Wednesday, March 7, 2012

154 Goldman's Profits Come From Our Pockets: Why We Need a Tobin Tax - Ellen Brown

(1) Goldman's Profits Come From Our Pockets: Why We Need a Tobin Tax - Ellen Brown
(2) Is the House Health Care Bill Better than Nothing? - Marcia Angell
(3) Housing supply down, profits up - Michael Hudson in Australia
(4) "Investors" seize control of Australian Wheat Board

(1) Goldman's Profits Come From Our Pockets: Why We Need a Tobin Tax - Ellen Brown

From: Ellen Brown <> Date: 10.11.2009 01:17 AM

Goldman's Profits Come from Our Pockets: Why We Need a Tobin Tax

Ellen Brown

November 9, 2009

"The homeless in America have Goldman Sachs to thank for their homelessness and starvation right now. They took the money from their pockets, they put it in their bonuses for this year. . . . That's a financial terrorist crime."
 -- Former stock trader Max Keiser in a France 24 interview

In the midst of the worst recession since the Great Depression, Goldman Sachs is having a banner year.
According to an October 16 article by colin Barr on

    While Goldman churned out $3 billion in profits in the third quarter, the economy shed 768,000 jobs, and home foreclosures set a new record. More than a million Americans have filed for bankruptcy this year, according to the American Bankruptcy Institute.

Barr writes that Goldman's "eye-popping profit" resulted "as revenue from trading rose fourfold from a year ago." Really. Revenue from trading? Didn't we bail out Goldman and the other Wall Street banks so they could make loans, take deposits, and keep our money safe?

That is what banks used to do, but today the big Wall Street money comes from short-term speculation in currency transactions, commodities, stocks, and derivatives for the banks' own accounts. And here's the beauty of it: the Wall Street speculators have managed to trade in practically the only products left on the planet that are not subject to a sales tax. While parents in California are now paying 9% sales tax on their children's school bags and shoes, Goldman is paying zero tax to sustain its gambling habit. Race track winnings and other forms of gambling are taxed at up to 25%. But stock market trades get off scot free.

That helps explain Goldman's equally eye-popping tax bracket. What would you guess - 50%? 30%? Not even close. In 2008, Goldman Sachs paid a paltry 1% in taxes - less than clerks at WalMart.

Speeding Tickets to Slow Day Traders?

Wall Street bankers have been called today's "welfare queens," feeding at the public trough to the tune of trillions of dollars. The fact that their speculative trades remain untaxed suggests a tidy way that taxpayers could recover some of their bailout money. The idea of taxing speculative trades was first proposed by Nobel Prize winning economist James Tobin in the 1970s. But he acknowledged that the tax was unlikely to be implemented because of the massive accounting problems involved. Today, however, modern technology has caught up to the challenge, and proposals for a "Tobin tax" are gaining traction. The proposals are very modest, ranging from .005% to 1% per trade, far less than you would pay in sales tax on a pair of shoes. For ordinary investors, who buy and sell stock only occasionally, the tax would hardly be felt. But high-speed speculative trades could be slowed up considerably. Wall Street traders compete to design trading programs that can move many shares in microseconds, allowing them to beat ordinary investors to the "buy" button and to manipulate markets for private gain.

Goldman Sachs admitted to this sort of market manipulation in a notorious incident last summer, in which the bank sued an ex-Goldman computer programmer for stealing its proprietary trading software. Assistant U.S. Attorney Joseph Facciponti was quoted by Bloomberg as saying of the case:

    The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.

The obvious implication was that Goldman has a program that allows it to manipulate markets in unfair ways. Bloomberg went on:

    The proprietary code lets the firm do 'sophisticated, high-speed and high-volume trades on various stock and commodities markets,' prosecutors said in court papers. The trades generate 'many millions of dollars' each year.

