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EYE-BALL’s Human Evil Exposed – John O’Neill (CEO-ARU) … Part 6 – The Phil Gray Audit Report …

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Human Evil Exposed –
John O’Neill (CEO-ARU) … Part 6

Link to all Posted Chapters for –

“Human Evil Exposed – John O’Neill (CEO-ARU)” – The SBS Story

The “Human Evil Exposed” – John O’Neill story link above takes you to a new page where all the chapters to this story are listed and linked.

All the documents that form a part of this story as evidence is linked here. These documents form the evidentiary trail collected as a part of the research undertaken during this project.

The “Human Evil Exposed” – John O’Neill story thus far covers events that took place between 1931 – 1995. The final ending is still to be played out. The motives for what took place in the late 70’s and early 80’s happened in 1931 when the then NSW Government owned – ‘Government Savings Bank of NSW’ was forced to close its doors. This set in motion a number of events that were not resolved until Dec 1987. The motives behind this story are steep in history and these grudges were held for a long time.

After they were finally settled – what then took place culminated in a $75 million FRAUD of public monies carried out by the NSW Government(NSWG) and its agent – The State Bank of NSW – (SBNSW) in 1988.

The players involved and connected with this FRAUD include:

  • Three consecutive NSW Premiers, Wran, Unsworth and Greiner,
  • Several Ministers serving in those Governments and their staffers – one of these Ministers is now a Justice with the NSW Land and Environment Court,
  • Regulatory Departments including the Department of Co-Operatives, Office of Business and Consumer Affairs, and the Australian Association of Permanent Building Societies, (AAPBS) and,
  • Employed State Bank of NSW Executives – the MD was John O’Neill – who all acted in proven ‘conflict of interest’ positions as Directors on the State Building Society Board, and whose intent was to facilitate a FRAUD against the 270,000 SBS members.

It’s a story that crushed the second largest NSW Building Society and at the time it had $1.6 billion in assets, some 270,000 Society members, and 650 SBS staff.

This is a story told by someone who lived through the 87-88 period and is told from his perspective and the evidentiary proof collected from research undertaken to prove the allegations. This story comes from a corrupted base of Corporate greed, corrupt and immoral Director’s, complicit Government representative’s, ego’s driven by historical flawed motive’s, financial market operative’s, drugs, sex, and the brazen Corporate RAPE and THEFT of the $75 million value attached to the State Building Society.

John O’Neill as the MD of the SBNSW destroyed a profitable and functioning Building Society because he could. It was done out of spite and revenge because he lost the 10 year plan to merge the SBS with the SBNSW. In the process he stripped the SBS of its corporate worth and broke all the Corporate and Regulatory rules in doing so. Rules that were put aside by the Administrators charged with the protection of the SBS members and their entitlements. He had help in the NSW Premier Nick Greiner who sanctioned O’Neill’s actions.

The story has many sub-plots and plots within those sub-plots – it is complicated, and to get a full appreciation of these complexities there is much reading to be done.

Please use the comments option below each post for any comments you might want to express – to ask any questions you want clarified – or if you want to make a private comment … please use the e-mail link here – blogcomment@bigpond.com – Enjoy the read …

The EYE-BALL Opinion … [ … where evil lurks – so do friends of the devil … ]

Definitions of Allegations alleged against Mr John O’Neill and his cohorts …

Linked: The Definition of EVIL:

  • morally wrong or bad; immoral; wicked: evil deeds; an evil life.
  • harmful; injurious: evil laws.
  • characterized or accompanied by misfortune or suffering; unfortunate; disastrous: to be fallen on evil days.
  • due to actual or imputed bad conduct or character: an evil reputation.
  • marked by anger, irritability, irascibility, etc.: He is known for his evil disposition.

Linked: Moral Bankruptcy:

  • Definition: the state of being devoid of morality and ethics, used esp. for business and political entities
  • Example: A complete lack of morals is moral bankruptcy.

Linked: Definition of RABID:

  • – irrationally extreme in opinion or practice:
  • – furious or raging; violently intense:
  • Synonyms – zealous, fervent, ardent, fanatical, bigoted.

Linked: Definition of FRAUD:

  • – deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.
  • – a particular instance of such deceit or trickery: mail fraud; election frauds.
  • any deception, trickery, or humbug: That diet book is a fraud and a waste of time.
  • a person who makes deceitful pretenses; sham; poseur.


Part 6 commences … The Phil Gray Audit/Inspection Report …

When John O’Neill decided to push the go button on his merger plan – he needed ’cause’ to be in a position to sack the SBS GM – Denis Cleary.

By Anzac Day 1988 – the 25th April and after the Phil Gray Audit report had been delivered to the SBS – Cleary knew he was in trouble. The SBS Treasurer was still on extended Administration leave insisted upon by Cleary – and still 10 days away from returning to his desk.

During the research phase of this project – it was revealed by two senior SBNSW sources that O’Neill received a phone call  advising him the SBS had huge futures and option positions, and that he might want to investigate the holdings. Whether that ‘whistleblower’ phone call was real, or a fabrication is still to be determined.  No evidence can be found other than heresy – all emanating from O’Neill.

However – according to Paul Kearns – the SBNSW Legal Counsel and O’Neill’s former boss – it was someone from the Reserve Bank of Australia (RBA) – and according to Mr Phil Gray – The SBNSW Treasurer – it was someone high up in the Futures industry.   Both were relying on O’Neill’s telling of the phone call as the source of the information.

The fact that these two high-ranking SBNSW Executives had different stories – and both adamant that they had the key – gives some realism to an alternative theory.  Perhaps there was no initiating phone call – perhaps it was all a part of O’Neill’s grand master plan to find ’cause’ to sack Cleary, to get inside the SBS Treasury operation and have a look at how the profits were being made.   This later reasoning sounds more like O’Neill’s modus-operandi given how he played future plots in this massive FRAUD.

Research undertaken to track down the ‘deep-throat’ was extensive – some six months chasing down an RBA employee who had a close relationship with the Co-operatives Dept, and given up as the most likely person who would have made such a phone call – that same person is still a person of interest, he is connected with the ‘Securency’ note bribery scandal and has gone to ground.

The RBA story was deemed the most likely because in the days before the SBS Treasurer went on leave at the end of Mar ’88 – the RBA contacted him and requested a meeting.  The meeting was a low-level meet with two RBA Executives and there were no red-flags raised.   The RBA were enquiring into the increased levels of SBS holdings in Commonwealth Bonds and wanted to know if it was likely to continue.  They were offering tender options whereby the SBS could tender directly on future CGS Bond Issues.

The real reasons why the SBNSW saw a need to investigate the SBS Treasury is a story for John O’Neill to tell in due course.   Whatever his reasoning was – he did had mitigating and extreme motives – he wanted to regain control over the SBS Board lost under his watch some eight months earlier, and he wanted to merger with the SBS more than anything else – he could not have the merger unless he controlled the SBS Board.

Whether he used Phil Gray to carry out that inspection as a means to deliberately fulfil his merger agenda is still conjecture – but largely believed – in any scenario – without the Audit Report O’Neill’s move against Cleary would have had to come from some other avenue.

In a series of E-Mail exchanges with Mr Gray during the research phase, the parameters of that Audit/Inspection were somewhat revealed along with other responses to questions that were asked.  Those e-mail messages are pasted below to provide authenticity and to establish Phil Gray’s creditability …

I believe Phil Gray to be a man of integrity – more so than Paul Kearns who was the legal opinion and promoter behind  the flawed formation and structure of the SBS as far back as the late 70’s – and again all through the court case with the CSB through to late ’87.  His motives were always aligned with O’Neill’s – whereas Mr Gray had only been with the SBNSW since Sept ’87 – and his knowledge of what had taken place before his employ commenced, left him as a possible ‘stooge’ in the game doing O’Neill’s bidding.   In fact, Mr Gray explained his status and position in direct terms in his e-mail exchanges – [see below.]

Kearns took over from O’Neill as Chairman of the SBS in July ’88 and only after O’Neill was forced out over ‘conflict of interest’ issues – primarily because he held Board Directorship’s on both the SBNSW and SBS Boards.   With Kearns’ appointment as O’Neill’s replacement SBS Chairman – the real ‘conflict’ was never resolved, and he remained Chairman throughout O’Neill’s end-game agenda and right up until the sale to St George was completed.  It was ironic that Kearns was still there until the end – as he had also been there from the start.

Mr Kearns also exchanged several e-mail messages with the researcher – his responses were always seen less than genuine despite undertakings and promise’ made to offer up his side of the story.   All through those exchanges he was holding out for what source information had been uncovered.   As soon as the questions became pointy – he did what was expected of any ‘snake in the grass’ type personality and ran for cover.  To this day – he remains as guilty as sin in the eyes of the researcher – and just as culpable and responsible as O’Neill and Greiner for the Corporate RAPE and FRAUD committed against the SBS Members and staff.

The E-Mail messages responses from Mr Kearns and Mr Greiner will be uploaded in future posts.  Both Mr O’Neill and Mr Kearns will have their own individual ‘Wall of Shame’ document and comment posts.  As this story delves deeper into events that happened after the May 5th Board meeting – all revealing Kearn’s, Greiner’s  and O’Neill’s complicit actions,  the documents and sequence of events will give cause to further events – and it is envisaged that that will include future and intended action that will ultimately determine their collective fates.

In the Interim – Mr Gray’s E-Mail responses appear below:

From: flippnlorry@gmail.com [mailto:flippnlorry@gmail.com] On Behalf Of Phil Gray
Sent: Friday, 29 October 2010 8:51 AM
To: bleyzie@bigpond.com
Subject: Re: Follow Up message



I do not wish to respond to all the points you have raised – you are obviously hunting for a deeper and conspiratorial angle to my role which never existed. On arriving at SBS to undertake the review, I was advised by Cleary that you were on leave – whilst not explicitly stated, the impression, from the way in which this was conveyed, was that you were on normal recreation leave, planned some time ago (I do not recall being advised that you were on requested leave).

