Batting for the Home Side Cover Story

In October 1997, the NAB announced it had paid $US1.23 billion to buy HomeSide Inc, a leading US mortgage business which had around $US97 billion worth of business in a home loans market estimated to be around $US4200 billion.

This was to be another step in the NAB’s US ambition plans following its acquisition of the Michigan National Bank

Batting for the Home Side

In October 1997, the NAB announced it had paid $US1.23 billion to buy HomeSide Inc, a leading US mortgage business which had around $US97 billion worth of business in a home loans market estimated to be around $US4200 billion. This was to be another step in the NAB's US ambition plans following its acquisition of the Michigan National Bank.

It was hailed as a coup and the HomeSide mortgage lending business and processes were to become a model for home loan lending in Australia.

NAB and its then chief executive Don Argus were at the top of the banking and business tree with the NAB recording record Australian profits.

This was also the period when discussions were held between NAB and AMP about a possible merger and/or acquisition. It was also the period where attempts were made to break down the four pillars of banking and allow mergers among the big four to take place.

Big was better and Australian companies had to be big to play on the world stage. This business philosophy permeated throughout every industry. The NAB wanted to become Australia's first global bank and it was attempting to prove this through expansion into Ireland, the UK and now America.

In 1998, Argus presented his last financial results to the market before becoming chairman of BHP. His legacy according to market commentators was a bank that was earning half its profits from overseas, a bank that had strong underlying profits (before taxes and bad debts) and a bank which knew how to manage risks and keep costs under control.

Ironically, Argus took over the BHP chair from Jerry Ellis who took the blame for the $US3 billion loss on BHP's Magma acquisition in the US. BHP obviously needed an internationalist who had a successful track record.

In 2001, the NAB dream of becoming a global player especially in the US received a wake up call when it announced a $4 billion loss on its investment in the HomeSide lending business.

Somebody had not been watching the shop. Accusations of what went wrong included the feeding of incorrect interest rate or related assumptions in computer modelling programs leading to distortions in financial results and HomeSide's exposure to interest rate movements.

Allegations surfaced that executives inside the business did this so that certain financial targets could be met regardless of the fact that US interest rates were coming down. The bank's reputation and, by implication, Don Argus' legacy, took a hammering which is still being felt today. What also took a battering was the reputation of Australian companies with pretension to play on the global business field.

Good reputations whether corporate or personal take a lifetime to achieve and if they become tarnished through the actions of others, people get upset.

"The NAB was always renowned for the way it went about its due diligence and risk management," says Argus. "I get very angry about HomeSide. It was mismanagement of risk. You had an interest rate risk then you had an early repayment risk in the US of the mortgage book and this was mismanaged."

The independent report by the US law firm Wachtell, Lipton, Rosen & Katz into what went wrong at HomeSide confirmed that the risk management controls between 1999 and 2001 had become too lax. Three US executives were fired.

Argus doesn't make any apologies for taking the NAB into the US and buying Michigan National and HomeSide saying both those companies were good contributors to profits.

"I can only talk about what we did in my day. We managed risks. If you devolve the management of risk then you have no control."

So was this also a question where Australian companies moving offshore fail to have proper due diligence processes in place as what happened with BHP in the US with its Magma copper acquisition?

"HomeSide had nothing to do with due diligence. Magma is another question. Maybe the due diligence wasn't as robust as it could have been.

"However to suggest that Australian companies can't run overseas operations is wrong. The NAB has run four very good businesses in the UK and Ireland. It runs a good business in New Zealand and we ran the Michigan State bank very successfully.

"People say that you don't have size but in the NAB's case they have size in the UK and Ireland and I don't know why they are not performing up to the levels that they should be performing. My only regret is that I should have bought another bank in the US."

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.