bank, and Kerry Packer al­most get­ting con­trol of the cri­sis rid­den West­pac. (A for­mer CEO of an elec­tri­cal ap­pli­ance com­pany, but more about Packer later.)

Most of the com­men­tary on the 1987 crash will be about the huge build-up in mar­gin lend­ing, which meant that when the share prices be­gan fall­ing the bor­row­ers were forced to sell. And each time the shares fell more of their share­hold­ers were forced out, and a vi­cious down­ward spi­ral de­vel­oped — and that share spi­ral low- ered the share-re­lated as­sets around the world.

Here in Aus­tralia the big­gest buyer of such as­sets had been Alan Bond. Bond had vir­tu­ally gone broke at the be­gin­ning of the 70s but re­cov­ered, and when he won the Amer­ica’s Cup in 1983 he and Aus­tralia were was the toast of Amer­ica.

The for­mer sign writer and Aus­tralia were one and the same thing in the eyes of most Amer­i­can banks and Bond walked around from bank to bank and was of­fered as much as he wanted, and that of­fer was not with­drawn in the years that fol­lowed.

Bond had a habit of think­ing of cash in the till as profit so imag­ine his de­light at so much bor­row­ing avail­able. He went on to buy Chan­nel Nine from Packer; a string of lead­ing brew­eries from Bris­bane to Perth, Kal­go­or­lie gold mines and many other as­sets. All of the pur­chases were all on bor­rowed money thanks to the Amer­ica’s Cup.

He was short of cash­flow and all the as­set val­ues slumped in the crash. Apart from Holmes a Court and Bond there were oth­ers in the as­set-buy­ing game prior to the crash, in­clud­ing John Spalvins, who bought a string of re­tail­ers and a com­pany known as Tri­con­ti­nen­tal, which was sub­sidiary of the State Bank of Vic­to­ria. Only Holmes a Court sur­vived.

Holmes a Court had set him­self the ob­jec­tive of buy­ing con­trol of BHP back in the early 80s and he built up his cap­i­tal with a se­ries of suc­cess­ful raids on other com­pa­nies, led by Ansett. More­over he set up a com­pany known as Bell Re­sources, which was a mir­ror im­age of the best as­sets of BHP, and he used that mir­ror im­age to woo Aus­tralian in­sti­tu­tions into ac­cept­ing his pa­per in ex­change for BHP shares.

BHP chief ex­ec­u­tive Brian Lo­ton and its chair­man, the late James Balder­stone, were pre­pared to do what­ever was re­quired to block Holmes a Court. BHP set up a re­mark­able set of de­fence mech­a­nisms, in­clud­ing a deal where BHP backed John El­liott’s em­pire with $1 bil­lion in cash and El­liott’s El­ders/Fos­ters group bought shares in BHP to block Holmes a Court. At the peak of the bat­tle, around 1985-86, both El­liott and Holmes a Court were ap­pointed to the BHP board. The 1987 crash caused huge losses for BHP and wrecked El­liott’s El­ders/Fos­ters em­pire. But by then BHP was safe.

None of the en­trepreneurs fully un­der­stood the mag­ni­tude of the crash and what it meant.

The ex­cep­tion was Holmes a Court and he im­me­di­ately be­gan mar­ket­ing and sell­ing his as­sets to raise cash. But that cash ended up in a com­pany called Bell Re­sour- ces, which was only partly owned by Holmes a Court. When the in­sti­tu­tions wouldn’t do a share ex­change he sold his stock in Bell Re­sources to Bond, who grabbed the Bell Re­sources cash to try to save his em­pire. That sent him to jail be­cause the out­side share­hold­ers in Bell Re­sources were rav­aged but Holmes a Court’s em­pire still con­tin­ues, al­beit much smaller, and is run by his wife, Janet Holmes a Court, who helped keep him on the track in the dark days.

In my writ­ings in the weeks and months af­ter the crash I pre­dicted that the prop­erty mar­ket would be next. I even ad­vised a young prop­erty en­tre­pre­neur to sell his prop­erty and he took my ad­vice. In the short term I was never so wrong. Shares had a bad name so money flowed into the prop­erty mar­ket and, aided by Ja­panese buy­ing prop­erty across the board, sky­rock­eted in price.

So much so that by 1989 the Re­serve Bank was scared and raised in­ter­est rates to 17 per cent. I per­son­ally re­mem­ber it well be­cause I bought a prop­erty to keep my par­ents’ view and then found rates at 17 per cent. The crash that nor­mally fol­lows such a se­vere prop­erty mar­ket fall came with a vengeance and the prop­erty I pur­chased fell 33 per cent in a few months. And that sort of fall took place around the coun­try. Some­times the falls were much greater. My young en­tre­pre­neur friend had be­lieved I was wrong and moved back into the mar­ket. He was bankrupted.

Aus­tralian banks had not un­der­stood the prop­erty risks that would fol­low from such a big share crash and many had loaned heav­ily into the mar­ket to fuel that last leg of the prop­erty boom. West­pac and ANZ led the charge and, worse still for West­pac, it con­trolled a fi­nance com­pany, Aus­tra- lian Guar­an­tee, that also loaned heav­ily into prop­erty. The com­bi­na­tion of the flow-on from the 87 crashes plus the prop­erty crash hit sev­eral banks sav­agely. West­pac and the ANZ were close to in­sol­vency. In­deed, af­ter an­nounc­ing a huge loss West­pac cleared out a few di­rec­tors and ap­pointed one of its non-ex­ec­u­tive di­rec­tors, John Uhrig, as chair­man and act­ing chief ex­ec­u­tive. A few years ear­lier Uhrig was CEO di­rec­tor of the Ade­laide-based Simp­son Ap­pli­ance Com­pany.

Packer, fresh from buy­ing back the Nine Net­work at a frac­tion of the price he sold it to Bond for, reck­oned the for­mer wash­ing ma­chine maker could be cleaned up. With his hench­man Al “Chain­saw” Dun­lap, Packer tried to bully his way into con­trol of the West­pac board.

But he to­tally un­der­es­ti­mated the de­ter­mi­na­tion and skills of Uhrig. West­pac, like BHP, al­most fell, but was saved. Dun­lap had planned to take to the West­pac Bank with his well-prac­tised chain­saw, which was a eu­phemism for mass re­trench­ments.

Mean­while in Mel­bourne the State Bank of Vic­to­ria was crip­pled by the sub­stan­tial losses of its high­risk lend­ing sub­sidiary Tri­con­ti­nen­tal. Paul Keat­ing con­vinced a Vic­to­rian govern­ment, which was also close to bankruptcy to sell the bank to the Com­mon­wealth Bank for a to­ken price.

Com­mon­wealth Bank would be floated and would emerge as Aus­tralia’s largest bank. The NAB had skil­fully avoided the ex­cesses of the post-crash era and un­der the bril­liant di­rec­tion of Nobby Clark and Don Ar­gus ripped busi­ness mar­ket share from both ANZ and West­pac.

We have never since seen any­thing like the 1987 crash. Could it hap­pen again? We went close in the global fi­nan­cial cri­sis. In 2017 glob­ally the de­riv­a­tive mar­ket is prob­a­bly our most dan­ger­ous world move­ment. In Aus­tralia, if any­thing slashes the value of Aus­tralian houses, our banks would again be in trou­ble. But we no longer have the likes of Alan Bond, Robert Holmes a Court, John Spalvins and John El­liott in the busi­ness bor­row­ing pipe­line.

None of the en­trepreneurs fully un­der­stood the mag­ni­tude of the crash and what it meant


Robert Holmes a Court’s em­pire, although much smaller, still con­tin­ues

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