The Loans Affair 35 years on: lessons in history

As the Government clings to clumsy populism to avoid defeat that seemed unlikely six months ago, it’s worth remembering a pivotal anniversary in another Labor downfall after just three years in office.

35 years ago today the famous Overseas Loans Affair was debated in Federal Australian parliament. The debate was one of just two times outside witnesses have been called to the bar of the Senate. The first time was at the height of the great depression in 1931 when Sir Robert Gibson, Chairman of the Commonwealth Bank Board, was called in to help the Senate “secure the utmost information possible to guide them wisely in dealing with the difficulties with which Australia is confronted.”

But in 1975 not just one, but many esteemed senior public servants were summoned to the bar. They were all there to say what they knew about the overseas loans negotiations. A year earlier a hard-up Labor Government attempted to raise $4 billion via unorthodox means. $4 billion was a lot of money in 1975 and Labor wanted to kickstart a sluggish post Oil Crisis economy with a massive number of resource and energy and infrastructure initiatives. They were going to electrify railways, build natural gas pipelines and enrich uranium for nuclear power.

The Minister for Minerals and Energy Rex Connor was authorised to bypass normal Treasury channels and seek access to Gulf Petrodollars that were floating around in enormous numbers after OPEC flexed its muscles. The problem was that no organised money market existed for directly investing the growing pool of money.

The Government were trying to get access to it but had no connections in the Gulf they could deal with directly. Neither did Adelaide builder Gerasimos “Gerry” Keridis but he had good indirect connections in the finance industry. In 1974 Keridis had heard from a friend about someone who had $200 million burning a hole in his pocket waiting to invest in something. The friend asked Keridis if he could help. Keridis traced the request to local jeweller and opal dealer, Tibor Shelley. Keridis then rang Clyde Cameron, another friend who also happened to be Gough Whitlam's minister for labour. Keridis asked Cameron whether he knew of anyone wanting some serious investment. Cameron was intrigued and began to work the phones.

The next day Keridis was invited to Canberra to meet Connor who was already plotting to get his $4 billion. The two men got along and Keridis left the meeting to find out the bona fides of the $200 million loan story. Keridis traced the money to Hong Kong but the trail ran cold there. He went back to Shelley who gave him the name of another finance broker who in turn gave him the name Tirath Khemlani.

The Pakistani-born Khemlani had credibility through his employers Dalamal and Sons in London. Britain’s Scotland Yard told the Australian Government Dalamal was a respectable commodities firm. Khemlani had heard about the Australian interest in getting Gulf money through a Hong Kong connection of Shelley’s. Though he had little experience in high finance he wanted to broker the deal himself.

He flew to Australia and met Connor and Keridis. Connor told him about the $200 million. Khemlani said that was chickenfeed and he urged Connor to go for $2 billion. Connor didn’t tell him the exact amount he needed but he described his visions such as the east-to-west coast railway, a national power grid and control of the North-West shelf's energy stocks. Connor and Keridis saw Khemlani as the messenger. They expected Dalamal and Sons to broker the deal.

Khemlani flew back to London to begin looking for the money. He reported regularly back to Keridis who in turn briefed Connor. Keridis continued to explore other avenues to get the money, hoping for a fat commission of up the $7 million on a $4 billion deal.

On 13 December 1974 the Government inner council authorised Connor to raise the money as a 20-year loan "for temporary purposes". This sleight of hand avoided the oversight of the Australian Loans Council to coordinate borrowing by Federal and State governments. The Loans Council was then governed by a “gentleman’s agreement” to impose borrowing limits on the Commonwealth and State semi-governmental and local authorities which was honoured more in the breach.

By avoiding the Loans Council, the Government kept the Liberal State Governments out of the loop and had the benefit of keeping their own side of parliament in the dark. The deal also insisted that the Government pay no commissions so Keridis was out of pocket. Six months of hard work with Khemlani had come to nothing. Each time the Dalamal broker rang in, there was a new reason why he had yet to engage the moneymen. A week after the secret deal was signed, officials convinced Treasurer Jim Cairns, Khemlani was a dud and he got Connor to terminate the arrangement.

