The Importance of Banks

The three of us sat quietly in the conference room; there was not the customary banter about work and people. We waited for the phone to ring; but it remained still. We checked our Blackberries for that elusive message, but they were also at rest.

Night replaced day; employees left for home unaware of the tension that was building in Room 6.03. My young General Counsel asked me, the old, experienced hand with the grey hairs to prove it, “Is this normal?” “No,” I replied without elaboration.

It was my birthday; but I had no plans to celebrate. My family was far away; my mind focused on the crisis before us.

I am Chairman and CEO of one of the bigger companies in Australia; let’s call it Propco rather than the real name. But the Company is very real. We have 250 employees and another 350 employees in a sister company that is still tied to us financially. These employees depend on the Company for their livelihood. In a recession, there are no jobs for them if we fail. We pay good salaries and benefits; I feel responsible for each and all of them.

I also feel responsible for our investors, typically pooled retirement accounts and pension funds, who have entrusted us with their future. I feel responsible to the banks, who loaned us precious and now scarce capital to expand our business. The burdens weigh heavily; we cannot fail; too many are counting on us and me specifically. This year has not been a good one for me to sleep.

The Company is a model corporate citizen. We are the leading property company in environmentally sustainable efforts. When we were public, we led the international Dow Jones corporate sustainability index. This year, as others cut back their environmental efforts, we launched a Sustainability Institute to fund and coordinate worldwide research on sustainability efforts and results in the commercial property sector.

We support key charities to help those in need. When the Property Council solicited donations to provide for homeless kids, we gave more than any other company in Australia by far. When neighbors lost their homes in the Victoria bush fires last year, we donated land and built a house, which was auctioned and all the proceeds donated to the bushfire victims.

We are the number one rated company in Australia for worker safety. Ask the Mayor of Sydney about us, and she will describe us as a poster company for corporate citizenship.

We did not reach this precipice of corporate life or death by poor performance or bad investments. The Company is outperforming all of its peers. Our office buildings are among the best in Australia; maintenance and presentation are unsurpassed. Our tenant retention is an unheard of 80%. As industry wide average rents decline, ours are increasing; as market vacancy increases, our vacancy diminishes. Our performance is above budget and all expectation. Our portfolio is exceptional and our employees even better.

We stand at the edge because of the global liquidity crisis. We have loans that were made when banks had money and these loans are now maturing when capital is unavailable. There is no issue of our ability to repay the debt; we just do not have a billion dollars of cash to pay the loans off now.

We sit and wait for the call from a U.S. international bank, our lender facility agent, telling us that all the banks have agreed to extend the loan maturity from 4 June until 30 June. This large international bank was saved from failure by the U.S. Government. If they had failed, our hopes would likely have suffered similar fate.

No one benefits from our failure. The employees, who are productive members of the community, lose their income; investors lose their investment; banks lose part of their capital they will not be able to relend; the community loses a key and active force for good.

Under Australia law, if the Directors determine the Company will be unable to pay their bills in the next 12 months, the Directors must close the company and cease doing business. Failure to act accordingly is both a criminal and civil offense; continue doing business when you know you will default on a loan translates into jail time and loss of personal assets. The stakes are high and no one, including me, will take that chance.

Chapter 11 bankruptcy is a United States’ issue. Australia, and much of the non US world, does not treat debtors so kindly.

If Propco were closed due to ‘insolvency,’ a receiver will come in, liquidate the assets, and pay whatever proceeds to the creditors. If our portfolio were liquidated at fire sale prices, because potential buyers cannot access capital, it would result in major property devaluations and certain further bank defaults. It is probable, the property industry would collapse in a series of loan defaults triggered by asset devaluations, and the banks would fall next. The economy would be devastated; an economic depression almost a certainty.

Propco is one of thousands (maybe hundreds of thousands) of businesses around the world that rely on banks and related financial institutions for capital and liquidity. If major banks were allowed to fail, companies everywhere would fail – not because of poor performance but due to the sudden withdrawal of financial liquidity in global markets. A global depression would be the inevitable consequence.

Back in Room 6.03, the CFO’s Blackberry phone buzzes and then rings. Citibank has received the extension approvals; the risk of default has been pushed back until 30 June. The agent cautions, however, no one believes we can refinance the loan by 30 June and there will be no more extensions.

In the weeks that followed, staff worked day and night, weekdays and weekends to refinance the maturing debt. Thanks to the active leadership of key banks including a German bank, which was saved from illiquidity by the German Government, the loan was refinanced on 30 June, to the amazement of all participants except us.
Our employees continue to work productively, our investors continue with their retirement funding plans, our banks feel assured their loans will be repaid. The economy has stabilized giving hope that a recovery is near.

For those who argue that major banks should be allowed to fail and the Federal Reserve and other governments’ central banks should not have acted proactively to provide bank liquidity, I think their theories are not based on real people and real business.