Great debacles of our time: Brokers get broken

Oh this is a right pickle.

Once upon a time, stockbrokers were venerable institutions with names like JB Were & Sons, Potter Warburg, Ord Minnett and others. They screamed integrity, even if you knew that the way they profited was by buying and selling shares, hence putting them in situations where conflicts of interest can and did arise.

Over time, advising their clients on share trading became much of a side event, as they branched out into areas that could "add value" to their revenue flows.

Derivatives trading became more prevalent. Then full financial planning services. Institutional advice. And margin lending.

About the same time, fund managers, custodians and superannuation funds were finding that they could open up more income flows by lending out their shareholdings to other institutions or investors. The money that flowed from this was valuable.

Why would anyone borrow shares? There appears to be two main drivers for this:

1. Borrowed shares can be sold, thereby covering an activity known as "short selling", which is where you sell securities that you don't possess. You can then buy them back later, which you need to do before passing the securities back.

2. Holders of borrowed ordinary shares can vote on resolutions of listed companies.

The mechanics of stock lending is a weird one to me - and I don't really know the full legal reasons why. When shares are lent, legal title actually passes from the lender to the borrower.

So what actually happens here?

Normally, when title to a security changes hands, there is a Capital Gains Tax (CGT) event. Where stock lending is concerned, for no apparent reason, this rule appears to head straight out the window.

So if the lender is not being pinged for the transfer of securities, one would expect that they have retained some sort of beneficial ownership. In which case, normally, when the shares in question are sold by the borrower - this should give rise to a CGT event for the lender. This doesn't appear to be the case either.

Legal responsibility for the CGT on shares being sold and then bought back would appear, then, to lie in the hands of the borrower. And I'm not really sure how this works, given that what I know of our CGT rules, assets need to be bought before they can be sold.

(Although, it should be noted that most share borrowers fall into the category of "professional investors", in which case, profits retrieved from the selling and buying back of shares would appear, to this observer, to fall into the income category, which makes the whole thing a little bit simpler to work out.)

Which means that ordinary tax laws go out the window a little bit here, and there must be some loopholes or explicit exemptions that are currently in place to facilitate this sort of activity.

But back to brokers again.

Eventually, someone had to connect the dots and work out that margin lending and stock lending could be combined in a profitable way. This would have been a no-brainer for stockbrokers, given that margin lending (or pretty much most lending arrangements for that matter) and stock lending are largely unregulated.

Brokers, who by now had extensive margin lending operations, were changing their arrangements with regards to margin lending subtly. The scope of the change was minor, but a biggie nonetheless: Brokers would assume ownership of the securities outright, rather than merely taking a charge over them.

Then, the broker could on-lend the securities in question.

I don't expect that this is limited to a handful of firms, either. While I have no evidence to back this up, I suspect that the practice is rampant, and it's only some who have been caught doing this.

Consequently, it was only a matter of time before a broker found themselves in hot water over this.

Tricom's problems came to light at the start of this year, when there was a huge slide in the value of stock markets around the globe precipitated by the woes in the US housing and credit markets. Essentially, they had lent out so much of their clients' stock, that when the slide hit and their clients were selling, they couldn't get the stock back in time to enable settlement for the sales made by their clients.

Tricom is still in business. They've since been bailed out by a lot of their owners and clients. Which makes them incredibly lucky.

More worrying was the problems caused by the collapse of another stockbroker not long after. Opes Prime collapsed after similar problems, however Opes Prime's problems were far sillier.

Opes Prime already were exposed to completely ridiculous practices that they'd put in place where they were accepting small listed companies as security for margin loans. This is not normally done.

Normally, margin lenders won't accept shares for security if they lie outside the ASX100, or maybe the ASX200 at a pinch. Opes Prime appeared to accept shareholdings in micro-caps, which was phenomenally silly.

Malcolm Maiden, in The Age described Opes Prime as the "margin lender of last resort".

Indeed, Marcus Padley said somewhere that the value of shareholdings outside the All Ordinaries Index posted as security came to in excess of 65% (if my memory serves me correctly) of Opes Prime's total book. Unbelievable!