Those many millions of dollars are coming from ordinary investors, who are being beaten to the punch by sophisticated computer programs. As one blogger mused:

    Why do we have a financial system? I mean, much of its activity looks an awful lot like gambling, and gambling is not exactly a constructive endeavor. In fact, many people would call gambling destructive, which is why it is generally illegal....

    What makes Goldman Sachs et. al. so evil is that they offer vast wealth to our society's best and brightest in exchange for spending their lives being non-productive. I want our geniuses to be proving theorems and curing cancer and developing fusion reactors, not designing algorithms to flip billions of shares in microseconds.

Gambling is an addiction, and the addicted need help. A tax on these microsecond trades could sober up Wall Street addicts and return them to productive labor. It could transform Wall Street from an out-of-control casino back into a place where investors pledge their capital for the development of useful products.

The Tobin Tax Gains Momentum

Various proposals for a Tobin tax have received renewed media attention in recent months. President Obama gave indirect support for the tax in a Press briefing on July 22, when he recommended that the government consider new fees on financial companies pursuing "far out transactions". Leaders from France, Germany, and the European Commission endorsed putting a speculation tax on the agenda at the G20 meeting in Pittsburgh in September. Brazil has now imposed what may be the first Tobin Tax on foreign investment inflows. A U.S. bill proposing to tax short-term speculation in certain securities, called "Let Wall Street Pay for Wall Street's Bailout Act of 2009", was introduced by Rep. Peter DeFazio (D-OR) last February. A different bill to regulate derivative trades was approved by the Financial Services Committee in October.

Derivatives are essentially bets on whether the value of currencies, commodities, stocks, government bonds or virtually any other product will go up or down. Derivative bets can cause shifts in overall market size reaching $40 trillion in a single day. Just how destabilizing short-term speculation can be - and just how lucrative a tax on it could be - is evident from the mind-boggling size of the market: $743 trillion globally in 2008. Another arresting fact is that just five super-rich commercial banks control 97% of the U.S. derivatives market: JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.

Pros and Cons

Promoters of international development have suggested that a mere .005% tax could raise between $30 billion and $60 billion per year, enough for the G7 countries to double international aid. But more than raising money, the tax could be an effective tool for slowing harmful speculative practices. According to a number of Nobel Prize economists, a downsized speculative market would go far towards creating a more sturdy financial system, helping to avoid the need for future bailouts. But if the tax is too small, it might not have the desired effect on speculation. The larger 1% tax originally proposed by James Tobin is therefore favored by some proponents. The much-needed income from a U.S. tax could be split between federal and state governments.

Opponents of the Tobin tax, led by the financial sector, argue that it would kill bank jobs, reduce liquidity, and drive business offshore. Supporters respond that Tobin tax profits could be used to create new jobs, and that the small size of the tax would hardly affect cash flows - although certainly the speculative market would shrink. Players in dice-rolling speculative operations have long claimed that their trades "stabilized" the system by enabling investors to hedge risk, but the recent financial crash has exposed that defense as being without clothes. Inflows of "hot money" are not good for a country. They create quick speculative bubbles that can collapse equally quickly when the money flows out again. Better for the country and its economy are the funds of prudent investors who intend to stick around for a while. A modest tax could even encourage these preferred investors, who will be more confident if their investments are not liable to collapse suddenly from hot money outflows.

Besides technical questions about how to implement the tax internationally, the offshore argument probably presents the most serious challenge. Should a Tobin tax pass in the U.S., investors would be likely to move to other markets beyond the reach of taxation. The U.S. could penalize traders for doing business abroad, but governments in major markets like Germany and London would no doubt need to endorse the tax for any meaningful shift to be seen. Some experts have argued that the Tobin tax would be best implemented by an international institution such as the United Nations, which would gain a large source of funding independent of donations from participating states.