In relation to the events at the time, I will simply reiterate these points:
• My role, as commissioned by John O’Neill, was simply to review the trading and potential risk of the positions. I received no direction from anyone on the required conclusions of the report and, even if that had been the case, I would have written the report anyway based solely on the basis of what was observed in the data
• Despite what you say, the risk was assessed taking into account both physicals and derivatives – see section “Hedging Activities”
• The report clearly states that “acceptable risk” is a subjective assessment, but the risk conclusion was benchmarked to the risk policy utilised by State Bank, and assessed in relation to the level of SBS’ Capital and Reserves
• Once the report was delivered, that was the end of my involvement in this episode

As you seem to believe that I was part of some kind of conspiracy, or somehow partook in maligning your reputation subsequently, I would suggest you read the report yet again, with an objective frame of mind.

I will highlight some key aspects which I think are relevant:
• Management was fully informed of the positions (Editorial: that is, there was no suppression of the trading activities)
• “In general, the quality of records and portfolio details was good”
• “I have high regard for the quality of the Treasurer”

Thank you for raising this matter with me, I have nothing else that I wish to add or clarify for you.

Phil Gray

In an earlier E-Mail Mr Gray revealed his information about the ‘phone call’ received from John O’Neill.

From: flippnlorry@gmail.com [mailto:flippnlorry@gmail.com] On Behalf Of Phil Gray
Sent: Monday, 25 October 2010 8:40 AM
To: bleyzie@bigpond.com
Subject: Re: Re Phil Gray


I am happy to provide some input, and would prefer to correspond by email thanks.

Certainly, my recall of events appears to be a little different to yours. That is not to argue that your version of events is wrong, rather it is it is probably a consequence of the fact that we both were receiving information and instructions from different people – John O’Neill in my case, and Cleary in yours.

The review was initiated after John O’Neill received a phone call from a senior figure in the futures industry (I am aware of the identity, but am unwilling to disclose) alerting O’Neill to the size of positions/trading held by SBS and querying whether he was aware and satisfied on these. He was unaware, and that led to the risk review being initiated by him. I have no reason to believe that the review was triggered by any other motivation, notwithstanding the final outcome.

Many years have passed, but my recall is quite clear that the review was not really focussed on the whether or not the accounts and reported profitability were correct (though it may well have been investigated for completeness). Rather, the review was very much a “risk review” around the prudency or otherwise of the positions. I recall concluding that SBS Executive were explicitly aware of the positions, indeed this was confirmed in face-to-face meetings with Cleary (ie there was no suppression or anything fraudulent about the positions that were held), the accounting was correct, but the positions were grossly excessive given the capital base of SBS. (On this latter point, we would probably have a different view – ie as to whether they were excessive – but there is no point debating that now, notwithstanding that this was the finding of significance from which the subsequent events flowed).

The review was undertaken by myself and Steve Heald (whom I think you know), there were no other staff involved.

I would be pleased to receive a copy of the report, it may trigger some other thoughts, and I will respond further if that is the case.

Phil Gray

In response to some specific points asked of Mr Gray – he responded as pasted below:

From: flippnlorry@gmail.com [mailto:flippnlorry@gmail.com] On Behalf Of Phil Gray
Sent: Monday, 25 October 2010 1:36 PM
To: bleyzie@bigpond.com
Subject: Re: Re Phil Gray

Thank you Ian.


As I do not subscribe to conspiracy theories, I have some concerns about where this is all heading, and will therefore offer just a few comments:

1) In seeking to identify the so-called “deep throat”, you overlook the fact that the Clearing House (and the SFE) at that time had the right to access individual client records held by a clearer or broker, if they had concerns about risk positions or undesirable situations. I do not know Hawkins, but I can say he was not the person named by O’Neill as the source of the initial alert.

2) You state that you were enraged when “Cleary told me in recent months that you ‘apologised’ to him for the report and that you mentioned, ‘you had been told to write the report as you did’” .You also mention that my integrity was ok, till you heard this from Cleary.

Whilst Cleary may well have said that, there was no such conversation: I can assure you that I don’t accept instruction from anyone on how to write a report, nor how to undertake an investigation. I will also add that in the final meeting with Cleary, and prior to my finalising the report, Cleary implored me “not to do a number on him” – and that was the only occasion when anyone tried to influence the conclusions!

Clearly, in writing your epistle, you better assess very carefully who you trust!

Now if you write that Cleary purported that “,,,,”, then so be it. But if you report the so-called conversation as if a fact, I will have to seek advice.

3) You clearly feel disenfranchised that “the strategy” was not discussed with you. Whilst you will not agree, the strategy was largely irrelevant, as the review was largely focused on the size of positions associated with that strategy, the potential risk, and the dollar risk relative to the SBS’ capital and reserves. Re-read the 2nd paragraph of the report to O’Neill.

4) Re the comment that O’Neill may have “set me up” to provide him the ammunition he required: perhaps, but I have no reason to believe so and have always and still do believe that O’Neill is a person of integrity. And in any event it would have made no difference to the findings and conclusions.

5) I have no recall of approaching you to work at SBNSW during the merger process? Perhaps Steve Heald (who held you in high regard) or some other staff member purported to be acting on my behalf, but I do not recall, sorry. I do recall the “proprietary trading” approach and which Steve Heald was championing on your behalf – I was completely uncomfortable with this for a number of reasons, the major one of which is that you wanted very large limits, and you wanted to take a significant proportion of the profits. But, of course, any losses would be for the account of the Bank. As someone who fundamentally believes in fair markets, this made no commercial sense to me at all.

To conclude, I believe there is little else that I can add, nor do I wish to debate whether “the strategy” is important to understanding the portfolio risks which were incurred.

By the way, have you had any contact with Steve Heald in relation to this, I lost contact with him many years ago?

Phil Gray

[A copy of the Audit Report was sent to Mr Gray in response e-mails to help him recall events.]

The researcher wishes to thank Mr gray for his contributions to date – and to let it beknown that there is still an open invitation for him, and any one else who can or wishes to contribute to this story.   The email address:  blogcomment@bigpond.com  – can be used to accommodate any contact.

During this Audit period in April ’88 the SBS and whilst the SBS Treasurer remained on annual and then administrative leave –  everything he had built up in the 10 or so months since he took on the Treasurer position – was now being torn down by the SBNSW without legitimate foundation or reason – or rebuttal from anyone who understood Treasury operations.  The only game in play was O’Neill’s frantic and almost manic want to merge the SBS with the SBNSW.   What took place can all attributed to this Phil Gray Audit/Inspection report and as commented on hereto – the Report was a complete mis-representation and based on ignorance and a total lack of understanding of what really did happen.

That report can be read in full using the links below:


The SBNSW Report:  Page 1:


The SBNSW Report: Page 2:


The SBNSW Report: Page 3:


The SBNSW Report: Page 4:


The SBNSW Report: Page 5:


The SBNSW Report: Page 6:



The importance of this document in the whole scheme of things cannot ever be overstated.  Because of the outcomes from this document – Ken Dennewald, Denis Cleary got booted – leaving the Deputy GM – Len Thompson as the only SBS Executive apart from two other GM’s.  Mr Thompson was sent on Administrative leave within days of the 5th May Board room coup for almost 2 months.   After that 5th May meeting – the SBS Board was again controlled by O’Neill and he appointed a GM from the SBNSW named Tony Howarth as caretaker of the SBS.

From that position O’Neill was able to orchestrate as he wanted until the Co-Operatives Department stepped in and investigated the happenings at the 5th May Board meeting.   But until that investigation was complete there was little that could be done to stop O’Neill and his intended game-plan.  O’Neill was now ‘McScrooge’ in control and playing GOD over how he was going to get what he wanted.

Before we go there in detail – [ i.e. Part 7 – the May 5th SBS Board Meeting …] – lets first have a good look at the Phil Gray Audit/Inspection Report in more detail and break it down and expose it for what it was.

The SBS Treasurer’s reading of the Report:

The SBS Treasurer was not given a copy of this report until after the May 5th SBS Board meeting.   The report was complied without any imput or conversation with the SBS Treasurer throughout the inspection phase.   When he became aware the Audit was in progress – whilst on leave on the 31st Mar ’88 – he immediately offered to return but was ordered to stay away.   In fact – a week into the Audit/Inspection he was again ordered to extend his leave for another three weeks to early May ’88 by the SBS GM – Denis Cleary.   His return date was to be the 4th May ’88.

When he finally had the opportunity to read the report after the 5th May Board meeting – he immediately knew the report had very little reference to the depth and breath of all the SBS Treasury activities during March ’88, or over the whole term of his tenure since Aug ’87.   It’s was a snapshot of the March ’88 end of day positions taken in a hindsight perspective, and based on one aspect of the overall SBS Treasury’s portfolio structure.  The Report gloss’ over the raw data and its realism, and primarily focused on the futures and option positions.  It did no justice to the breath and depth of the SBS Treasury operation or its innovative ‘risk management’ techniques.

The report painted a false picture and distorted the connectivity of futures and options and their role in the overall ‘risk management’ positions, and does not grant the concessions that had connective offsets against all the other SBS Treasury activities.   There were several components of the Treasury activities that were not commented on or formed any part of the report.    It is not known if these were deliberately left out – or whether Mr Gray did not receive any information on these activities from his Audit/Inspection team leader – Mr Steve Heald.

After the SBS Treasurer was finally received a copy of the report and was able to read it in the solitude of his office – all its fabrications and inaccuracies were immediately obvious to him.   He made notes as a means of containing his frustrations, all of the comments made would not have been obvious to any of the SBS Executive who tried to defend the SBS Treasury in the face of Mr Gray’s summary document.    There was no way the SBS Treasurer could trust anybody remaining or whom he was to report to after that May 5th Board meeting.  His arrival back in the dealing room on the 4th May was met with Treasury staff concerned and wanting to know what was happening.   The specifics of these events will be covered in future uploads.

For the moment the SBNSW Audit Report is the focus.

Page 1 of the SBNSW Dealing Activities Report:

Copies of any Attachments referred to throughout the report were not received as a part of the report to the SBS Treasurer,  and they have never been seen.