There the matter might have rested except Khemlani was not inclined to take no for an answer. Though no longer employed by the Australian Government, he kept looking for the money and Connor kept talking to him unofficially. Connor later told the Enquiry he dropped Khemlani after his loan authority was revoked on 20 May 1975 but Khemlani would later tell the media they were still talking later than that. The middle man Keridis remained a fan of the Pakistani until he began to make blackmail threats. That happened when Khemlani arrived back in Australia in October 1975, a month before the Dismissal, with a bag of secret documents about the affair he wanted to sell to the highest bidder.

By then most of the political damage had been done. In May, the Government had gotten cold feet about petrodollars and instead went to an American investment house, whose name was never revealed (a fact forgotten in the furore). The Americans insisted they be the sole authorisers and Whitlam revoked the loan authorisation.

Information had started to leak and by July an outraged opposition demanded the Government to tell all about the affair. On 9 July, Whitlam played his cards, tabling all the documents in parliament confident that they had done nothing wrong and determined to show they were a Government with vision. His gamble came unstuck. The media ignored the reasons why the money was needed and came down hard on its secrecy and haplessness. The “Loans Affair” became a term loaded with negativity and ignominy, despite the fact no money ever changed hands.

Already beset by economic difficulties, the affair made the Government look like amateurs. Whitlam was forced to sack his Treasurer Cairns and then saw Labor suffer a shock loss in a Tasmanian by-election. The 15 percent swing was enough to give Opposition leader Malcolm Fraser the confidence to use his upper house majority (thanks to Joh Bjelke-Petersen’s night of the long prawns) to block supply of the Budget. The rest was history.

It is well to remember that history 35 years later. New Prime Minister Julia Gillard’s catastrophic blunder over East Timor in an effort to look tough allied to a stupid pretence it never happened, could yet end Labor up in Loans Affair-like election trouble again.

The Whitlam Years

In 1972, the Australian Labor Party formed government in Australia for the first time in 23 years. The government lasted just two elections and three years before being dismissed in the most controversial event in Australian political history. But the legacy of those three short years was immense. Australia was a vastly different country in 1975, although the electorate didn’t necessarily appreciate it and kept Labor out of office for another eight years.

Back in 1966, previous Labor leader Arthur Calwell had suffered his third successive election defeat (it was Labor’s seventh straight loss since 1949.) The following year, Labor turned to Edward Gough Whitlam to lead the party. Whitlam was Melbourne born and educated in Sydney where he studied law. He was admitted to the NSW bar in 1947. He was elected as a federal Labor MP in a 1952 by-election for the seat of Werriwa. He became deputy leader when Calwell became party leader. The Liberals crushed Calwell in 1966 on a pro-Vietnam war policy (PM Holt’s catch-cry was “all the way with LBJ”) forcing him to resign. Whitlam defeated his rival Jim Cairns in a party leadership ballot.

Whitlam immediately changed key Labor policies to remove the White Australia Policy and allow universal health insurance and state aid for religious schools. Whitlam brought a fresher, optimistic and socially liberal stance to the role of leader. He proved to be a natural TV performer and gifted campaigner. In his first election in 1969, he lost narrowly but gained a 17 seat swing from the government. The Liberals appointed a new leader in 1971 Billy McMahon who proved a disastrous Prime Minister. McMahon attacked Whitlam for recognising The People’s Republic of China but this strategy backfired when Nixon announced his visit to China. He proved to be a poor TV performer especially in comparison to Whitlam and with inflation rampant and the media against him it was no surprise when he lost the 1972 election.