That proposition sets off alarm bells for other observers, who see any international tax as a move toward further strengthening the power of the global financial oligarchs. However, the very fact that the United Nations, the G20, and the Bank for International Settlements are discussing this option suggests that we the people need to jump in and stake out our claim for national purposes, before we lose the tax money to international bodies controlled by the global bankers. We need to design the tax the way we want, before they design it the way they want. It needs to be collected by the U.S. Treasury and to go into the Treasury's coffers. It needs to bypass Wall Street and reach Main Street, where it can be used to stimulate local business and investment.

Officials from the International Monetary Fund insist that implementing a Tobin tax would be logistically impossible. But Joseph Stiglitz, a Nobel Prize winning economist and former World Bank leader, disagrees. In Istanbul in early October, he said that a Tobin tax was not only necessary but, thanks to modern technology, would be easier to implement than ever before. "The financial sector polluted the global economy with toxic assets," he said, "and now they ought to clean it out."

While Wall Street's welfare queens have been busy collecting generous government handouts, the 50 states have been left to fend for themselves. Some 48 states have faced budget crises in the past year, forcing them to cut libraries, schools, and police forces, and to raise taxes on income and sales. A sales tax on the exotic financial products responsible for precipitating the economic crisis is long overdue.

(2) Is the House Health Care Bill Better than Nothing? - Marcia Angell

From: Gary Kohls <> Date: 10.11.2009 12:45 AM

Marcia Angell, M.D. <>
Physician, Author, Senior Lecturer, Harvard Medical School

Posted: November 8, 2009 08:02 PM

Is the House Health Care Bill Better than Nothing?

Well, the House health reform bill -- known to Republicans as the Government Takeover -- finally passed after one of Congress's longer, less enlightening debates. Two stalwarts of the single-payer movement split their votes; John Conyers voted for it; Dennis Kucinich against. Kucinich was right.

Conservative rhetoric notwithstanding, the House bill is not a "government takeover." I wish it were. Instead, it enshrines and subsidizes the "takeover" by the investor-owned insurance industry that occurred after the failure of the Clinton reform effort in 1994. To be sure, the bill has a few good provisions (expansion of Medicaid, for example), but they are marginal. It also provides for some regulation of the industry (no denial of coverage because of pre-existing conditions, for example), but since it doesn't regulate premiums, the industry can respond to any regulation that threatens its profits by simply raising its rates. The bill also does very little to curb the perverse incentives that lead doctors to over-treat the well-insured. And quite apart from its content, the bill is so complicated and convoluted that it would take a staggering apparatus to administer it and try to enforce its regulations.

What does the insurance industry get out of it? Tens of millions of new customers, courtesy of the mandate and taxpayer subsidies. And not just any kind of customer, but the youngest, healthiest customers -- those least likely to use their insurance. The bill permits insurers to charge twice as much for older people as for younger ones. So older under-65's will be more likely to go without insurance, even if they have to pay fines. That's OK with the industry, since these would be among their sickest customers. (Shouldn't age be considered a pre-existing condition?)

Insurers also won't have to cover those younger people most likely to get sick, because they will tend to use the public option (which is not an "option" at all, but a program projected to cover only 6 million uninsured Americans). So instead of the public option providing competition for the insurance industry, as originally envisioned, it's been turned into a dumping ground for a small number of people whom private insurers would rather not have to cover anyway.

If a similar bill emerges from the Senate and the reconciliation process, and is ultimately passed, what will happen?

First, health costs will continue to skyrocket, even faster than they are now, as taxpayer dollars are pumped into the private sector. The response of payers -- government and employers -- will be to shrink benefits and increase deductibles and co-payments. Yes, more people will have insurance, but it will cover less and less, and be more expensive to use.

But, you say, the Congressional Budget Office has said the House bill will be a little better than budget-neutral over ten years. That may be, although the assumptions are arguable. Note, though, that the CBO is not concerned with total health costs, only with costs to the government. And it is particularly concerned with Medicare, the biggest contributor to federal deficits. The House bill would take money out of Medicare, and divert it to the private sector and, to some extent, to Medicaid. The remaining costs of the legislation would be paid for by taxes on the wealthy. But although the bill might pay for itself, it does nothing to solve the problem of runaway inflation in the system as a whole. It's a shell game in which money is moved from one part of our fragmented system to another.