Page 1 – Parg 4 – states in part :

‘… With the exception of turnover in so-called forward contracts and options, I did not examine intra-day trading activity, only end-of-day positions.  Following discussions, the methodology proposed by the Society and subsequently adopted involved re-creating the various option positions (including details of strike prices and exercise dates) and is agreed by both parties to represent a realistic measure of the attendant risk.’ 

The phrases – “FOLLOWING DISCUSSIONS”, “SUBSEQUENTLY ADOPTED”, “AGREED BY BOTH PARTIES”  and “ATTENDANT RISK” stood out as coercive entanglement – i.e. Mr Gray was laying down his ground rules  and putting a noose around the SBS Executive at the same time.

These ‘phrases’ were the set-up – what ‘discussions’, what was ‘adopted’, who agreed to what ‘re-creations’, and what ‘attendant risk’ – were obvious questions the SBS Treasurer wanted answers to but there was nobody around to ask – they were all gone.

Why had Cleary and his advisors agreed with Mr Gray to these initial parameter settings?

Whatever took place during that discussion between Mr Gray and the SBS Executive at that introduction meeting – and given his charter from O’Neill – [see below] – it was clear what the inspection/audit was about – and the SBS Executive were already on a path that was about to about to lead them to their own hanging.

Nobody on the SBS Executive and at that meeting could refute or challenge Mr Gray’s treasury knowledge – it was like a ‘howdy-doody’ show where the ringmaster -[Mr Gray] – cracked his whip and the SBS pigeons all lined up in a row – said how high.  The SBS Executive were severely disadvantaged from the get go – they knew absolutely nothing in real terms and its realism about Treasury operations and Mr Gray was about to make them sing to his tune.

The term ‘adopting‘ as a research reference sets the policy structure and this would have been completely outside the SBS Executive knowledge base on Treasury matters – unless of course someone senior from SBS Treasury was there to advise them – this was not the case.

There was never any discussion with the SBS Treasurer in any time frame about these discussions issues, or the adopted methodology, or parameters in how the SBNSW was to carry out their inspection.     First impressions upon reading the report were that Mr Gray was writing the report with no counter input to any of the issues raised.   He had free reign and the SBS ‘mouse-like’ staff cowered in the face of Mr Gray and his reputation.  The SBS Executive had accepted and agreed the Society would adopt and use the SBNSW’s inspection policy relating to:

Page 1 – Parg 3:

‘ … the Bank’s Asset, Liability and Trading Committee (“ALTOC”) and draws on the statistical research of interest rate movements which was undertaken by Mr. Graeme Chambers of the Economic Research Unit.’

Mr Graeme Chambers was unknown to the SBS Treasurer – his authority or credentials were also unknown.  The Economic Research Unit could have been an independent organisation but was most likely a economic division within the SBNSW.  Mr Gray was suggesting that some body of researches who researched interest rate movements, were now some sort of benchmark authority that the SBS should listen to and accept in a retrospective expose.  This was Mr Gray’s comfort zone and his reality.

The SBS had correctly picked every interest rate move since before the Oct ’87 crash.  The ‘think-tank’ approach Mr Gray wanted to use was his knowledge base – and it was all new to the SBS Executive – they had no basis to object nor any answer to this ‘rail-road’ type approach.

Page 1 – Parg. 4:

‘…involved re-creating the various option positions (including details of strike prices and exercise dates) and is agreed by both parties to represent a realistic measure of the attendant risk.’

The words ‘attendant risk’ also stood out – ‘which parties agreed’ on behalf of the SBS – there was nobody within the SBS Executive who had any real depth of understanding to what ‘attendant risk’ really meant in market terms.

Mr Gray was being allowed to dictate his own terms of reference for his report and this severely disadvantaged the SBS.  Mr Gray was also implying associated, or contingent, or measured risk and he was using phraseology to confuse and intimidate the SBS’s Executive, and expose their lack of knowledge on Treasury functions and operations.   Nobody on the SBS Executive side was willingly going to admit they were out of their depth – this was an ego issue … and in the end their collective posturing failed miserably.   If Mr Gray had of put O’Neill in the same position – O’Neill would have also been an ‘Elmer Thudd’  – and as ‘thick as a brick’  as the saying goes.

These same shortcomings applied to all the current SBS Board members, including the four SBNSW appointed Directors that included O’Neill and Kearns.   Dennewald was connected with a Pitt St. Merchant Bank and he would have some knowledge – but he was not at this meeting.   Take Mr Gray out of the room and leave O’Neill and Cleary to face off against one another – it would have been like watching two men on Viagra trying to duel with eachother – neither could talk authoritatively on Treasury matters so it would have been all about ego and one up-manship.

The intent of this report was transparent from the outset – it was still early in the read but already it could be seen that it was designed to expose the SBS Executive’s weakness on Treasury matters and the attendant risk profiles that become associated with Treasury activities.   it was obvious in hindsight to now see through O’Neill’s plan – he had been intent in making Cleary the scapegoat for all the current and collective ignorance within the SBS Board’s past record on Treasury function and the absence of defined Treasury limits.

O’Neill needed Gray to expose the Cleary’s and the other SBS Executive’s ignorance on Treasury operations.   Not having the SBS Treasurer there to defend the SBS Treasury against the report was a risk O’Neill did not want to address.   But was it O’Neill’s or Cleary’s decision to keep the SBS Treasurer away for all of April – the truth on this matter is still to be disclosed – Cleary made the phone call – and has stated that O’Neill had threatened to sack the SBS Treasurer – but this is only part of the story that still awaits to be told.

O’Neill already had his fish-hook baited and Cleary was now at a full nibble – and was soon to be hooked completely.   He just did not know what was coming.

When Mr Gray alleged negligence and irresponsible risk profiling at the Treasury Operations,  and using soft and loose words to embellish and support what he called an ‘excessive risk’ profile – the Report became the link document O’Neill needed to sack Cleary for ’cause’.  Mr Gray was using market terminology well above the knowledge base of any non Treasury personnel.   Cleary needed an expert by his side – and where was the SBS Treasurer – benched for the duration.

Cleary has much to answer for in the ultimate demise of the SBS – he played his hand badly – and the help from his Deputy Len Thompson during this period was just as poorly advised.   If Cleary wasn’t going to recall the Treasurer – that should have been Thompson’s cue to step in and insist they needed an expert to help advise.

Comments Page 2:

Gray’s Comments from top of page 2:

Preliminary Observations:

The review requires the following qualifications or general comments:

  • Documentary evidence confirms that on 23rd March 1988, the General Manager approved interim dealing limits.  I have been advised that interim limits were actually approved on 3rd March 1988, though this cannot be either verified or disputed.  No analysis was undertaken of limit compliance prior to 23rd March 1988.
  • The interim limits distinguished between the investment and trading portfolios but no such distinction is made in the maintenance of portfolio records.  The Society argues that the physical portfolios are investment portfolios (and should be set aside for the purpose of a trading risk review), bit I am unable to confirm from an analytical point of view whether the physical portfolios are indeed investment portfolios, particularly as active trading took place on the portfolios during the period under review.  Attachment B summarises the end-of-day physical portfolio positions.’ …

The first point made in this passage was a complete fabrication of facts.   Mr Gray was reporting an outright lie – the SBS General Manager never ‘approved any limits’ – the SBS Treasury had no Limits in place despite repeated urgings to the AGM Finance before he left in Feb ’88.   The SBS Treasury had never had any defined or structural limits apart from the minimal requirements for size of liquidity assets.   Ever since the SBS was formed in 1982 – no Treasury limits existed.

This was an operational oversight many years in the making, and all structured under the SBNSW controlled SBS Board all through that time – with the exception since Aug ’87 when the SBNSW no longer controlled the SBS Board.

The SBNSW had just gone through their own limit review process arranged by Mr Gray,  Now – Mr Gray shows up and lectures the SBS Executive about limits that had never been a part of the SBS treasury operational procedures.  It was like trying to shut the hen-house gate after the fox had his fill.   Monday quarterbacking is a great gig if you can swing it – but this report had its own agenda and the SBS treasury operation was just the means …

Mr Gray stated he sighted “Documentary evidence” – someone was filling in the blanks before the questions were being asked.  Whatever evidence Mr Gray was talking about was either fabricated or documents that had never been discussed or shown to the SBS Treasurer.

Why did Cleary feel he had to manufacture evidence?

It was obvious the SBS Executive were in panic mode and playing with fire – they were handing O’Neill the SBS on a platter.

The ‘interim limits‘ spoken of above refer to late February and early March ’88 meetings between the SBS Treasurer and the Executive SBS Management, and were specific to the on-going futures close-out strategy.  At those meetings indications to possible moves in portfolio size volumes were discussed in non-specific terms.  The only numbers talked about in specific terms were the upside and downside profit forecasts.   advice was given that the SBS had already locked in $4 million of the $8 million forecasted profits.  Further advice was given that is the strategy came unstuck – the minimum profit would be $2 million after positions were unwound.  There was some discussion as to estimates of projected forward sales that might be used to manage the overall position.   But to construct some formal evidence of ‘interim limits’ was beyond the pail in this Audit/Inspection scenario.

What were they thinking?

The SBS portfolio was sitting above $500 million and had been there for some months.   No specifics about the size or structure of the Liquids portfolio were entered into – other than Cleary being asked directly if he wanted the strategy to continue, and him giving his approval to pursue the ‘Futures Closeout’ strategy.  This happened a week before the futures contract closed on the 15th Mar ’88.

How Cleary and his team were able to explain these away as ‘interim limits’ and produce ‘documentary evidence’ – only demonstrates the amount of rope Mr Gray was feeding to all the SBS Executives to hang themselves.   If the SBS members had any idea how there Society was being managed throughout this period – they would have wanted blood.

Cleary and his Executive team still need to explain how this ‘documentary evidence’ appeared, and how ‘interim approved limits’ were enacted.

An extract from the diary notes made by the SBS Treasurer after a meeting he had with the SBS Executive on the 29th February ’88 appears below:

‘Meeting held between the SBS Treasurer and Chief Dealer with Management group, namely, Cleary, Thompson, Don Watson and Tony Page. Meeting outlined the general strategy of the ‘market squeeze’ against the January ’98 Commonwealth Bonds and the March ’88 10 yr futures contracts.