Anyway, compounding this was the insistence of Opes Prime to take advantage of lax stock lending laws to move shareholdings between accounts in order to avoid making margin calls on clients' accounts. This was dangerous stuff, and eventually, the losses were going to be big.

ANZ Bank got dragged into this, as they were Opes Prime's principal financier, and held title themselves to much of Opes Prime's stock. How they did this, I'm not really sure. Opes Prime would have been extraordinarily stupid to have allowed ANZ to have ownership of the shares in question, given their practices.

At the end of the day, both the ASX and ASIC have come under heavy fire for allowing situations like Tricom and Opes Prime to happen. I'm not sure why - they couldn't really have prevented this, anyway. I'll talk about this some more in a few moments.

As a postscript to this, broking firm Lift Capital have just gone under, after inappropriate margin lending arrangements with three of the company's directors sent this firm under.

So the question remains - why is only investment covered by the financial services provisions of the Corporations Act? Why isn't lending?

This is more a gripe than a question that I'm going to attempt to answer today.

Standard but necessary disclaimer: This is not advice. Only a complete idiot would think that any of this constituted advice. It's not even vaguely reasonable to consider this to be advice. If you are in any doubt as to the content of this, see a good, independent financial adviser immediately. They do exist.

Great debacles of our time: The sub-prime mortgage meltdown

As Michael Bains might say - "Silly humans!"

Sub-prime mortgages were something on my radar, until one of my Facebook buddies (and former primary schoolmate) posted this on my FunWall.

I hate FunWall, but I love this. This says all you need to know about the whole stupid mess - and how financial engineers can sell anything.

And it's hilarious, too.

Personally, I think that there should be arrests to come out of this, but we won't see any. Enjoy.

Standard but necessary disclaimer: This is not advice. Only a complete idiot would think that any of this constituted advice. It's not even vaguely reasonable to consider this to be advice. If you are in any doubt as to the content of this, see a good, independent financial adviser immediately. They do exist.

Great debacles of our time: The great mezzanine financing collapse (part 3)

This is part 3

Part 1 is here.

Part 2 is here.

It is with great displeasure that I announce that Bridgecorp has gone under.

This, sadly, means that a fourth major mezzanine financier has gone to the wall, and appears to have taken with it about AUD $25 million of investors' money.

I don't really want to add much more to this. It's a sad tale, and I don't know much about Bridgecorp's circumstances. Suffice to say, there can't be much more carnage on this front.

Standard but necessary disclaimer: This is not advice. Only a complete idiot would think that any of this constituted advice. It's not even vaguely reasonable to consider this to be advice. If you are in any doubt as to the content of this, see a good, independent financial adviser immediately. They do exist.

Great debacles of our time: The great mezzanine financing collapse (part 2)

This is part 2.

Part 1 is here.

We were starting to really get stuck into the the sheer carnage caused by the collapse of Westpoint, Fincorp and ACR.

In part 1, we looked at a couple of burning issues created by these debacles:

1. The role that adviser commissions played in the collapse of these businesses and the loss of investor savings;
2. Mezzanine finance and portfolio theory - how is it that advisers can spot a wildebeest when it walks and quacks like a duck? and;
3. Financial literacy and retirees. Is it wrong to target a vulnerable sector of the community when pushing risky products?

The media has been completely enjoying this horrific financial pile-up. And why wouldn't they? There are thousands of angles to explore this from - advisers, investors, the companies involved, the executives, the trustees, the liquidators administrators, the federal government, regulators etc.

And why not? They all had a role to play in this. Whether good or bad, savoury or otherwise.

I'll do my best to cover some of the angles, but I'll re-iterate the important lesson to be learnt from this:

"If it looks too good to be true, that's normally because it is."

Let's look at some interesting stats from this. According to an article in the Fin of Saturday 2 June, 2007 by Robert Harley, the following numbers come up. There were:

• 20,000 investors burnt; and
• AUD $800 million lost.

No matter which way you crunch the numbers, this adds up to serious money and serious lost dreams.