Here is my program for real reform:

Recommendation #1: Drop the Medicare eligibility age from 65 to 55. This should be an expansion of traditional Medicare, not a new program. Gradually, over several years, drop the age decade by decade, until everyone is covered by Medicare. Costs: Obviously, this would increase Medicare costs, but it would help decrease costs to the health system as a whole, because Medicare is so much more efficient (overhead of about 3% vs. 20% for private insurance). And it's a better program, because it ensures that everyone has access to a uniform package of benefits.

Recommendation #2: Increase Medicare fees for primary care doctors and reduce them for procedure-oriented specialists. Specialists such as cardiologists and gastroenterologists are now excessively rewarded for doing tests and procedures, many of which, in the opinion of experts, are not medically indicated. Not surprisingly, we have too many specialists, and they perform too many tests and procedures. Costs: This would greatly reduce costs to Medicare, and the reform would almost certainly be adopted throughout the wider health system.
Recommendation #3: Medicare should monitor doctors' practice patterns for evidence of excess, and gradually reduce fees of doctors who habitually order significantly more tests and procedures than the average for the specialty. Costs: Again, this would greatly reduce costs, and probably be widely adopted.

Recommendation #4: Provide generous subsidies to medical students entering primary care, with higher subsidies for those who practice in underserved areas of the country for at least two years. Costs: This initial, rather modest investment in ending our shortage of primary care doctors would have long-term benefits, in terms of both costs and quality of care.

Recommendation #5: Repeal the provision of the Medicare drug benefit that prohibits Medicare from negotiating with drug companies for lower prices. (The House bill calls for this.) That prohibition has been a bonanza for the pharmaceutical industry. For negotiations to be meaningful, there must be a list (formulary) of drugs deemed cost-effective. This is how the Veterans Affairs System obtains some of the lowest drug prices of any insurer in the country. Costs: If Medicare paid the same prices as the Veterans Affairs System, its expenditures on brand-name drugs would be a small fraction of what they are now.

Is the House bill better than nothing? I don't think so. It simply throws more money into a dysfunctional and unsustainable system, with only a few improvements at the edges, and it augments the central role of the investor-owned insurance industry. The danger is that as costs continue to rise and coverage becomes less comprehensive, people will conclude that we've tried health reform and it didn't work. But the real problem will be that we didn't really try it. I would rather see us do nothing now, and have a better chance of trying again later and then doing it right.
From: IHR News <> Date: 07.11.2009 06:10 PM

Nearly Half of US Children Will Get Food Stamps, Study Shows
The Associated Press

Nearly half of all U.S. children and 90 percent of black youngsters will be on food stamps at some point during childhood, and fallout from the current recession could push those numbers even higher, researchers say. The estimate comes from an analysis of 30 years of national data, and it bolsters other recent evidence on the pervasiveness of youngsters at economic risk. It suggests that almost everyone knows a family who has received food stamps, or will in the future, said lead author Mark Rank, a sociologist at Washington University in St. Louis.

(3) Housing supply down, profits up - Michael Hudson in Australia

From: ERA <>  Date: 08.11.2009 09:47 AM

Date: Sunday, 8 November, 2009

Housing supply down, profits up

by Michael Hudson

Higher land and house prices typically infer an increased supply of housing. Yet at the peak of  Australia’s perennial housing affordability crisis, the Housing Industry Association declared that there will be a 13% fall in housing starting this calendar year, compounding last years 18% fall. In light of massive re-zonings in Victoria and improved planning bureaucracy in many states, this can only be seen as a warning that property insiders expect there to be a price crash.

The public face of the housing industry is quite different. So the question is, what do property investors expect that the rest of the population does not?