 SBS Treasurer described in detail the inherent risk profile and exposure in fully committing to the trade strategy.  Further explained that the risk could be managed if the spread value was monitored and controlled.  Also explained how all the FRA contracts used to monitor and protect the spread trade, would all expire on midday on the 15th March 1988. 

Further explained what that meant in risk and exposure terms, and that all open FRA contracts would be cash settled against a benchmark settlement price – that settlement price was to be determined by the dominant physical stock that closely matched and reflected the futures trading platform – that stock would be the January ’98’s because that was the only stock trading as a relationship to the March futures contract.

Management all acknowledged that they understood this information.  No numbers were discussed other than potential profit ranges if squeeze play was successful or was discovered.  SBS Treasurer explained that it was still too early to fully commit to the strategy – and as the market edged closer to the 15th Mar ’88 closure date, price action would determine what action could and should be taken.’

As for the second string – Page 2:

  • The interim limits distinguished between the investment and trading portfolios but no such distinction is made in the maintenance of portfolio records.  The Society argues that the physical portfolios are investment portfolios (and should be set aside for the purpose of a trading risk review), bit I am unable to confirm from an analytical point of view whether the physical portfolios are indeed investment portfolios, particularly as active trading took place on the portfolios during the period under review.  Attachment B summarises the end-of-day physical portfolio positions.

Mr Gray was right – there was a short maturity structure and a long-end maturity structure.   As positions were liquidated the percentage size of each of these short and long structures varied with positional strategy along the yield curve.   Since Oct ’87 – the portfolio strategy had been largely targeted at the long end and specifically at the Jan ’98 maturity.

The SBS Treasury operation was not a Bank Treasury with a multitude of various derivatives and capital market type exposures.  It did not have an industry style funds management operation, or foreign exchange exposure and transactions.  Its deposit base customers owned shares equivalent to their deposit balances in the Society and it operated as a Co-Operative –  this made it entirely different to a Bank operation on so many risk and administrative levels.

The SBS was not lending for anything other than residential housing or commercial property ventures.   The Liquidity Portfolio was the management tool to cover all the daily and monthly operating costs of the Society.    In an extraction of SBS profits since its formation in ’82 – the largest share of profits came from the Liquids Portfolio and its return over cost of retail funds.   It can be argued that the business of the SBS – that being lending for residential housing was structured for the benefits of members as per the Co-Operatives mantra.

To give some validity to this assessment – an extraction of the SBS Liquids assets and its budged returns of 1% above cost of funds used to estimate the Treasury contribution to the overall SBS gross profits. The extractions for the SBS Treasury can be seen from the table below:

[This is a raw extraction based on end of year numbers – it is not 100% accurate, but for the purpose of demonstrating the point that the Liquids performance dictates the overall profitability of the SBS it is quite accurate.]

Mr Gray’s ‘interim limits’ comments again talk in circles and try and connect the SBS Treasury operations with the protocols and structures of the SBNSW Treasury operations.   Why would he measure and use similar yardsticks for the Treasury operations of a Bank with those of a building Society?

A Bank Treasury and a Building Society treasury function are like chalk and cheese – in regulatory terms, in settlement and commerce arrangements, and in funding requirements.  Aligning them up under Mr Gray’s viewpoints was very prejudicial to the SBS Treasury operations.

Turing to the obvious – the SBS treasury was very profitable and the SBNSW was not – secondly the SBNSW had all sorts of regulatory Banking protocols to conform to that the SBS did not – thirdly the SBS was a Co-Operative where members shared in the benefits of the Societies profits.

There were many others – but this audit/inspection was about finding out the SBS futures and options holdings, its strategy, and its overall risk profile.   It could never be completed or done accurately without information and guidance from the SBS Treasurer, and for Mr Gray to think otherwise or that he could do any reasonable reconstruct without the input from the SBS Treasurer – meant he was yanking his own chain – or was that Mr O’Neill’s chain.

Review of SBS Liquids Portfolio Aug ’87:

When the Liquids portfolio was first reviewed when the SBS Treasurer started in Aug ’87,  he knew immediately that it was an old style investment portfolio that relied on buying a security at the best yield on offer and generally holding it through to maturity.   The criteria for purchasing such a security was that it complied within the Legislative Investment guidelines the Society’s could invest in.

The Aug ’87 SBS Liquids portfolio was invested in the most obscure of stocks, one that comes to mind was something called Northern Territory Abbatoirs, and guaranteed by the NT Government.  If the Society needed to sell this type of security to meet withdrawal demands over and above its immediate cash position, the Society was at significant risk of inheriting a capital loss, or in a worst case scenario – not being able to find an immediate buyer for the security.

This was the way the SBS Board had approved Treasury investment guidelines since it was formed in 1982.   As this SBS Board control rested completely with SBNSW appointed Directors up until Aug ’87  – their own Banking expertise was reflected in this existing and ongoing policy of investing.   This all altered after the appointment of the SBS Treasurer in Aug ’87.   Lengthy discussions were held between the SBS Executive and the new SBS Treasurer before they agreed to a new approach to managing the SBS portfolio.

For O’Neill via the Phil Gray report to now get on his high horse after the SBS suddenly turned their performance around – making some $20+ million with the new portfolio management structure – O’Neill and Mr Gray would have been better off tapping into the SBS Treasurer’s expertise and knowledge base to try and improve their own Treasury performance.

As part of the immediate overhaul when the new SBS Treasurer arrived – he completely restructured the portfolio with Managements approval during Sept-Oct ’87 and before the Oct 19th Stock market crash hit.  Before approval was given to the restructure – he went to great lengths to explain the inherent risks to the Society in investing in illiquid assets/securities.

As history proved – this restructure exercise saved the Society $10’s of millions of dollars in unrealised and revaluation losses after the ’87 crash.   These losses would have happened had a significant run on members deposits eventuated as a result of the crash.  From what Mr Gray was not saying in his report, that being the real story of the restructure and where the SBS liquids portfolio now stood as a result, the SBS Management had largely forgotten this restructure as well and never even raised this issue.

OTC’s – Over the Counter Options:

Mr Gray’s comments mostly relate to exchange traded futures and options activities.   Yet the ‘Over the Counter’ options OTC’s – that were a daily risk management tool the SBS Treasurer used were never included in Mr Gray’s summary calculations – these were offset positions that yielded overnight protection.   This was yet another misrepresentation contained in the report.

The type of hindsight risk profile Mr Gray was building against the SBS Treasury operation was not industry standard Auditing.   None of the SBNSW staff doing the Audit/Inspection were recognised Audit staff.  Mr Steve Heald was a Treasury operative and had worked with Mr Gray previously at Australian Bank.  His tenure with the SBNSW was also aligned with the recent appointment of Mr Gray – [Sept ’87].

During the eighties there had been several ‘deposit-runs’ on Building Societies across Australia that saw them fold and/or become part of a Bank or another Building Society because of liquidity problems. This was mainly because their ‘liquids’ could not be liquidated to accommodate the deposit redemptions without erosion of the Societies capital holdings.   The SBS Treasury portfolio was quite possibly the best structured and managed portfolio in all of Australia at the time Mr Gray did his audit – his report makes no comment on these aspects of the portfolio.

How Mr Gray’s summations and recommendations for the SBS would have compared with a similar review of the SBNSW’s portfolio, and that of other Building Societies, and at this same time – would have been most interesting.

Maybe Mr Gray knew nothing about O’Neill’s overall agenda regards Cleary and the SBS Board control – the end result was that this report gave O’Neill the ’cause’ needed to sack Cleary.

The over-riding question that still haunts the SBS Treasurer to this day – is why Cleary ordered that he stay away for that three week period from 11th April through until early May ’88 – and during a time when the SBS had the lifeblood sucked out of them – triggering a slow and painful death ending in the sale of the SBS to St George in Aug ’88?

Phil Gray Report Continues … Page 2 –

Risk Analysis:

The key results are summarised in Attachment C which uses a refined analysis under the following interest rate scenarios:

Typical Move:

  • Bonds: 0.30% p.a. overnight move,
  • Bills:  0.75% p.a. overnight move.

It is also observed that, according to our research, the ‘worst’ moves during 1987 were as follows (and in fact, occurred on about four days during the year):

‘Dramatic Move:’

  • Bonds:  0.60% p.a. overnight move,
  • Bills:  1.50% p.a. overnight move.

Whilst we have not undertaken formal analysis of the potential trading risk in this latter case, we know that the risk will be at least twice that shown in Attachment C (due to the accelerating delta ratios on options positions).

Based on this analysis, it is noted that the Society’s overnight capital risk during the period 4-8 March (which included a weekend) was in the order of $10 million and would have been a least $20 million had rates moved by the same magnitude as the ‘worst’ day in 1987.

For the period till 23rd March, the average overnight risk was $5 million.

It is noted that the interim limits if utilised, would accommodate overnight risk of about $8.5 million based on a 0.30% p.a. movement in bond rates.

Honestly, as these ‘Risk Analysis’ comments were read, re-read and absorbed – all this poppycock word association and veiled threat analysis was giving a clearer picture of what sort of Treasury operation the SBNSW was now running under Phil Gray.

Mr Gray’s synopsis did not scare the SBS Treasurer – nor did O’Neill for that matter.   Gray was again applying his own form of conservative ‘risk-profile’ management, and using it retrospectively to hindsight judge the SBS Treasury portfolio in ‘what-if’ type scenarios.

The SBS Treasury had kicked ass – perhaps Mr Gray should have taken a leaf out of the SBS Treasury book and learn something about ‘risk management’ – hang on a moment – he did!

Mr Gray approached the SBS Treasurer with a position to Manage all the SBNSW risk exposures after the SBS Management had been sacked.  The SBS Treasurer never had to turned him down – Mr Gray knew the position he wanted for the SBS Treasurer and it was a very interesting approach.  It was made with some provisos’ – they all being about getting his own Treasury staff to yield up their own discretionary limits.  But Mr Gray could not sell it within his own Treasury Management group.  The formal offer was never made – but Mr Gray exposed his underbelly in that he had seen the SBS Treasury operations first hand – and he wanted the SBS Treasurer to come and work for him.