The financial regulator, ASIC, is looking very battered and bruised after some fire from both sides of Parliament. But was ASIC being made a scapegoat?

This blogger thinks that they were. And these are the reasons why:

4. Mezzanine finance is a risky proposition.

Even though the issue of debentures and unsecured notes are done through a trustee, there is very little recourse available through a trust deed for investors. The trust deed itself is normally written by a the company who is issuing the paper.

Trustees are usually appointed through a tendering process whereby the one that offers their services most cheaply will win out. Not only that, but during the tendering process, preference will be given to trustees who promise no questions asked.

Trust Company, the trustee appointed to look after ACR's investors maintains that ACR did all that was required from Trust, and met all their obligations under the trust deed right up until the bitter end.

Is this a conflict for trustees?

I don't really think so - provided that there is proper disclosure given up front. If this is done, then the job of the trustee is mostly done. The trustee just needs to look after the rest, but they still have a duty to act on behalf of the investors.

How about ASIC?

ASIC polices the issue of these investments, but really only up to the point where disclosure is concerned. If the issuer of this paper is meeting their disclosure requirements, then ASIC's job is done.

How the company that has issued the debt then operates in servicing their debt obligations is between the trustee, the company and their investors.

This is a bit different to a bank or a superannuation fund.

Banks and super funds have their day to day activities policed by a number of bodies, all of whom ensure that their prudential and regulatory duties are being upheld.

For banks, the regulatory side of things is monitored closely by the Reserve Bank, and APRA monitors their prudential undertakings to ensure that all is good.

Super funds also have APRA keeping tabs on their prudential requirements, except for DIY super funds which are looked after by the ATO. The ATO also looks after super funds' regulatory arrangements.

In the case of debentures, unsecured notes and other debt instruments, there is no body that looks after the prudential goings on of the company that issues them - it really is caveat emptor.

This adds a whole new level of risks that banks and super funds don't have.

Where disclosure is inadequate, this is pretty much the only area where ASIC can step in and so something about it. And in fact, ASIC did so - the article in the Fin reports that ASIC stopped ACR from issuing capital raisings three times until they fixed stuff up. Which ACR did.

ASIC also issued 11 warnings about Fincorp's goings on both before and after their CEO, Eric Krecichwost resigned as CEO (and as a director) in 2005.

This would appear to point the finger of blame in an entirely new direction, and in a direction that investors will not like, at least for investors who didn't use financial advisers:

5. Investors really only have themselves to blame

This really only applies to investors who just saw the advertisements and went berzerk. It doesn't really apply to investors who sought financial advice.

ASIC appeared to be doing everything short of double-checking the disclosure given by these companies for mistakes and errors.

But the whole deal looked too good to be true for retail investors.

What happens in the institutional world?

Harley's article mentions that where professional lenders, like the ubiquitous Macquarie Bank are concerned, rates of 20% or higher are the norm.

(By the way, just once I'd like to do a post where I don't mention Mac Bank. How in the name of Crikey do these guys end up in everything that I write?)

Anyway, you can bet that where professional lenders are involved, all sorts of caveats are written into the contract to ensure that the lender has some recourse.

Retail offers simply don't have this kind of bargaining power. These investors were pretty much sitting ducks for the walloping that they got, and I hate to say it, but they really only have themselves to blame.

6. How do we protect investors from this sort of thing happening again?

Well this is an age old question.

Investing, much like supply, demand, democracy, revolution and innovation only works because of two base human emotions - fear and greed.

I would also add laziness to this, but I'll detail why on another day.

Investors who got burnt were basically shovelling everything that they had into these investments. In a nutshell, they got greedy.

Of course, where advisers were involved, this complicates things a little, and the blame shouldn't be sheeted home to investors entirely.

Portfolio theory says that putting large slabs of your cash into the one asset is a very silly thing to do, and history has borne this out. Diversification, while it won't protect people from market nosedives, will protect people from problems with particular parts of a portfolio.

But if you throw everything into one asset that goes belly up, you are in deep trouble.