Government spokesmen reflect assurances by bankers and their major category of customers the real estate industry that Australia’s economy is defying gravity. The reality is that this is as impossible in economic life as it is in physical nature. One can counteract gravity as airplanes do when their jet engines overpower the force of gravity, but they cannot defy it. The engine of Australia's property price boom is not immigration, nor is it the rising man/land ratio. Population grows at a steady pace (except for debt-ridden economies, which suffer emigration as well as capital outflows), but the financial cycle zig-zags up and down around the long-term trend line.

This fluctuation is increasingly frenetic, more like fibrillation of a heartbeat. The bloodstream in this case the economy’s most important circular flow is financial in character: the flow of credit and debt repayment.

Property prices are defined by how much a bank will lend. Donald Trump claims that a man is worth what he can borrow. This usually depends on what a borrower can afford to pay, after meeting basic break-even needs (the cost of living plus taxes). In the corporate sector, it means after-tax cash flow. So property prices are set by the banks, subject to the tax system.

The motto of real estate investors is that rent is for paying interest and whatever the tax collector relinquishes is available to be capitalized into a bank loan as a flow of interest payments. The guiding idea is that affordability determines property prices, not the crude man/land ratio.

One example of how the tax system affects property prices is in its failure to distinguish land from capital improvements. For example, the man/land ratio does not take into account the phenomenon of hoarding by landowners. Speculative withholding of prime locations from the market in an undeveloped or unsold state creates artificial scarcity. This raises prices. The net land denominator must take account of such hoarding.

Property speculators are able to afford this hoarding to the degree that the land's potential site rent remains untaxed. Taxing the land would bring underutilized land and other property onto the market. It also would reduce the available free lunch rent that presently is capitalized into bank loans to raise prices. The myth is that higher property taxes
increase the cost of housing and office space over time. The reality is that higher taxes would leave less site-rent to be pledged to banks thereby reducing the financial cost of property ownership while also enabling the government to shift the tax burden back off labor onto property, as used to be the case in Australia before the mid-1970s.

This explains why the financial lobby supports the real estate lobby in shaping public perceptions of the property market along with government financial policy toward the finance, insurance and real estate (FIRE) sector.

Australia’s fiscal-financial system has become increasingly dysfunctional in giving tax preference to land-price capital gains and hence property speculation rather than tangible capital formation. Instead of raising living standards by producing more, what passes as post-industrial wealth creation takes the form of inflating asset prices on credit. The result is a Bubble Economy. And inasmuch as asset-price gains are fueled by debt leveraging, wealth creation is more accurately viewed as debt creation.

The problem is that debts remain in place even as prices drop. And they are dropping in response to the economy’s shrinking ability to pay, as more and more income is  earmarked to pay debts run up in the past. This debt service is not available for spending on goods and services. The result is debt deflation. Lower spending on goods and services shrinks the domestic market (and also shrinks imports), leading to lower business profits and also lower business rentals. Lower rental income results in lower property prices and at a point, property falls into negative equity: The mortgage debt exceeds the current market price that homeowners or commercial investors can recover.

Over one-quarter of U.S. housing is now estimated to be in negative equity and over half of Latvian property, and as much as three-quarters of Icelandic real estate. This is the end stage of debt-leveraged bubbles. In this respect it behooves Australians to look ahead. It seems that Australian property investors are also doing this. How else to explain the cutback in new building?

Under these conditions a bubble economy can be kept afloat only by a central bank policy that sponsors asset-price inflation inflating asset prices by enough so that debtors can borrow the interest by refinancing their mortgages. In other words, the solution to over-indebtedness is to borrow ones way out of debt.

This turns real estate bubbles into a national Ponzi scheme: Debts are paid by borrowing the interest, that is, by adding the interest charge onto the existing debt. The result is an exponentially growing debt. That is what the magic of compound interest means.