With that sanction and approval in mind – all Mr Gray’s comments have to be read with some scepticism and clouded assessment as to whether he really believed everything he wrote in the report.   This report was not aimed at the ability of the SBS Treasurer or the current ‘risk profile’ of the SBS Treasury – it was aimed at the SBS Management and Mr Cleary in particular.   All the heat in the SBS Portfolio was gone by the 15th Mar ’88 – and this report was happening some 3-4 weeks later.

In further reference to the ‘Risk Analysis’ comments in Mr Gray’s report highlighted above – the interest rate moves Mr Gray use to highlight his theory related to the extremes of the Oct ’87 crash.   The same period when the October crash saw the equity market correct itself in a way that had not been seen in almost 60 years.

You don’t think he was loading a pistol with a cannon ball to make his point.  1987 was a year of many extreme moves – the point being that the SBS was on the right side of all those moves.   Yet – Mr Gray’s bean-counter extractions show once again how he was helping to line the SBS Executive up against a wall – and daring them to defend the past performance of the SBS Treasury against his ‘dooms-day’ type projections.


This was low-ball commentary – every dealer worth a pinch of salt knows and understands volatility – it’s a bit like being a bookmaker – no … its exactly like being a bookmaker – as a trader you take on and embrace the risk to know where the risk is and coming from.  Avoiding some huge punter for fear you might lose is no way to play the game – take on the risk and you own the market’s risk exposure and from there all you have to do is manage that risk by spreading it over other assets – i.e.  in bookmaker terms – spread the risk over the other horse in the field.

Hell – this volatility was why the SBS was having so much fun in making all its money – it owned the risk and was managing it in a way that was controlled, and whilst the interest rate trend remained bullish until the March ’88 futures close-out – there was never any real risk exposure that was not already covered any and whichever way possible.

Mr Gray and his helper Mr Heald – had no way to report or structure an answer to this type of Treasury operation – they had never seen it before.  I fact they never saw the real SBS treasury purpose in its futures and options positioning.  Of course the raw numbers scared them – hell it would have scared everybody – but if they had of asked the right person – then they might have got it – they might not have understood it all – but they might have learnt something.   they were sitting on this great big scandal with keys to expose the ‘futures sting’ of the decade – yet the didn’t see it or get it.   That is a reflection of the base level creditability that can be attached to this report from the SBS treasurer’s perspective.

Hell what the SBS Treasurer did – was not supposed to be able to happen – if the regulatory SFE staffers had of got a hold of what actually happened the whole ‘non-deliverable’ aspect and integrity attached to the 10 year bond contract would have been blown away.   Mr Gray was sitting on the SFE Compliance committee when the recent contact with him happened.   When this story was exposed to him – he had no comment as the above e-mails can attest to.   Mr Gray’s comments were like a kindergarten reading in the big-picture and the big-league that the SBS Treasury was operating in.

[If you want to know more about how the SBS profits were made – you can read all about it using this link to –  ‘Balls like an Elephant’ – a non-fiction novel account of the SBS Treasury operation during this period.]

Overnight Interest Rate Moves:

Yes – the overnight interest rate moves Mr Gray highlights in this report did occur – but the risk exposure was no greater for the SBS than it was for every other Investment portfolio that took on naked interest rate exposures.  That just happened to be almost every Investment Fund and Bank in the world.   Mr Gray picks on the worse overnight move during the October ’87 crash, and uses it to paint a picture where the SBS would have incurred a negative revaluation exposures of $20 million.

What was the SBNSW’s exposure on the same day – or any other Financial Institution for that matter?

If the SBS compared its overnight exposure with the SBNSW’s on that same day – the SBNSW would have been in the crapper like so many other Banks throughout Australia and the world – and yet low and behold – the SBS survived intact and was operating its business as usual – there was no hiccup – the crash presented once in a year type opportunities and the SBS portfolio was structured to take full advantage.    You could call it luck – by the crash was coming and the reason for the portfolios hasty restructured – in timing terms it may have been luck – but then the skill needed to take advantage of the opportunities still had to be implemented.

Mr Gray’s numbers were purely a scare tactic and they did spook the SBS Executive – by this stage of the report Cleary would have been almost ready to fall on his sword – and the report was only into its second page.

The reality of the ’87 crash scenario was the Society reported a trading profit of over $1 million for the month of October ’87 – and had positioned itself in Commonwealth 10 year Bonds above 14% in yield terms.  That position was as pure laden as gold.  In addition, whilst the revaluation in the portfolio the day after the crash was negative, by month’s end it was substantially positive because the portfolio had been liquid and was repositioned quickly to take advantage of the high yields on offer.

Hell, SBS made more money because of the crash, not losses.  Who was Mr Gray kidding – and yet – the SBS Executive were the ones left standing trying to defend the SBS Treasury’s operations – all like innocent lambs to the slaughter.

Mr Gray’s dramatics in using words like ‘typical’, and ‘dramatic’ in demonstrating interest rate movements, were word-theatre, and intended to make un-knowledgeable and inexperienced Directors and Executive Management types quiver in their boots with the prospect of moral and fiduciary responsibilities.  There overall importance was nothing more that bean-counter terms and were better used to access corporate debt exposures and serviceability on loan applications.

Mr Gray’s analogy was like applying a rider to a home loan application in a scenario where the family income was reduced by a factor of 20% and then at 40%, to see whether they could still afford the loan.  The decision to either make the loan or decline it would depend on whether the loan could still be serviced under those complying conditions.   If that analogy was applied to every investment security prior to purchase, and then analysed and subjected to the capital loss exposure if interest rates moved negatively, nobody would ever buy a security, or a house or take out a fixed rate loan.  This report cuts to the very core of Banking and understanding that Banking is ‘Risk Management’ and if you avoid all risk, then you cannot call yourself a Banker.

Mr Gray spoke of ‘interim limits’ in his ‘Preliminary Observations’, limits that were never in existence but applied for the purpose of his Audit, and then he presumes to make statements about overnight ‘capital losses’ based on a SBNSW research committee report on possible interest rate moves.  The creditability of this report were as false as O’Neill’s credentials to be the MD of the SBNSW – yet this report was toxic for the SBS Management and it was what sunk Cleary.

Again the Question – why did Cleary not recall the SBS Treasurer to defend the SBS against the summations contained within the Report.

Continues to Page 3:

Hedging Activities:

By comparing the daily risk on physicals with the daily total risk position (by deduction, the difference reflects trading in non-physical instruments), we can examine the extent to which non-physical trading was used to either hedge (offset) or leverage risk.

Apart from four days, for both bill and bond trading, non physical trading was used to leverage the trading risk of the Society.

It is noted that intra-day trading in ‘forward’ bonds was high.  For the period of 1-30th March, a total of 24,647 contracts were traded representing 3.8% of total market turnover.

The level of intraday trading in bond options was especially high. For the same period, a total of 16,958 contracts were traded, or 10.7% of total market turnover.

Once again Mr Gray is dealing in layered and degrees of deception.   For every futures contract traded, there is a buy side and a sell side. So when he comments, ‘a total of 24,647 contracts were traded representing 3.8% of total market turnover’,that number of contracts represents only 50% and not 100% of the completed transaction. Therefore the 3.8% was really only 1.9%.   [To defend Mr Gray’s comments – this was possibly just an honest error within the report …]

The futures and options numbers Mr Gray mentions sounded right from SBS’s side of the transaction.   But to try and make mileage out of the size has no relevance unless they are benched and offset against all intra-day positions – including physicals and forward purchases and sales, and any movement an re-positioning in the maturity structure of the physical and forward positions within the portfolio.

Mr Gray’s report mainly focused on the futures and options activity.  How could the risk exposures of the futures and options position be taken in isolation and used to create the illusion for readers of the report that the SBS Treasury’s risk exposures had no mitigating offsets.   Mr Grays risk exposures were wrong on so many levels.

How could Mr Gray make the comment – ‘trading was used to leverage the trading risk of the Society’, without understanding any of the intra day, overnight, weekly and longer term strategies,  and the overall maturity structure of the $500+ million Portfolio,  it begs to ask – how smart was Mr Gray?

Mr Gray’s staff did not even mentioned the OTC’s as highlighted previously – the SBS were very active in these overnight style options and these helped mitigate much of any overnight risk exposures.

Mr Gray does not acknowledge the expiry of the March Futures Contract in any of his summations and how that impacted on risk profiles.  The 10 year Bond contract was non-deliverable – that meant that all risk exposures to futures and options expired at midday on the 15th Mar ’88.   At a minute to closeout you might have 25,000 open futures contracts, at midday you have zero exposure and a cash settlement against the close out price determined against the physical benchmark stock.   Mr Gray did not factor any of these contract specific’s into his report.

Mr Gray ould have known these specifications attached to the 10 year Bond contract – but he made no mention of it in his report – was that an oversight or a deliberate omission?  Mr Gray never commented when asked this question in recent e-mail exchanges – [see e-mail message exchange responses above.]

At the completion of the Audit – Mr Gray was still not aware of the stratigised positioning undertaken by the SBS in its March Futures strategy.   This says lots about how successful the SBS was in covering its market exposures.   Put another way – the SBS Treasury was so good at its job – that it fooled everybody in the market and and has done so for nigh on 24 years – nobody has had a goddamn clue how the SBS pulled off the biggest ‘futures sting’ in Australian Financial history.

It would be most interesting to know if this successful ‘futures sting’ – revealed toi Mr Gray during the recent contact is now used in training manuals to rewrite SFE history and educate compliance officers in the futures industry.

SBS Internal Auditor:

Tony Page, the SBS Internal Auditor was up to his eyeballs in this report.   He had either turned stooge or was sufficiently intimidated by his lack of understanding of Treasury operations and accounting procedures – that he folded like a cheap tent under the SBNSW investigation microscope.   Page was advising Cleary on all things SBS Treasury – its operations and procedures.  He had been doing this for several months – he was Cleary’s go to man when Cleary needed understanding about Treasury matters.    That meant Cleary was almost certainly  relying on Page to advise him in the face of this report.  Talk about the blind leading the blind.

Efforts to contact Mr Page to date have proved unsuccessful.

