Email of the day on the role of banks in money creation
Comment of the Day

May 01 2014

Commentary by Eoin Treacy

Email of the day on the role of banks in money creation

For 12 years I was a member of a Bank Credit Committee later a member of a Fixed Interest Credit Committee for an international Insurance company.  The animal spirits of the members of those credit committees can so easily loose personal impartiality.  They start to buy the gloss not the critical analytics of the deal before them.  

I was hated on Bank Credit Committee because I was voting against real estate deal after real estate deal.  All to build high rise office Towers principally in Melbourne.  Credit Committee meetings became very heated and even bitter.  This was during the credit boom in real estate in the early 1990 here in Australia.  The Banks CEO hated me because we were not writing enough new bank loans like our competitors.  If my Treasury Division had not been making so much money he would have fired me.  The staff in the Bank’s Lending Department avoided me.  

I was eventually proven right because within a couple of years commercial real estate vacancies in Melbourne were 25%.  There was many shiny new office towers and nobody to tenant them.  I know of one company that signed a 10 year tenancy agreement in one of these empty Towers and the first 5 years of that Tenancy agreement was rent free.  Think the Landlord also paid for the fit out.  It was a financial disaster.  Westpac almost went under.  It was also a very ugly time for bank shareholders.

So how did I make money from this situation?  Well one morning I lined all my dealers along the window.  (they still like to remind me of this exercise).  I asked them “what do you see on the Sydney skyline”.  One young dealer said "Cranes".  I responded that is right every third building had a crane on it.  I said this investment boom in commercial real estate will eventually go bust and that will then lead to single digit interest rates.  What a fortunate insight because we made heaps and heaps of money.  After bond rates fell from 14%-15% to 7% I got scared.  The rally in bonds then exceeded anything I could have ever possibly imagined.

Later members of the Bank Credit Committee never spoke about this matter.  It was as if it never happened.  There were no acknowledgements or apologise.  They were friendly again.  It’s uncomfortable place to hold a view the majority so strongly oppose.  The following quote helped me understand my colleagues.  

?“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” — Arthur Schopenhauer

Eoin Treacy's view

Thank you for sharing your valuable experience which emphasises just how much of a resource the Collective of subscribers to this service represents. You mentioned this episode at our dinner in Sydney earlier this year but this more in-depth explanation serves as a timely reminder of the psychology at work within the financial system not least in reference to the above email. .


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