Tony D'Aloisio, the new chairman of ASIC, says that all products like these coming on to the market should all be professionally rated.

This is possibly a constructive solution, but D'Aloisio knows only too well that investors will bear the cost of such risk ratings.

D'Aloisio's other solution is better, though:

7. Can we educate investors about risk?

I think that risk is so important that I honestly believe it should be taught at school as the fourth 'R'.

I'll do a Financial Tip on risk a little down the track, hell possibly even three, but risk is so important, and it's through misunderstanding of risk that people go on to get burnt in the way that they have.

I believe that we can educate investors about risk, but this should start in secondary school.

Trying to educate mature Australians about risk is shutting the gate after the horse has bolted type stuff. It really is.

Australians' financial literacy is shocking. But risk would be an excellent place to start fixing this discrepancy up. And I for one will support any initiatives that ASIC puts in place to improve this particular piece of general financial knowledge.

It's the most important piece there is.

Edit 13/06/2007: I lay the blame for quite a lot of this squarely at the feet of investors, which oversimplifies things a little bit. In the case of Westpoint investors (and some others), however, quite a lot of them sought financial advice, and the advisers in question recommended the debt in question. I've done a couple of edits to rectify this, but I may explore Westpoint's situation in a future post - it warrants some additional comment space.

Disclosure: This blogger owns shares in Macquarie Bank Limited.

Standard but necessary disclaimer: This is not advice. Only a complete idiot would think that any of this constituted advice. It's not even vaguely reasonable to consider this to be advice. If you are in any doubt as to the content of this, see a good, independent financial adviser immediately. They do exist.

Great debacles of our time: The great mezzanine financing collapse (part 1)

I haven't really blogged much about this, but the dominoes are really starting to roll within mezzanine finance in Australia. After Westpoint went down, we've now seen Fincorp and Australian Capital Reserve (ACR) hit the deck as well.

The fact that this is even major news speaks volumes about 2 things:

1. Where financial advisers stand to gain significant commissions from the sale of such products, can there be any more evidence that commission-based advice is completely wrong?

2. Where such risky products are offered, should this ring alarm bells on the general level of investor financial literacy if investors go into these with all guns blazing?

First of all, what do we mean by mezzanine financing?

Basically, in all these instances, the company that was the end user was building property developments. Sound OK, so far?

In order to undertake this level of development, money needs to be borrowed, usually from banks, to fund purchase and/or construction.

However, this will only go part way. You know how banks will generally lend up to 80% of a property's value? And possibly a bit more if the bank (which the borrower pays for, natch) buys Lender's Mortgage Insurance?

Well, more money will quite often be required for property development.

This is where mezzanine financing comes in.

Mezzanine finance is usually sourced from the issuance of certain financial instruments, usually debentures and unsecured notes. This promises the investor a fixed rate of interest for a fixed term, and at the end, the borrower pays back the principle, together with any interest that is owed.

Debentures are usually secured through a trust deed over the company. Unsecured notes are, as the name would suggest, not secured.

But the security provided for debentures is not normally worth the paper it's written on, unless the security provided are specific assets. If it is only security over the company itself, then debenture-holders will rank behind secured creditors if the borrower is wound up.

In the case of Westpoint, Fincorp and ACR, the "secured creditors" are the banks who have lent to these companies and have first mortgage claims over specific assets. So all is good for them, provided that employees are paid, the taxman gets his cut and the administrators/liquidators get paid, though not necessarily in that order.

Unsecured notes will then normally rank behind debentures. Shareholders will be last, in the unlikely event that there is anything left over after the banks have mopped up.

The main problems, though, with these were in the points raised above. Let's look at them one by one:

1. Financial adviser commissions

I've heard, but I can't pin it down, that in the case of Westpoint, commissions paid to advisers were as high as 10%. This means that for a $10,000 investment, a financial adviser would be collecting a commission of up to $1,000 up front, not allowing for cuts that his dealer group may keep. Not only that, but the commission was paid for by Westpoint themselves, it wasn't recouped from the investor through an "entry fee" arrangement.