Counterparty Risk:

All Bond forwards and ETO-type options have been transacted with Bain & Company as principal.  This produces a direct counterparty risk in the converse case of a favourable move in rates, but default by Bain.  Using the same interest rate scenario, the overnight counterparty risk was estimated at up to $6.5 million.

It is noted that the Bank has not been prepared to extend an unsecured dealing limit to Bain, whilst the Society has now formally indicated that it proposes to formally implement an appropriate limit on dealing with Bain.

These comments suggest some ignorance of the rules and entitlements pertaining to SFE’s Floor membership,  their role and relationship with the International Commodities Clearing House (ICCH), and the ICCH’s role and its guarantees pertaining to all SFE futures contracts.

Mr Gray does not even mention the FRA/Futures agreement between Bain Refco and SBS and how their agreement worked.   It is most likely that Mr Gray had no idea about the arrangement.

The reality was that each FRA/Futures contract SBS transacted with Bain Refco was equally matched with a genuine futures contract that became part of Bain Refco Floor Membership house account with the ICCH.  SBS dealt with Bain Refco in FRA’s and Bain Refco offset these position with a like futures contract.   That meant that every open position SBS had was not even with the SFE.  All the Bain Refco House account positions held in offset to the SBS positions were guaranteed by the ICCH and therefore Bain Refco as the holder of the contract, was itself guaranteed and protected.

So when Mr Gray speaks of unsecured credit limits, he is talking about the ICCH as the end client for the futures contract.  In not being aware of or the understanding of Bain Refco and SBS arrangement – his relationship statement that even the SBNSW does not have an unsecured facility with Bain Refco, is scare mongering.   It has no relevance to where any futures risk exposure lay between the SBS and Bain Refco under their forward rate agreements – FRA’s.  The FRA differential exposure to market value was where any credit risk might be – the same as the futures contract and how it is valued to market with margin calls.

To explain this further, each futures open trade has a bought and sold matching contract.  That in effect means that any margin debt (call) required by the ICCH is also internally matched with a corresponding margin credit (surplus).  Any default on margin, deposit, or contract settlement by a client of a Floor Member, on any open or closed contract, is the responsibility of the floor member and clearing broker.  Any default on futures settlement is guaranteed by the ICCH.

That means, that Bain Refco covered all deposit and margin call requirements on behalf of all transactions it was holding on account of the FRA/Futures agreement with SBS.  If the margin position was negative, Bain Refco were responsible for funding the margin call to the ICCH.  The SBS would then also be carrying the loss margin in its revaluations from its trade position.  That then means SBS would owe Bain Refco as an unsettled liability.

In the reverse of that transaction, that is where Bain Refco have a credit margin on trades it is holding for SBS, there is a credit exposure between Bain Refco and SBS in that Bain Refco owes SBS the amount of the profit margin on revaluation – if there was credit risk – this is where it happened.

If SBS were dealing directly with a Floor Member (Bain Refco) as a normal client, SBS would not be entitled to that margin credit via its clearing account with any Floor Member (Bain Refco) until it liquidated the contracts.   That Floor Member (Bain Refco) would then be holding those funds in its segregated Clients Funds account until it settled with SBS.  SBS and Bain Refco settled on a daily basis for the net result of all closed positions.

Mr Gray had to of understood this process – he had been connected with the SFE for some years and remains so today.  He did not ask about this agreement before he wrote this report, and therefore he did not comprehend the agreement – nor fully understand the Counterparty Risk argument he presented.  He elected to write about Counterparty Risk as pure intent to again intimidate the SBS Management.

There was never ever any credit risk exposure that had connectivity with Mr Gray’s comment – “the SBNSW did not have unsecured credit limits with Bain’s”.   Also, Mr Gray’s comments under ‘Counterparty risk’‘Using the same interest rate scenario, the overnight counterparty risk was estimated at up to $6.5 million’,  … are an absolute beat-up.   These comments are almost criminal in their misrepresentation – and whether deliberately so is for Mr Gray to respond to.

This report had lost all creditability within the SBS Treasurer’s mindset by the time he had read page 3 – and yet it continued …

General Comments from the bottom of Page 3:

… to the middle of page 5,

More importantly, it is now clear that the Society was only able to accurately estimate the risk of its options positions on an ex-post basis.  In the absence of a well-developed and installed options pricing and hedging model, it is difficult to justify the substantial positions and turnover in bond options which took place.  As a fundamental principle, if is difficult to see how such trading could be justified without the ability to accurately calculate, on-line, and ‘fair value’ of listed options, the delta ratio and, more importantly, the potential exposure to change in market volatility (i.e. ‘vega’ ratio).

To put the matter in perspective, proposed new limits for the Bank are for a maximum exposure across all markets (i.e. domestic interest rates, foreign exchange rates, foreign interest rates and equities) of $20 million of which no more that $10 million would be incurred against a particular market (e.g. Domestic interest rates).

Gray was really showing up his staff’s deficiencies throughout the investigation phase – there was such a computer program.  It was used exclusively by the SBS and was propriety software.

All the printouts Mr Heald was looking at had to have been printed from this software.  Did he not ask to see the program?

The same program that generated those printouts also provided the risk profiling for all the SBS Liquids portfolio.  Every position, transaction, forward, option, futures, FRA, OTC’s, physical maturities, yield curve analysis, trading records, profit/loss reconciliations, management reporting – everything was a part of that computer program and the SBNSW staff never bothered to have a look at the program to see what it was capable of.

The SBS Treasurer had developed this program over a long market career.  In the after SBS experience the program was sold to Bank Treasury operations on a commercial basis.   The program was on all the SBS Treasury Computers and encompassed all the day to day activities.    So when Mr Gray says there was no program to monitor all the associated risk exposures – he is being completely ignorant on a factual basis – and again misleading everybody who read the report.  In fact the program is still functioning today with some major upgrades due to spreadsheet improvements.  Why the SBS Executive did not take on Mr Gray on this point is a mystery … hell they were receiving the reports this computer program was generating.

With the touch of a button and with market price/value updates – the total SBS Liquids portfolio, physicals and derivatives could be revalued via a calculus macro within the program.  The refresh function instantly appraise every physical asset, Bank Bills, Semi and Commonwealth Government security in terms of Market Valuation and a hedge relationship with both 90 day Bank Bill, 3yr and 10yr Bond contracts.  All Options, Futures and other derivatives could also be revalued ‘to market’ using the same parameters.

The quality of the input of transactions was the Dealers responsibility and then verified by the Settlements staff for errors.   There had not been a single error input in the time the SBS had been using the software.   The SBS Finance Dept continued to run its existing procedures to verify all Treasury operations – but from a Management Risk profile – the program running on all the Treasury computers was what was used to monitor all the Portfolio risk. Whilst the dual systems produced the same numbers – Executive Management were trusting the SBS Treasurer’s software for Management reports.

Again – the SBS Executive was aware of this – how they did not defend against this allegation is beyond understanding.

The volatility barometer within the program was a self policing input.   The SBS Treasurer knew the SBS Treasury activity was causing the markets increased volatility because of the ‘in-and-out’ squeeze being applying to the spread value between the 10 year futures contract and the 10 year physical market.  It would not have been prudent or accurate to adjust the ‘Vega’ variables for true value on account of that volatility being instigated by the SBS Treasury.  The SBS were the reason for the volatility and why should they pay away the premium income that volatility generated – hell the SBS made more money because of the volatility factor and it was being controlled by the SBS’s market activities.  Mr Gray should have understood this.

It was possible for the program to price the fair value of all options, both OTC and Exchange traded, basis time decay and intrinsic values relative to the physical/futures spreads.   This was a wiz-bang computer program and it gave the SBS a monumental head-start over all the other market operators.  It could factor in market scenarios from any perspective – bullish or bearish moves, the ‘what-if’s’ were used in determining potential profit and loss scenarios and applied to trading strategies.

This program was 5 years maybe even 10 years ahead of the market.  It could have been termed a ‘computer generated trading program’ – and dealing rooms around the world now can’t survive without them.   For Mr Gray to say:

” … it is now clear that the Society was only able to accurately estimate the risk of its options positions on an ex-post basis.  In the absence of a well-developed and installed options pricing and hedging model, it is difficult to justify the substantial positions and turnover in bond options which took place…”

… demonstrates a true indication to how biased and unfair this report was.

The SBS Treasurer had proprietary title to this software and SBS Management were paying him a monthly fee for its use.  This arrangement was established and approved shortly after the SBS Treasurer joined the SBS and the AGM Finance – Paul Ogilvy had signed off on it.

When SBS were eventually sold to St George, the soon to be ex SBS Treasurer brokered a deal where St George could use the software for 3 months during the changeover period, and on the basis that if they still wanted to use it they would then have to buy it.  This was a verbal agreement with Greg Bartlett, the St George Treasurer at the time.   When the three months expired, Bartlett elected not to continue to use it – the price tag was $10,000 – cheap at any cost.   The St George Treasury were scared of the SBS Treasurer and did not want him anywhere near the St George dealing room under the merger and integration arrangements negotiated when St George took over the SBS.

Shortly thereafter the now ex SBS Treasurer instigated legal proceedings against ST George when an ex SBS dealer – now operating out of the St George dealing room – informed the ex SBS Treasurer that St George were still using the software.   The ex SBS dealer also claimed that St George Treasury Management – i.e. Greg Bartlett – had approached him to pirate the software by entering the macro structure and the source calculus, to try and recreate the program functions in a different format so it would look like a different program.   The ex – SBS dealer was unable to create the new program so St George continued to use the program as it was.

The ex SBS dealer was to be the star witness and his testimony would have sunk St George.   The St George Solicitors and Treasury Management intimidated the ex SBS dealer by using his job security into withdrawing his testimony.   After 12 months or so, the SBS Treasurer dropped the case to protect the ex SBS dealer.  Greg Bartlett, the Treasurer of St George at the time, and recently retired Director of Westpac Banking Corporation,  was the person involved throughout this piracy scam.   He was never bought to account for that theft.


Mr Gray’s recommendations were the final slap in the face given what the SBS Treasury had achieved over the previous 10 months.