It cannot be sustained over time, because the rising debt burden outstrips growth in the economy's surplus out of which to pay debt service. So, to make a long story short, the basic principle at work is that debts that can't be paid, and won’t be paid.

It is tragic that Australian tax policy encourages this financialisation of the real economy of production and consumption along this new road to debt peonage. By taxing capital gains lower than profits and wages, economies encourage speculation on asset-price gains. This turns the real economy into a Bubble Economy rather than encouraging tangible
capital formation in new means of production to raise output and living standards.

This development is not a natural evolution. It reverses the Enlightenments spirit of classical political economy and the Reform Era of social democracy a century ago the spirit that infused early Labour parties throughout the British Empire. This was the capstone of classical economic reformers from the Physiocrats to Adam Smith to Henry George in their 200-year battle to liberate industrial capitalism of feudal influences over economic democracy.

The classical idea of free markets was a market free of rentier income what John Stuart Mill called the unearned increment that landlords made in their sleep and that monopolists extracted by charging prices in excess of cost-value. This category includes all returns to legal privilege in contrast to actual costs of production, including bank
interest and kindred financial fees and charges in excess of direct, technologically necessary operating costs.

Australia's tax policy is paramount when pension savings of A$1.1 trillion are the third largest pool in the world.

There is a simple way to avoid property bubbles and their associated road to debt serfdom. Taxes on land rent and other forms of economic rent and returns to legal privilege reduce asset prices, by leaving less of the (rising) rental income to be capitalized into bank loans. A land tax (and general rent tax on unearned income) is paid out of the excess of price over cost-value. It therefore minimizes the cost of living and doing business. By doing so, it makes economies more competitive internationally, relative to economies that tax labour instead of property. Unfortunately, Australia has been following the latter path since at least the late 1970s.

(4) "Investors" seize control of Australian Wheat Board

AWB raising lets down grain growers

November 2, 2009 - 8:21AM

We've seen some dreadful capital raisings for small investors over the past year but when 241 million new shares in wheat giant AWB start trading today it will go down as one of the worst.

While it's not a scandal equivalent to paying $300 million worth of bribes to Saddam Hussein, Australian grain growers have once again been badly let down by the directors appointed to protect their interests.

Back in the good old days before AWB lost its single desk monopoly, shares in the company peaked at almost $5.50 in early 2006.

Growers controlled the company through their monopoly over super-voting A class shares and also owned about 30% of the economic interest through the non-voting B class shares which at the peak were worth more than $500 million.

However, the wheat-for-weapons scandal and the defeat of the Howard Government led to AWB losing its single desk monopoly in June 2008.

The board, led by Queensland-based farmer Brendan Stewart, decided it was time to adopt a conventional capital structure and after two votes and a divisive debate, eventually secured the necessary 75% approval from farmer shareholders in September 2008.

I campaigned long and loud for AWB to make this change and believed the board when they pledged to look after farmer shareholders once a conventional capital structure was adopted.

AWB vulnerable

Alas, with all the farmer directors departed, the slimmed down five man AWB corporate board managed to imperil the company over the past year, primarily courtesy of the $150 million-plus lost in Brazil which sent debts soaring towards $1 billion.

The solution was a company saving $459 million capital raising, which almost by design ended up delivering majority control of AWB to the privileged big institutional investors at the expense of thousands of grower shareholders.

There has been a heavy debate about retail rip-offs in capital raising structures on BusinessDay over the past six months, but we haven't seen one as bad as AWB for quite some time.

The main element of AWB's raising was a $359 million heavily discounted 1-for-1 entitlement offer at $1 a share.

Problems with discounted placements

There is nothing wrong with heavily discounted entitlement offers provided they treat all shareholders equally. The first problem with AWB's version was that it was also accompanied by a $100 million institutional placement at the same 31% discount of $1 a share.

The second problem was that the entitlement offer was not renounceable, so the vast majority of farmer shareholders who did not participate failed to receive any compensation for having their stake in the company diluted.