Now in all my years of providing advice, it was rare that any product would provide anything up front of more than 4%. And even then, this would normally be recouped via an entry fee, so that the investor essentially paid the fee.

Ostensibly, this means that Westpoint were paying a 10% commission to advisers on top of the interest rate applicable to the notes that they had written. That's some seriously expensive borrowings.

The interest rates were quite high, too. But I'll come to this later.

I can't find any evidence to suggest that Fincorp and ACR were being invested in via financial advisers, so I'll have to assume that his problem was specific to Westpoint.

2. Mezzanine finance and portfolio theory

From what I can tell, advisers appeared to be completely ignorant about the nature of these investments.

Debentures and unsecured notes are medium to long-term instruments that promise a rate of interest paid in regular instalments, together with a return of capital at the end.

This means that they are fixed interest investments, just like bonds and term deposits.

Because the funds were used for what was ostensibly property investments, advisers were not only recommending these to people as part of their fixed interest portfolio, but also as part of their property portfolios.

This is erroneous in the extreme.

Not only that, but it appears that advisers were, in some instances, recommending that investors stick all this part of their portfolio into the one instrument.

Portfolio theory tells us that this is a silly thing to do. For most investors - my guess 90-95% - portfolio theory tells us that diversification achieves a greater return for a given level of risk.

Usually, the risk that is managed through diversification is market risk, however there are other risks out there, two of them being credit risk and interest rate risk. Diversification provides an effective way of managing both of these risks, by "not putting all one's eggs in the one basket".

But if you're going to stick an entire segment of your portfolio in the one asset - your diversification is reduced. And because of this, your exposure to something going wrong is greatly increased.

It's fair to suggest, and studies back up this suggestion, that advisers were really only thinking about their commissions when recommending this sort of product.

Again, I can find no evidence to suggest that Fincorp and ACR's ones were being sold through financial advisers, so this problem appears to be Westpoint-specific.

However, my point about diversification applies to all investors who used this sort of product still stands, and I'll discuss this some more in due course.

3. Financial literacy and retirees

In the case of ACR, I remember seeing advertisements on TV last year where interest rates of up to 9.15% were being offered. I remember at the time breathing a snort of disbelief and thinking to myself, "Surely that can't be sustainable."

And obviously, it wasn't.

However, as I've mentioned before at various spots throughout my blog, the general level of financial literacy throughout the Australian public is not particularly good.

The first thing that anyone should learn before they invest a cent is this old maxim:

"If it looks too good to be true, that's normally because it is."

Anyway, the advertising that ACR was doing was calculated to ensnare retirees. I'm told that Fincorp and Westpoint were doing this too, at various times, but retirees are an interesting demographic.

Why?

A. They're usually cashed up. They've retired from the workforce, and they often have a significant chunk of money to play around with, either in the form of superannuation, or equity in their homes.

B. It would appear that retirees are not particularly financially savvy compared to later generations. This blogger would contend that later generations aren't all that better, but I'll leave that post for another day.

C. Retirees generally like investments that pay regular income.

So it would appear to be a no-brainer - when presented by advertisements showing excellent rates, why wouldn't retirees go in for this hell for leather?

In my book, aiming one's advertising at retirees is only slightly better than how the music industry, alcohol and tobacco companies target their advertising at kiddies.

This doesn't make it any less vile.

I'm going to call a halt here - there's plenty more that I'd like to write, but it needs a second part. Stay tuned.

Standard but necessary disclaimer: This is not advice. Only a complete idiot would think that any of this constituted advice. It's not even vaguely reasonable to consider this to be advice. If you are in any doubt as to the content of this, see a good, independent financial adviser immediately. They do exist.

Great debacles of our time: The failed Qantas takeover

This one was always one that had our full attention from day one. And it stands as an example of a pretty good lesson in how not to do a private equity deal.

The story goes like this - a company that is roundly considered an all-Australian icon, Qantas, is subject to a takeover, where the guys taking the company over is a small cabal of management in league with Macquarie Bank and a bunch of private equity financiers including Texas Pacific and Allco Finance Group and others.