The limits issue was fair-game, but his attempts to address this issue had been rebuffed by the previous AGM Finance – and now in the face of this report the SBS Executive were making up limit structures to suit Gray’s requests.

The Financial markets were evolving – they have and always will be a living breathing and emotive centrepiece, and limits form the most important fencing structure to not let dealers wander off the grid.  But – when the Management have no understanding on what Limits really mean and how they should be used – they become a useless tool.  You only had to read about the AWA FX dealer Andy Koval 1986-87 exploits, and the more recent NAB’s Dealer scandal’s to understand how dealers can get around Management imposed limits.

The SBS Limit situation was not perfect – but the SBS Treasurer had structured a self-policing limit structure and he was the only one who knew about it.   He made it a point to kept his Management informed of every aspect of the portfolio’s performance, structure, profit, loss and revaluation status on a daily basis.   He took it upon himself to make sure that his operation had full disclosure to everyone that mattered … his Management trusted him implicitly … and yet – Mr Cleary did not trust him enough to bring him back from leave and defend what he had created in the face of O’Neill’s ‘seek missile’.

Mr Gray’s summation was the nail in Cleary’s coffin – exposing all the wrongs Mr Gray believed was wrong with the SBS Treasury protocols – his views and his perspective.

Was this the best possible summation of the SBS Treasury operation … hardly – given the examples exposed hereto about Mr Gray’s inability to fully understand the SBS Treasury operation as this Audit report response is a testament to its lack of creditability.

The EYE-BALL Opinion’s Summary Comments – on behalf of the SBS Treasurer:

The SBS Treasurer new every aspect of the SBS liquids portfolio – he had lived and breathed it for 10 months – he had restructured it, massaged it, lengthened and shortened it when necessary, and his ‘game plan’ for the futures strategy was ‘inch-perfect’ in its formation and its execution.  He had positioned the portfolio in a ‘bull’ market run that was still going – and he had used the market’s post  ’87 crash skittishness to turn the SBS Treasury into a major market player.   Not for player or reputation recognition’s sake – but because of his professionalism and pride in that the SBS Treasurer applied himself to be the best at anything and everything he did.

This O’Neill sanctioned witch-hunt audit in the form of a ‘rats’ scheme – was trying to turn the efforts of the SBS Treasury into something less that it actually was.  The profits generated were extreme in ’88 terms – and there was nobody who did not tip their hat to the SBS Treasury performance.

O’Neill’s creditability was a lap behind in racehorse terms – he was a young 35-year-old with the MD tile of the SBNSW – he was in love with the political power within the NSW Labour party that title generated – he was not in love with his Banking responsibilities because he was now in charge of a Bank on life support.

Yet – he was sending Mr Gray into the game to destroy the best thing he had going as a Director and Deputy Chairman of the SBS with fiduciary responsibilities to the SBS membership.   His SBNSW title was not more important than his responsibilities to the SBS members – yet his actions pissed all over those SBS members to achieve a financial gain for the SBNSW.  His responsibilities in the way he went about this Audit, and the way in which he set about a course to destroy Cleary and the creditability of the SBS Treasury and SBS Treasurer – were not the actions of someone acting on behalf of the SBS members.   He was trying to tear down what had been created from within to save his own skin.

Mr Gray’s comments in support for the SBS Treasurer ‘expertise’ were small change compared to the – ‘casino like futures trading’ – allegations O’Neill coined and used in his own personal attack against Cleary.  He again used them in press leaks to sway SBS members in a crucial vote to sell SBS to St George in Aug ’88.

The information that led to the story appearing in the press clippings below and dated 16th Aug 1988 – were leaked just six days before the 22 Aug ’88 SBS AGM and vote on the sale of SBS to St George Building Society.

[Click Image to enlarge:]


[Page 32 – Click Image to enlarge:]


These press leaks did untold damage to the previous SBS Executive’s creditability – and they destroyed the SBS Treasurer’s own market creditability and career – and all done by O’Neill’s PR campaign to sway the SBS member support for the impending sale to St George without a second thought.   O’Neill was just blasting away and paid no consideration to those he destroyed in the process.

In the face of this Audit report – Mr Kearns the SBNSW Legal Counsel, and replacement SBS Chairman after O’Neill was booted from the position for ‘conflict of interest considerations – commented in the 1988 SBS Annual Report as follows:

[Click Image to enlarge:]


Can you all read the hypocrisy in Mr Kearns comments – [above] – and this all orchestrated whilst serving as John O’Neill’s lap-dog on the SBS Board.   Mr Kearns told lies in this Chairman’s report –  the SBS Treasury had made near $25 million by the end of the Financial year in May ’88 – some $8 odd million was trimmed from the Treasury’s contribution in this Chairman’s report – $5 million as a provision and the other $3 million that has never been publicly accounted for.

In Mr Kearns’ review of operations he had this to say about the SBS Treasury Operations – page 8 of the Chairman’s review:

[Click Image to enlarge:]

Everybody can now read how the SBS Chairman and still serving SBNSW legal Counsel – viewed the SBS Treasury operation in hindsight – his comments in acknowledging the SBS Treasury’s performance when stacked up against the Phil Gray Audit Report – are in themselves a walking contradiction.  How could the SBNSW Executive live with themselves.

With more incriminating documents still to be uploaded – the criminal intent and their crimes will only become more exposed.


Final Say on Mr Gray’s report:

Back to Mr Gray’s report and Apr ’88 – every portfolio security, every option and futures/FRA, every forward sale/purchase, every OTC, every aspect of the portfolio was known, massaged and caressed like a new-born baby – this SBS Treasury operation was no fly by night – take the money and run type operation.

Yet – Mr Gray walked into the SBS Treasury while the SBS Treasurer was away with a mandate from Mr O’Neill to find out what was going on within the SBS Treasury.

If Mr O’Neill wanted to know – why did he not just ask the SBS Treasurer – he was Deputy Chairman of the SBS Board – Cleary could not deny him access – yet the SBS Treasurer has never met Mr O’Neill nor any of the other SBS Board Members apart from the SBS Chairman – Mr Ken Dennewald and the SBS GM and Executive Director – Denis Cleary.

If they were so desperate to know the SBS futures and options positions – all they had to do was ask – yet Mr O’Neill decided the ‘jackboot’ style approach was better.   Mr O’Neill wanted Cleary’s head desperately – that would give him back SBS Board control – he wanted to see Cleary him humiliated, wanted him so jacked up that he would be happy to fall on his sword.

Mr O’Neill was not concerned at who he destroyed to get what he wanted – another sign of just how ‘evil’ the man is and was.   His desperation to save his own career – not his Bank – but his own reputation – was so committed he saw no good in what the SBS had achieved – as a SBS Board member was he serving the SBS members interests?   Of course not – he was serving his own interests.

Mr Gray’s comments and assumptions in this report were consistently erroneous to a fault – in some cases they formed outright lies.  Who conducts an Audit and does not speak with the attending Management to discuss any findings – or to ask the questions when issues are discovered?

The SBS Treasurer was given no right of response – and in the situation where the SBNSW were preparing to commit a soon to be revealed FRAUD with purposeful intent to steal the value attached to the SBS reserves – some $75 million – this Report became the instrument that allowed O’Neill to set up the events of the May 5th Board meeting where he staged his coup, and then set in motion a Corporate RAPE and its attendant FRAUD that has never been exposed – nor challenged in any meaningful way.  O’Neill got away with it – and this expose has intent to change that history.

On a major side issue that has to still be addressed to give clear reasons as to why things happened as they did –

  • Why was Mr Cleary held totally and collectively responsible for all of the SBS Boards collective ignorance and lack of attention to all the things Mr Gray raised on the questions of Limits? … and …
  • The SBS GM – Mr Cleary has much to answer for in his decision to prevent the SBS Treasurer returning during this audit period and its aftermath.  To date – the truth about that decision is still to be told in full honesty.

In can simply be said of Mr Gray and everybody else associated with this report – they did not understand what they did not understand …


Part 7 continues … The 5th May SBS Board Meeting … see below for link …


Link to all previous chapters for –

“Human Evil Exposed – John O’Neill (CEO-ARU)” – The SBS Story


The EYE-BALL Opinion … Without Prejudice …

  1. Brian
    January 18, 2012 at 2:03 pm

    Hello Eyeball,

    Where you say John O’Neil was playing god, i loved the part where Phil Gray wrote he would not take instructions on his findings, nor instructions on his investigations. If so what is a prudential standard?

    If you had a portfolio of say $500 million Commonwealth Government bonds, equally offset by short futures, then you don’t have absolute risk, but rather basis risk. Should that basis risk trade be deeply in the money you need to consider credit risk on Commonwealth government and SFE clearing system, then as that is virtually neglible, you really only need to employ trailing stops.

    From what I see John O’Neil is not the only delusional/deluding/deluded force.

  2. January 18, 2012 at 3:31 pm

    Great question Brian … I’ll let Mr Gray respond to the question if he dare … my objectivity is a little clouded … and am working feverishly on Parts 7-11 at the moment …

    Thanks for the question/comment.


  3. david the pragmatist
    January 18, 2012 at 4:26 pm

    The audit report is just that! The objective of any audit report is to establish if procedures are being followed and prudential issues met.
    It seems to me that the audit report established its objectives from the perspective of what? ie what parameters were established and in turn how did the management of Building Society react to it in a formal sense. The bottom line was that it showed no impropriety.
    At that point the onus was on management or external influences to establish appropriate guidelines to follow.
    The exposures that were incorporated may have been controllable, but once no impropriety was established it is a subjective matter to recognise appropriate limits and risk.
    An opinion as to what was appropriate, is and should have been the arena of management and even driven by the Treasury itself. The immaturity of management and the Treasury operation in general in not recognising this is a culpable aspect of the building society and equally the State bank in not recognising the needs. Obviously the objective of the State bank was in another direction, but unquestably if given recognition should have been driven towards a recommendation to have an appropriate structure in place.

    Whilst the objective of this blogsite is to attack John O’Neill and the obvious conspiracy he inspired, the shortfalls in management at all levels is quiet appalling.

    The evil that you try to expose is more simply put as a criminal attempt to achieve his goals and to that extent it is proven from a prosecution perspective and is then subject to a defence of either fact or derision.