Whitlam campaign slogan was “Its Time”. He set forth a vision of what he called the ‘New Nationalism’ a platform based on three planks: independence in world affairs, increased cultural activity and nationalism in the economic sphere. As well as Prime Minister, Whitlam appointed himself foreign minister and pronounced Australia ready to take advantage of Nixon’s Guam Doctrine and set Australia on a more independent course. The first step was to take Australian troops out of Vietnam. China, North Korea and East Germany were officially recognised. Major links with Britain were also removed. He replaced the British honours system with the Order of Australia and the national anthem was changed from God Save the Queen to Advance Australia Fair. Appeals of law would no longer be sent to London’s Privy Council as the ultimate legal arbiter.

Whitlam was the first Prime Minister to recognise Aboriginal culture as having a prior claim on the landscape. He saw treatment of Aboriginals as a ‘stain on the national honour’ and increased funding was a key policy plank.

In the area of law, Whitlam’s attorney general Lionel Murphy enacted the Family Law Act. It overhauled Australia’s family laws and allowed for ‘no fault’ divorce despite fierce opposition from the Roman Catholic Church and other conservative bodies. Whitlam appointed Murphy to the High Court in 1975 and unwittingly sowed the seeds of his own destruction. The Liberal NSW premier used his right to appoint an independent senator in place of Murphy. Having breached a precedent, the notorious Queensland premier Joh Bjelke-Petersen repeated the move when another Labour senator died in office. The balance of power was thus fatally changed in the upper house.

Prior to this, Whitlam had won a second term of office in 1974 but his double dissolution election failed to achieve his aim of an upper house majority. Economically his government was running into trouble. They were having difficulties funding some of their more ambitious electoral promises such as universal health care and the abolition of university fees. Whitlam appointed his longtime rival Jim Cairns as Treasurer in 1974. Cairns claims his appointment occurred just after the Loans Affair when Labor tried to borrow several billion petrodollars (dollars earned from oil exports) from the Middle East through an intermediary, a shady Pakistani banker named Tirath Khemlani. The deal went sour and Khemlani was never able to deliver the money. Khemlani disappeared to obscurity but not before leaving his nickname “old rice and monkey nuts” (due to fact he traded in commodities not money) as a Google Bomb gift to current Melbourne Herald Sun journalist Andrew Bolt.

Cairns’ role in this was not helped by a scandal which enveloped his love life in 1975. Although married, he had an affair with his Chinese born and Philippine educated secretary Junie Morosi. The fact that Morosi and Khemlani were ‘foreigners’ was used by the Opposition as they tried to turn the screws on Whitlam’s government. Their primary tactic was blocking supply. This meant that the hostile Senate would cut off supply of Treasury funds. Whitlam wanted to face down the Senate and borrow money from the banks. Opposition leader Malcolm Fraser was determined to keep the initiative and urged Governor-General Sir John Kerr to act. Kerr, although a Whitlam appointee, had developed a grudge against Whitlam due to perceived slights against him and his wife. The Chief Justice of the High Court advised Kerr that Whitlam’s loan moves may be illegal and told him it was his duty to dismiss Whitlam.

On November 11, 1975 Kerr gave Whitlam merely a moment’s notice before revoking his commission to govern. He installed Fraser as caretaker Prime Minister until a federal election could be held. He then accepted Fraser’s advice to call another double dissolution election. Whitlam delivered his famous impromptu address to the in front of the steps of Parliament House where he told the crowd: "Ladies and gentlemen, well may we say 'God Save the Queen', because nothing will save the Governor-General."

Unfortunately for him, despite outrage over the dubious nature of the dismissal, media and public opinion had gone against him. The string of ministerial scandals, the economic effects of the 1973 Oil Crisis and heavy tariff reductions all took their toll and the December election was a landslide defeat for Labor. Whitlam lost one more election in 1977 before resigning as leader.

His government’s legacy is immense. Most of his achievements still stand: the no fault divorce, Aboriginal rights, the Trades Practices Act, removal of tariff barriers, end of military conscription, universal health care and relations with China. Despite his brief stint in the sun, Gough Whitlam deservedly remains a giant figure in the Labor movement.