Sure, you can argue that is a problem for the individual farmers but the AWB board knew full well that their farmer shareholders were less likely to take up an in-the-money offer than, say, retail investors in big banks who have collectively made billions over the years.

Any company which has seen its share price plunge knows that retail participation in a capital raising won't be particularly strong because many investors take the position: "I'm not giving those turkeys who've lost so much of my capital another red cent."

The AWB directors also ought to have known that their grower shareholders would not participate in large numbers, especially given that two other heavily farmer-owned companies, Elders and Graincorp, have soaked $1.15 billion from the market over the past two months.

Then you have participation rates from companies which demutualise. These are normally low because many of the shareholders are accidental investors who don't know how to maximise their financial position.

This is why sharemarket predator David Tweed often targets former mutuals with his low-ball offers.

In some respects the AWB board isn't that much better than David Tweed because they failed to come up with a structure that protected many of their grower shareholders who are not particularly financially literate and don't have much financial capacity after years of drought.

Low participation from farmer shareholders

This is borne out in the figures. AWB has more than 45,000 retail investors, the majority of whom are current or former grain growers.

However, presented with an opportunity to collectively buy $241 million worth of shares in the retail offer at a healthy discount, only approximate 15,000 shareholders AWB shareholders participated, according to figures supplied to BusinessDay by the company.

This was despite AWB shares trading at between $1.18 and $1.28 during the offer period which stretched from October 2 until October 21.

Normally in these situations, especially over recent times as the market recovered, any offer presenting a quick 20%-plus gain saw a relatively modest shortfall which was fully snapped up by retail investors who can apply for so-called "overs". This left directors with the tricky task of managing a scale back.

Growers look a gift horse in the mouth

Alas, only 3200 or 7% of AWB's retail shareholders applied for more than their entitlement when this was the financially rational thing to do.

A few sneaky institutions applied for huge licks of "overs" through the retail offer, but they were scaled back. I owned just 10 AWB shares and applied for the $10 entitlement, plus another $19,990 worth of "overs".

After lobbying the board ahead of their deliberations, it was quite surprising to see the final announcement where investors were limited to the higher of $15,000 worth of "overs" or 5 times their entitlement.

Given this policy saw 98% of the applicants for "overs" satisfied, we are dealing with less than 70 scaled back investors. But why would you scale back any genuine retail applicant at all when there was a massive shortfall? After all, Billabong's minimum "overs" allocation was $112,500 and Amcor allocated applicants up to 15 times their entitlement.

Bonanza for unknown institutions

AWB's ASX announcement on October 26 revealed that only $135 million was raised from the retail investors who were offered the $241 million worth of shares at just $1 each. This comprised $88 million from the 15,000 shareholders who took up their entitlement and $47 million (an average $14,687) from the 3200 who applied for "overs".

AWB still raised the full $241 million because the three foreign underwriters - Deutsche Bank, Goldman Sachs and UBS - had flogged the $106 million shortfall to a group of unknown institutional investors.

This is the same group of under-writers who flogged an additional $100 million worth of $1 shares to another unknown group of institutional investors in the selective placement, further diluting the existing shareholders.

Retail investors now in the minority

The net result of this whole fiasco is that AWB's share register has been transformed. Six weeks ago the company was 68% owned by the 45,000 retail investors and trading at about $1.25.

Today, it is institutions which have about 61% while retail has been diluted down to 39% of the dramatically expanded capital base. The lucky institutions which snapped up the $206 million worth of $1 shares over and above their pro-rata entitlement through the $100 million placement and $106 million retail shortfall are enjoying a paper profit of $47 million based on Friday's close of $1.23.

This windfall has come straight from the 30,000 non-participating retail investors, the majority of which are grain growers. ...

Stephen Mayne, a shareholder activist and publisher of The Mayne Report contributed this article to BusinessDay. He can be reached on

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