Naturally, all the usual stuff comes out - the unions complain about possible off shoring of jobs, politicians complain in parliament about the possible loss of an all-Australian icon, staff complain about an uncertain work environment and the media lap it all up.

Anyway, institutions holding the shares refuse to sell and the whole deal falls down in a blaze of uncertainty in what was possibly the most anti-climactic end to a private equity deal yet.

Anyway, I found this whole thing amusing from start to finish. I would have found it even funnier if I didn't hold shares in Qantas and Macquarie Bank, but this was truly a debacle that ranks highly on our great debacles scale.

The first thing about this story was the degree to which management could not keep it quiet that they were going to attempt a management buy-out. Rumours abounded and bubbled around to the point where the ASX had to issue a please explain. Fortunately, by that point, the consortium funding this was ready to go public and so the deal financially came out. Not before, I'm sure, people read the newspapers and acted on the rumours which were, by that stage, smoking hot.

I'm sure that I'm not the only one who thinks that the ASX took far too long to act to get the rumours addressed. But this was funny stuff.

Anyway, the consortium's takeover attempt goes public and is embraced fully by the Qantas board after some weak attempts to show some form of neutrality. You do have to note at this point in time, and also throughout, very little disclosure has been made as to how many in management or on the board were in on this. It appears that disclosure only takes place these days when possession of the shares in the new entity takes place.

So the terms of the private equity deal are fairly attractive relative to the share price - $5.60 per share prior to a fully-franked dividend of $0.15 per share which means that the takeover offer price is $5.45 per share after the dividend is paid out.

Acceptances are slow coming. That's OK, the consortium is happy with this. They're expecting them bit by bit. But they're still confident that they'll get the required 90% acceptances to allow mandatory acquisition of the remaining shares by the cut-off date.

Meanwhile, some of the institutions are holding out. It's clear that quite a few of them do not want to sell.

One of them, Andrew Sisson from Balanced Equity Management breaks the silence that fund managers usually put up by publicly announcing that the offer by the consortium is simply not good enough.

It is clear at this stage that the bid is now in deep trouble.

It is at about this point, if memory serves me correctly, that the desperate consortium tries to pull a rabbit out of a hat. This was quite novel and really quite amazing for this type of takeover. The consortium extend their offer and says that they'll proceed with only 70% acceptances.

I found this bit hilarious - basically, they were saying that they were happy to allow 30% of the company to remain on the market.

This bit was always going to backfire for several reasons:

• Retreating to 70% acceptances looks desperate; and
• A new possibility for investors has emerged.

A new possibility for investors had emerged, and it was one which would have been particularly attractive to some, although admittedly not so attractive to others - investors had effectively been offered a once-in-a-lifetime entry in at the ground floor to a private equity deal involving a management buy-out.

Time was running out now.

To complicate matters, as they do, ever since the board of Qantas announced that they were approving the bid, hedge funds just could not help themselves.

Now what hedge funds do here is very simple. They go out there and, without breaching the mandatory takeover offer rules, they get their hands on as much of the company that they can, while taking advantage of the arbitrage difference between the buy price and the takeover offer price.

As a result of all the shares changing hands, Qantas, which is prevented by law from being owned by more than 49% foreign investors, is suspected to have breached this provision and it is thought that the amount of shares in the hands of overseas hedge funds may have cleared the 49% mark by a good portion.

What is also interesting to note, is that the hedge funds themselves signalled their intention for the fun and games to continue by issuing acceptances for part of their shareholdings in the hope that this activity could be stretched out. More on this later.

Anyway, hedge funds were in it up to their eyeballs and stood to make a killing should the takeover go through.

So the deadline approaches, and the consortium approaches every man and his dog on the share register attempting to get enough acceptances to enable the bid to be extended.

At the deadline, all they had to do was to get 50% acceptances, and an automatic extension of two weeks would have been added to the deadline.

It is at this point that the funniest part of this little arrangement happens.

Leading up to the deadline, it was clear that they had about 47-48% acceptances and they just needed one of the hedge funds to get on board - because it was clear that any of the Australian fund managers who were holding out would not be selling.

