For now same sex marriage takes centre stage, but journalists and pollies have taken time out to unload on the Commonwealth Bank, forgetting that their own esteem in public eyes hovers around that of used-car salespersons. Also most have never organised anything bigger than a booze-up in a brewery, so the chances of them understanding how large businesses work is close to zero.

We’ll have to wait for the court case to find out what really happened, but there have been a couple of articles in the AFR, and an ABC TV interview with the chair of the board, Catherine Livingstone, so here is my best estimate as to what happened.

I should say that I have shares in all four big banks, most of us do through our superannuation funds. Investing is not based on emotion, but you do get to take a particular interest what is really happening to the bottom line.

Joanne Gray has done a few interesting article in the AFR – Risk, culture and complexity: CBA board must investigate lapse in controls, followed by Catherine Livingstone imposes accountability rarely seen on Australian boards and Catherine Livingstone takes charge to steer CBA during crisis.

There is also Allegations against the CBA show the need for a Royal Commission into the banks by Thomas Clarke of UTS at The Conversation.

Seems that money laundering by feeding large wads of cash into ATMs started in 2012. In June 2014 they realised that transactions bigger than $10,000 were not being reported. They tried to fix it in September, but the fix was not complete until November 2015 and inactive accounts that were suspect were not fixed until September 2016.

For at least some of the time CBA had lifted the bar for suspicion to $20,000, whereas ANZ had reduced it to $5000.

It seems that suspect transactions should be automatically reported to the Australian Transactions Reports and Analysis Centre (AUSTRAC), but the software wasn’t working. Seems they took quite a bit of action back in 2015, putting on extra surveillance staff and removing head of operational risk and group security. There was involvement at board level back in 2015.

I get the impression they are still not certain that everything is as it should be.

“The bank’ is said to have initially ignored warnings, but it is not clear exactly who did the warning and who did the ignoring. No doubt this will come out in the court case, but the AUSTRAC claim is that ‘the bank’ was knowingly complicit in money laundering and failed in disclosure. To do this consciously would be basically suicidal, and on the face of it I would find it hard to believe. Yet we’ll have to wait to see what the lawyers and judicial system make of it.

Share price is a reasonable guide to the seriousness of the problem to the bottom line. When the news struck I think the price was just over $84. It fell a bit over $3, but never went below $80 and appears to have stabilised at around $81. Last June it dipped to $78.50, and first broke through $80 back in 2014. In effect the price has been range trading for nearly three years now, which actually reflects its stagnation as a business.

So the market judges the issue as no big deal.

Journalists and most pollies have little understanding of issues relating to large software programs, or the complexity and layers of responsibility in an organisation that is spread across many functions and employs 51,800 staff. CBA works across three industries – banking, insurance and wealth management (including financial advice). When an issue like this blows up they think, with the wisdom of hindsight, that the CEO should have been giving it maximum and exclusive attention.

However, as Gray says when Catherine Livingstone saw the 580-page statement of claim alleging breaches by the bank of anti-money laundering and counter-terrorism financing laws, as well as consistent and repeated failures of risk management land on her desk, it would concentrate the mind.

Livingstone joined the board in March last year and ascended to chair in January. She cancelled the bonuses of all the executives and set up Mary Padbury, who joined in June last year, to oversee the four-person committee overseeing the AUSTRAC response.

Narev can’t actually say much, as the matter is now before the court. Livingstone has ‘sidelined’ him, but in fact he is now free to run the company, which also has to be attended to. The assessment may well be that sacking him would be more disruptive. He’s been there since December 2011, which is already longer than you’d expect.

Indeed most appear to think Narev has delivered a lovely set of numbers in the annual report. However, realistic investors should contemplate the following:

• The CBA is a large business but only returns 1% per annum on its assets.
• Despite better than expected revenue trends, 2H17 revenue growth was just 1% (~1.5% adjusted for number of days) which was below expense growth of 2%<./li>
• Earnings per share have only grown 5.5% in the past three years, and are forecast to grow 7.5% in the next three, which is less than the CPI.
• Dividends per share have grown 2.8% in the past three years and are forecast to grow 2.1% in the next three.

The upside is that the dividend yield at current prices is about 5.4% fully franked, which, depending on your other income, equates to a return of 7.5% to a bit over 8%.

Return on equity at 16% indicates basic health, but in my view the growth eps and dps, plus yield, and the pattern over time, tell a more revealing story.

The overall story is that the big banks took an overall hit of about 20% during the GFC, but came back well for about five years. However, since around 2013, they have been struggling to make any further ground. In terms of investment the large profit numbers are a distraction for the ignorant. They provide an attractive dividend stream, but one that is struggling to keep up with inflation. The market had effectively priced in CBA’s financial results, which is why their price has been going nowhere for three years.

Since the government levy was imposed in the budget, the point has often been made that it is a return to the taxpayer in exchange for the guarantee made by the government during the GPC. I don’t have the link to hand, but I have read that a special fund was set up with the banks contributing 70 basis points of the net interest margin to the fund. A couple of years ago APRA decreed that the banks should lift their Tier 1 capital to 10.5% or more by 1 January 2020. CBA reports that it is now at 10.1% and will comfortably reach the target in the course of normal trading.

In other words they are standing on their own feet.

The bottom line with the present affair is that Livingstone by cancelling executive bonuses may have in one stroke changed the culture of the bank. With managerialism there has been a culture that management only wants to hear good news coming up the line. Now executives are going to get more than a little cranky if problems and issues are not communicated to them so that they can take responsibility.

The latest CBA affair has increased the likelihood of a royal commission, which has value in that everyone in the bank at every level will be obliged to reveal all with protection.

The biggest concern, however, lies elsewhere. Jacques Peretti told Phillip Adams that the new technology-based international firms like Google, Facebook, Tesla and Amazon plan to replace banks by setting up their own means of lending and money exchange. They, he says, have tipped the balance of power between business and government in favour of the former. Will we cheer them on as they replace our biggest tax payers with companies that pay no tax?

Our free trade agreements mean we are powerless to stop them.

Now, that is worth worrying about.