    To sum up further is to state that the Treasury of the Building Society was able to achieve to the ends of the Building Society a result that came from purely legal and acceptable circumstances and that whilst naivety was paramount on all sides, the Building society did nothing wrong and the agreements of profit sharing and awards was justified to the Treasury operation.

    If I had conducted the audit in a proactive and procedural sense, all these issues would have been recognised and addressed and appropriate limits put in place.
    The market is a different place now and the cowboy antics of the personell invoved in those days would not be tolerated in this day and age. In saying this it is again reinforced that the circumstances available to the Building Society in this period of time showed no breaches of any established guidelines. Albeit non existent through ignorance of the parties.

    Carry on with your O’Neill prosecution as the audit report is not a weapon for either party to go to war on, other than signify the naivety of all concerned.

  4. January 18, 2012 at 4:42 pm

    Thanks David the Pragmatist,

    Sounds like you have some Financial markets background … would you like to share?

    I can agree that the Audit report was an illusionary weapon – and in the face of as you say the collective SBNSW and SBS ignorant’ management types – the Audit report was a document that was more bluff than bluster. It’s use was in its threat value and once the SBS Management rolled over – it proved effective.

    Do you have a comment on why Management did not recall the Treasurer to defend against the Report?

    Thanks again for the comment.


  5. david the pragmatist
    January 18, 2012 at 8:13 pm

    i suspect the management,both executive and non-executive had no fundamental understanding of risk management and was very typical of building societies of this time.
    I might add that State Banks were not much smarter and I can still remember the famous Don Argus of the NAB receiving so many accolades for not taking his bank into the very costly Commercial lending market in and before this era. His genius was recognised by the ignorant ( read press and commentators), everyone in the industry that had half a brain new that Argus would have loved to be there but the NAB’s antique computer systems would not allow the growth in that form of lending to keep up.
    Anyway i digress, back to your question. why was not the Treasurer called back?, who knows, most likely fear of being exposed to understanding what he was going to say.
    Remember the Empeorers’ New Cothes. If you could not see the cloth you were a fool.
    I suspect that no one wanted to appear as such, because realistically they did not understand.
    The trade was a very sophisticated and brilliantly thought out strategy BUT it was for all intents a transaction that should never have been undertaken in a properly disiplined organisation. Something the Treasurer should have been aware of if he was acting in the proper role of the transaction, whereas he was the dealer making it all happen. This is not necessarily a ctiticism of him as the structure that the board allowed to be in place. Such a segregation of duties whilst not understood by the naive management and board and should have been a significant notation on the Audit report produced by the State Bank.
    Of course this all adds weight to O’Neill’s real objective.ie facts spoiling the story.
    Even though the individuals that came from the State Bank Treasury were respected money market professionals, they also were naive when it came to big picture ALCO (Asset Liability Management). Probably the single most important management aspect that any CEO of a financial institution needs to understand. CEOs were notorious in this time for abrogation of such responsibilities because it was something they did not understand. Whilst I have been retired from banking since 1996 I noted this fear held by CEO’s right up to this time and I suspect they still delegate this responsibility to this day and unfortunately the “eggheads” that have been delegated do not understanding some of the basis risks because they have no fundamental banking experience. Understanding basis risk is not as simple as differentiating Wholesale and Retail as much as understanding the dynamics that drive both in a particular organisation or culture.
    Australian Banking is still maligned for this mix and again it is not understood properly. Funding is now much more pure than days long gone when retail markets were heavily subsidised by the large margins achieved, these days fee income generation and a much more stringent margin management process has not allowed the non thinking Reserve Bank to understand basis risk in funding and asset management. Securitisation also comes into this equation.
    So in a round about way the answer to your question is 3 monkeys. ie hear no evil, see no evil, speak no evil.

  6. January 18, 2012 at 9:31 pm

    Well done David the Pragmatist …

    You crack me up … ask a simple question and a genius responds … do ya think O’Neill understands any of this?

    On the question of why no recall of the SBS Treasurer – Cleary was done like a dinner if he didn’t and done both sides if he did …

    Surely the outcome for SBS members should have weighed in somewhere – Dennewald was a dead duck in any scenario as he was a SBNSW appointment – Cleary’s Executive Diretorship came via the Boards approval from Whitlams 1984 appointment when Cleary was sweet with the thought of the SBS merging and him becoming the SBNSW MD after Whitlam exited …

    The personal feud between O’Neill and Cleary can’t be the only reason here … something is missing? Time for Cleary to ‘fess up …

    EYE-BALL …

  7. david the pragmatist
    January 19, 2012 at 9:29 am

    Yes Cleary as the person who was the direct representative between Treasury and the Board was the person who did not show appropriate leadership.
    If he had the matter could have been so much better handled. ie if he had brought back the Treasurer and drained every aspect of the transaction from him and hence understood it to point of being able to represent it, he could have made O’Neill look like a fool. In turn if the Treasurer was sophisticated enough to make the appropriate defense (he was not allowed to) then the nature of the Audit report could have been qualified heavily and in fact turned into a positive. Yes the Board had much to implement but not withstanding this weakness the system that was in place worked. This was because the Treasurer was fundamentally honest and did not attempt to hide anything. If Cleary had taken the initative he could have represented the bank as fully covered by being the auditor of the transaction in his own right.
    What this means of course is that if this person was not honest then the B/S was open to potentially any type of corruption. The system needed a Chief Dealer (the Treasury encumbent) and a genuine Treasurer capable of making representations to the General Manager (Cleary) and the board.

    A CEO once said to me everyone has their own “dung hill” to protect and ignores the other ones. He was an autocrat, which I have no problem with.
    Essentially good management and i suspect its still a problem with modern management needs to address true executive competence as being able to interact and understand everyones dung hill.

    In this case the executive and non executive new nothing about the industry they were operating in other than loans and savings and good customer service. Whilst this is fine a true executive knows the total fit and responds accordingly (he does not have to run the other dung hills) much to the “chagrin” of most of his colleagues who will usually resent the terrortorial interference. State Building Society was obviously bereft of any true executives or in turn the management did not allow such initiatives.

  8. herman
    January 20, 2012 at 10:24 am

    To say this could not happen today, is nonsense. Evidence, Lehman, UBS, BOS, and many more. Bank for International Settlements introduced Basle in 1996 to attempt to address this. Now they are trying to accelerate phase 111. To say they were cowboys then, but that is changed is an absolute denial.

    If we were to use Basle as we now understand it, SBS with mortgages and liquidity of CGS (although concentrated) would have faired much better than the exotics that SBNSW entertained like Cablemakers or the very thought of leasing back the dams. Would the State Government guarantee that (the dams deal with the Water Board)? In the end they did carry the bad lending book.

    A lot of what transpired at the time, is the inefficiency of State owned entreprises. The government has little capacity to effectively own such entreprise. In the last decade, laisse faire had a put on governments in respect of bad debts. Look at Soc Gen today. Try BOS.

    What has not changed is the egotism and greed. Look at AIG or Goldman or UBS.

    Wran thought he was doing something good, and did not play fair on the CBA agreement, and empowered Whitlam and O’Neil etc. Greiner was just as big a goose probably even bigger.

    This all remains an excellent case study, even though the modern ones possibly have better relevance.

  9. January 20, 2012 at 10:51 am

    Thanks Herman – another incitfil comment –

    To expand on your theme – if the Wran/Unsworth/Greiner Governemnts are an example of how Governments go about circumvented Legislation put in place to protect consumers – what are all Governments capable of? – i.e Greek austerity measures, and the other members of the P.I.I.G.S. – how did the process of Governemnt allow the debt status in these Nations get to the levels that forced the markets reactions – i.e. Ratings downgrades etc …

    The US had ‘debt ceiling’ – but if Government can move the ‘goal posts’ without the people being involved – what use are Laws and Legislation … and their processes.

    Premier Greiner did what he had to do to get the SBS problem off his plate – is expediency a form of denial – the denial being ‘out of sight out of mind’ … the crime is still exists – and who really knows when a crime has happened?

    If Governments can hide their mistakes and their underhanded deeds – how do we know they are following the Legislation we all believe is there to protect and to stop Governments enacting a crime.

    This SBS shakedown was a crime – and at the time the media, the Opposition, even the Attorney General knew what was happening and stood back and tured a blind eye … this could be an example of how Governments have operated all the time … if a criminal knows he is going to commit a crime – their first task is to plan their escape or how they will get away with it – and knowing the proceedures gives first hand knowldge in how to beat the system …

    The risk of exposure has to be the biggest threat – everybody who could do something about this ongoing SBS fraud decided to stand aside – yet the moral and integrity structures we are supposed to believe in our Governments did not work … this is the issue that most disturbs … the comercial reality of events are for civil considerations – but the Governemnt’s cover-ups and aid in allowing the fraud to continue when it was exposed requires maximum penalties.

    EYE-BALL …

  10. david the pragmatist
    January 20, 2012 at 12:50 pm

    If you and Herman want to philosophize, do so by all means,but you are way of track from comments on Phil Gray’s audit report which was what I was focused on.

    I think the troubles of the world and its corruption from the media down are fair targets but you make it very difficult for your audience when you go off in tangents.

    I personally focused on the audit report because I have been both an auditor and bank treasurer. I have opinions on world affairs, but do not consider my self such a statesman to justify grandstanding. Your focus on SBS is a microcosym and for the sake of your forensic investigation you should both stay on that stage.
    If anyone reading your synopsis and discussion paper was interested in mounting a challenge or investigation, I suspect they are now well and truly lost in your self admiration society.

  11. January 20, 2012 at 1:33 pm

    I thought is was all on point – the corruption and Legislative abuses and the continuation through the ages …

    But you do make a good point – this is a hard enough forensic examination to be flippantly digressing – the synopsis is trying very hard to point out the obvious and the not so obvious in a manner where the path leads to the most illuminated hot spots.

    Part 8 is where it begins to get very interesting and the errors begin to stack up …

    The weekend is already spoken for … the tennis will have to wait until late next week …

    Thanks for the reminded … consider yourself chastised Herman – I certainly feel that way …

    EYE-BALL …

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