One of the hedge funds gives enough acceptances to get the offer over the line - but a full five hours after the offer lapses.

The bid is declared dead, but the consortium is not giving up.

Soon, after the Takeovers Panel rules that they will not be accepting this, and Qantas, and the consortium both publicly declare the bid is dead.

What emerges not long after that is a comedy of errors, as it is discovered that, if they wanted to, the consortium could have chosen to exercise a bit of fine print in the takeover offer that they appeared to be completely unaware of. This point was cut and pasted into the takeover offer at some point, and seemed pretty clear in that if a shareholder had issued a partial acceptance, the bidder could have deemed that a full acceptance had been issued.

If the bidding consortium had chosen to enforce this, this bid would be easily over the line. Of course, it should be noted that a long and costly court battle would have ensued.

Instead they chose not to.

The bid was finally dead.

The big losers from this were the hedge funds - as a result of this failed takeover, they're all having to sell their shares well into the red.

Will this takeover be resurrected? Maybe. They'd want to do it better than this, though. This was a foul-up of monumental proportions.

Disclosure: This blogger owns shares in Qantas Airways Limited and Macquarie Bank Limited.

Standard but necessary disclaimer: This is not advice. Only a complete idiot would think that any of this constituted advice. It's not even vaguely reasonable to consider this to be advice. If you are in any doubt as to the content of this, see a good, independent financial adviser immediately. They do exist.

Great debacles of our time: Snowy Hydro

The road to privatisation for non-core government assets is riddled with potholes.

But that's not to say that most of them cannot be avoided.

In the case of the recent Snowy Hydro fiasco, it appears that the driver of this particular car fairly aimed all four wheels at the same hole. At once.

What we ended up with was a complete mess.

Morris Iemma, premier of New South Wales has come out of this in perhaps the worst shape of his political career. Steve Bracks, premier of Victoria hasn't ended up much better.

In fact, the whole sordid affair looks more and more likely to bury the New South Wales labor government.

Meanwhile, the architects of this disgraceful little episode, the PM and Senator Bill Heffernan, look like heroes to their core constituents, as well as some unlikely prestige in the eyes of the green/left vote.

Who woulda thunk it?

I for one have to get my two cents in and tip a bucket over the federal government for this.

The thing is - would they have done anything else?

John Howard has revealed himself to be a policy maker on the run, incessantly chasing after votes from the lowest common denominator.

Iemma needed these funds real bad. The NSW government, after years of financial mismanagement by the ALP have a fiscal black hole that needs some serious plugging.

And as for Bracks, well, at least he was able to back out with some pride when the rug got pulled.

But none of this is the point.

None of this finger pointing actually achieves anything. Incidentally, Alan Kohler speculated in Saturday's Age that Howard was going to fry Bracks and Iemma all along. The theory being that, even though the federal government is all for privatisation and would, "plough on through any opposition, even Alan Jones," to achieve it, they would much rather embarrass two state labor governments if they could.

The point is that all the reasons for not privatising Snowy Hydro were all wrong.

Kohler himself points out the following:

"The Snowy hydro-electric scheme is no more iconic than the Loy Yang power station, the national phone network, or even the TABs."

"In withdrawing it from sale the [federal] Government has capitulated to the paranoid and cynical campaigns of vested interests."

"Snowy Hydro is, in fact, an investment bank — selling derivatives and insurance products to the electricity industry."

Quite a scathing indictment, actually.

Elsewhere, some quite fraudulent arguments were uttered by the Victorian branch of the Australian Greens about who owned the water.

Bill Heffernan weighed in with some concerns that foreigners could end up controlling it. (So what?)

What is nearly worst about this tawdry chapter is that our government once again, just like with the failed bid by Royal Dutch Shell for Woodside Petroleum, has shown the rest of the world that while we talk the talk about open and fair economies, we don't walk the walk.

This is a DISGRACE.

What is the worst is that it shows that the federal government is not above using populist rubbish like this for their own political gains, once again proving that democracy is at times, frustratingly undemocratic.