Jacinta Collins (Victoria, Australian Labor Party) Share this | Link to this | Hansard source

My question is to the Minister for Superannuation and Corporate Law, Senator Sherry. Can the minister update the Senate on the challenges currently being faced by the US financial markets?

Nick Sherry (Tasmania, Australian Labor Party, Minister for Superannuation and Corporate Law) Share this | Link to this | Hansard source

The fallout from the US subprime loans crisis continues, unfortunately, and it continues to impact on the global financial system and exposed US financial institutions. Some have come under a significant stress and a number have collapsed, with significant consequences. The events illustrate what can happen when there is poor regulation and supervision of financial institutions and their lending practices. The base cause of the crisis in the United States was the massive distribution and effectively mis-selling of mortgage products to millions of Americans. In turn these mortgage products were packaged into various securities and passed on through the financial systems of primarily the United States and Europe and, unfortunately, they were given AAA ratings on the way through.

We thought, with Bear Stearns some months ago, that the worst would have passed but unfortunately it had not. In the last couple of days Lehman Brothers, the fourth-largest investment bank, has filed for bankruptcy—that is the largest bankruptcy in US history, over $600 billion—and the 94-year-old investment bank Merrill Lynch has agreed to be purchased by the Bank of America. This morning the American International Group, the largest insurance company in the United States by assets, has effectively been bailed out to the tune of some $85 billion. In a statement issued a few hours ago , the Federal Reserve Board said:

The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group ...

These events follow the takeover of the stricken Bear Stearns by JP Morgan, and the US government’s recent financial lifeline for US mortgage lenders Fannie Mae and Freddie Mac. Obviously these issues have impacted severely in the United States and Europe and have had a major impact around the world. I can say in these circumstances that Australian banks are well-capitalised and well-regulated and that they do not have the same problems as banks in the United States. But, of course, the Australian economy and the financial markets have not been immune—

Helen Coonan (NSW, Liberal Party, Shadow Minister for Human Services) Share this | Link to this | Hansard source

What about the super funds?

Nick Sherry (Tasmania, Australian Labor Party, Minister for Superannuation and Corporate Law) Share this | Link to this | Hansard source

I am going to get to super funds in a moment, Senator Coonan. However, the Australian economy is not immune from these impacts. It is fair to say, however, that we are in a stronger position than most other countries to weather the storm. The share markets have fallen significantly in almost every advanced economy around the world as a consequence, and consumer confidence in advanced economies has fallen. But I will emphasise that we have a well-regulated financial sector, with the prices of commodity exports remaining high and businesses investing in the future with confidence.

There is one major area, however, where we can have control of our own destiny, and that is the budget surplus. It was very disappointing to see yesterday that the new leader, Mr Turnbull, is determined to carry on the budget-wrecking approach of the former leader by reducing the budget surplus by some $20 billion. We need a strong buffer in these uncertain turbulent times. A significant budget surplus is required and all the Liberal Party opposite can do in the face of these financial disasters in the United States is to tinker with, reduce and wreck the budget surplus by $20 billion. (Time expired)

Jacinta Collins (Victoria, Australian Labor Party) Share this | Link to this | Hansard source

Mr President, I ask a supplementary question. Those opposite will be happy that I now ask the minister to elaborate on what the US financial crisis will mean for Australian superannuation funds and investors.

Nick Sherry (Tasmania, Australian Labor Party, Minister for Superannuation and Corporate Law) Share this | Link to this | Hansard source

As I think most Australians would be aware, because of the impact of the US subprime crisis on the share market, that in turn has impacted on the returns of Australian superannuation funds.

Helen Coonan (NSW, Liberal Party, Shadow Minister for Human Services) Share this | Link to this | Hansard source

Senator Coonan interjecting—

Nick Sherry (Tasmania, Australian Labor Party, Minister for Superannuation and Corporate Law) Share this | Link to this | Hansard source

I might say that this is not the first time this has happened. Apparently Senator Coonan via her interjection believes it is the first time this has happened. It actually happened in 2001, Senator Coonan, when you were Assistant Treasurer, but we did not hear very much from you about it then. So superannuation funds have been affected adversely by these impacts. The average negative rate of return was 6.4 per cent for the last financial year. What is important, of course, is that Australians overwhelmingly do not access their superannuation at a single point in time; it is a long-term saving. The most important rate of return to focus on is the five- to seven-year rate at least, if not longer. What we do know about the Australian superannuation system is that it is robust, it is strong, and it is well diversified and well regulated. (Time expired)