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S&L-type lenders down under could go under

Published Oct. 17, 2005

A run on deposits has forced a state government to close a group of lending institutions to prevent a chain reaction like the one that hit their American equivalent, the savings-and-loan industry. Victoria state also pledged this week that all of the small, uninsured depositors at the failed Farrow Corp., the southeastern state's largest such institution, would get all their money back.

About 220,000 Australians had faced the loss of their life savings in the failure of Farrow. The corporation is composed of three so-called building societies, which, like American S&Ls, were established primarily to make home-mortgage loans.

The decision to refund the depositors could cost the financially troubled state up to $800-million (U.S.), although the final toll will be determined after the assets of Farrow Corp. are sold off.

Analysts said Farrow's risky loans caused the firm to go under _ a practice also blamed for the failure of S&Ls in the United States that is projected to cost American taxpayers hundreds of billions.

Some critics have called for Victoria Premier John Cain to resign over the financial crisis, which conceivably could lead to the fall of the state government. Victoria, Australia's second most populous state, with 4.1-million people, includes the coastal city of Melbourne.

The decision to close Farrow followed a run on deposits that dropped Farrow's liquidity from about $316-million in February to about $47-million last week.

Government-appointed administrator Ken Russell initially warned that some depositors could lose their money. Depositors then pressured Victoria and threatened to file suit, pointing out that the state treasurer had assured them in February that their funds were secure.

In response, Cain said Tuesday the government would ensure that all small depositors would be repaid in full over an unspecified time and would get 20 percent to 25 percent as soon as possible.

To offset a possible crisis in confidence in other building societies and avoid a domino effect of runs on deposits, Cain said Monday they would be brought into the banking sector gradually.

Major banks will support them in the meantime through a line of credit guaranteed by the state government.

Russell said the closure resulted from his failure to find a buyer for Farrow.