Bankers: the smaller the deal, the bigger the fee

The Opposition is complaining about too much spending … However, it’s not so bad if the government over-spends on Liberal Party pals … Never has a satisfactory answer been given as to why Credit Suisse’s OzCar fee got bigger as the scheme got smaller … Another infamous email from party mole Godwin Grech … Samantha Bowers investigates

Like plod Justinian isn’t quite ready to close the book on Godwin Grech.

We can’t shake the feeling that in the maelstrom of Wretch’s indiscretions, the implications of one dastardly little missive didn’t get enough attention.

It’s an email promising Credit Suisse a jacked-up fee for its work on the government’s OzCar car dealership special purpose vehicle (SPV) financing.

Which is exactly what Credit Suisse got.

We decided to dig a little deeper, to see if there was some legitimate reason why it was sent and whether CS was entitled to an enlarged fee. There are still gaps in the story. Treasury is not keen to explain the detail and Credit Suisse has kept schtum.

* * *

It’s (now) no secret Godwin whiled away many a dull hour at his Treasury desk with a bit of partisan email banter with his Liberal pals.

Among his correspondents was Liberal Party donor John O’Sullivan – who is also boss of investment banking at Credit Suisse, the program manager for the OzCar scheme.

Godwin liked to exchange views on topics as rangy as the awful Rudd government to abortion to tip offs on forthcoming government tenders.

It seems Godwin was so humbled by the promise of a free coffee with O’Sullivan (aka “jos”) and his far right columnist wife Janet Albrechtsen that he felt compelled to promise a little something himself.

On March 19 last year, he emailed jos under the subject heading “Auto dealer Floorplan Financing Programme”:

“John,

FYI for now. Re fees – what I have in mind is that once Rudd and his hacks sign off on Ford Credit – you and I can change the contract to reflect your preferred fee arrangement and push that through quickly next week. I will not be running it past Henry [Secretary to the Treasury] and co.

Godwin”

Jos replied:

“Sounds sensible.”

Perhaps he had similar thoughts when Treasury approached Credit Suisse four months earlier (directly, and without calling round for competitive quotes) to see if they were keen for the job. In a sterling feat of negotiation, Treasury said at that time ...

“we will pay a fair market rate that will be negotiated later”.

This looks like a formula for a fair amount of rubber to creep into the fees.

The Auditor General seemed to think so too, tsk tsking in his August 2009 audit report that even though the Credit Suisse and other third party fees were met from the SPV financing and not by government directly, direct sourcing without even asking for an estimate …

“seriously weakens the Commonwealth’s negotiating position.”

At the end of the day, Credit Suisse walked away with a tidy $5 million fixed fee.

This is the figure it originally estimated it would get for an SPV of $2 billion, yet when the contract was finally signed (six months after the bank came on board) the facility was worth a mere $230 million.

Was it all as Godwin planned?

* * *

The chronology is interesting.

When Credit Suisse first came on board (and it was expected that the SPV program would be worth $2 billion) it thought “scale based fees based on the size of the underlying facility” would be fair.

In November 2008 it proposed a scale that bagged it a tidy $5 mill upfront for the first $2 billion, with extra cream if the facility ended up being even bigger.

Of course, this meant the fees could also be scaled down if the facility ended up less that $2 billion.

When the car sales industry started to perk-up and the response the facility (not yet up and running) started getting smaller, Credit Suisse decided scale based fees weren’t so fair after all.

On January 30 2009 (by which time the facility had shrunk to $1.3 billion) it came back to Treasury, where Godwin was in the relevant saddle, with a new offer: a fixed fee of $5 million.

Funny, that’s the same figure CS estimated it would take home when the program was worth an extra $7 million.

The fixed fee also increased the likelihood that the government guarantee on minor securities under the facility would be called.

CS claimed the change was to cater for the drop in the size of the program and the inclusion of Ford Credit as an eligible financier.

Maybe this was fair, maybe it wasn’t. Either way, by January 30 last year the bank would have pocketed only $3.25 million under the scale based arrangement.

More time passed, there was still no contract and the expected size of the facility continued to shrivel.

By the time Godwin emailed jos on March 19, 2009 he’d just told a Senate Estimates committee it would “probably be no bigger than $800 million”.

On May 13, Treasury announced:

“what was initially expected to be a $2 billion facility should now be no larger than $850 million.”

Twelve days later Treasury signed a contract with Credit Suisse agreeing to the fixed $5 million.

Under its original, scale-based proposal, CS would have got less than half of that amount by then.

At the point the facility was actually activated (by which time it was worth just $230 million), CS would have walked away with only $575,000 – less than 12 percent of the figure it ended up trousering.

Despite Godwin’s explanations that he agreed to the revised fee schedule because he was worried about program slippage and didn’t see the need to let Henry know because the SPV was more viable (yadda yadda yadda), it’s hard not to conclude that he did exactly what he promised jos he would two months before.

* * *

We asked Credit Suisse if it had a legitimate explanation for jos’ exchange with Grech on March 19.

It declined to comment.

Treasury seems to have been a bit coy about the issue as well.

Whatever Godwin’s indiscretions, the minders in Canberra were very keen to defend Credit Suisse’s fee on the basis of a paragraph or so of an Ernst & Young review that can’t be released in full because of legal professional privilege.

This was a review jointly commissioned by Treasury and Credit Suisse.

According to that paragraph, E&Y …

“formed the view that the fees and expenses payable by Treasury to Credit Suisse in respect of [OzCar] are commercially reasonable for a transaction of this kind, taking into account all of the circumstances.”

It would be interesting to know whether E&Y held up to the light Godwin’s email to O’Sullivan.