Farmers fail under 'missold' swaps
In Britain, it's being called a scandal. In New Zealand, there's been barely a squeak.
But with around one in 10 farmers in dire straits with high debt burdens and devalued farms, claims that complex “interest rate swaps” were missold to farmers who did not understand them are surfacing.
The swaps, traditionally used by sophisticated businesses with expert finance staff, were sold in 2007, 2008 and even 2009 by some banks to farmers as insurance against interest rates - and hence floating rate farm mortgages - rising rapidly, farmers say.
But when the opposite happened, the farmers who bought them were left locked in to high interest rates which they could not escape without paying hefty break fees.
Already heavily indebted, some farmers have lost their farms as a result of the instruments.
In Britain in March, the Treasury began an investigation following reports by the Telegraph newspaper that both farmers and small businesses such as hotels and golf clubs had been sold swaps they did not understand.
The same claims are now being made here, and one senior financier, who asked not to be named, likened the swap sales to the sale of Swiss franc and US dollar-denominated loans marketed by some banks to cow cockies in the 1980s as a means of getting lower interest rates.
They too went spectacularly wrong as a result of currency movements leaving some facing loan rates of more than 40 per cent.
Farmers who naively bought swaps following contacts from banks, have suffered two effects.
Firstly, they have been locked into paying interest rates of around 10 per cent, and the break fees on the contracts - similar to the residential mortgage break fees which caused an urban outcry in 2010 - are far too high to allow refinancing with another bank.
Sunday Star-Times spoke to one farmer who estimated the cost to break his swap as $1 million, leaving him paying nearly 10 per cent interest for the next couple of years compared with about 6 per cent for an ordinary floating rate farm mortgage.
“The bank says we are not making any money,” he complained. “But how can we? We have paid $1m more interest than we should have paid had we been in a normal floating rate loan.”
The second effect is the swaps have damaged farm balance sheets as they must be accounted for as a significant liability.
“Now I can see it is just a form of gambling, and I don't gamble," the farmer said.
Ad Feedback Federated Farmers president Bruce Wills, an ex-banker, said there were some problems in some cases with the way the interest rate swaps were sold.
“Senior bankers have told me that some of these products have been pushed out there without enough explanation or understanding.”
Accountant Stephen Stafford-Bush, chairman of the Institute of Chartered Accountants influential regional advisory committee, is more forthright, and says he believes the swaps were missold in many cases.
“The big question mark is have the banks acted illegally? Probably
not. Have they acted unethically and immorally? In my view, yes," he said.
Stafford-Bush said many farmers who have come to him did not understand the risks they were taking. He said interest rate swaps were a commercial instrument suitable for large, sophisticated companies, not family farms.
A senior financier said the swaps were sold to farmers with the idea they could manage their own interest rate risk. "But these guys are out milking at 6am," he said. "Then they are out calving later. They weren't foreign exchange or interest rate money market dealers. They were farmers. They did not have the expertise or the time to do it."
Stafford-Bush feels there should be more “shared blame” instead of the financial costs falling entirely on farmers.
Farmer Theresa Nicholas said the swap sales and subsequent pain have remained under the radar because farmers suffering under the swaps were too afraid to speak publicly in case they anger their banks, which have the power to put them off their farms.
Similar claims have been made in Britain, and some will speak to the media only on condition of anonymity.
Nicholas said politicians did not want to know, and the Banking Ombudsman Scheme had a cap of $200,000 for complaints, which is too small to cover swap complaints.
A class action lawsuit was being discussed but several years of good dairy payouts, and a more sensitive treatment of affected farmers by banks derailed it.
Nicholas said farmers were able to negotiate some concessions with banks, such as lower interest rates, but had to sign gagging contracts enabling the banks to shut down criticism.
It is not known how wide the sale of swaps to farmers was, and the banks wouldn't say when questioned by Sunday Star-Times, answering specific questions with general descriptions of how they sell interest rate products now.
A Westpac statement said only: “Interest rate swaps make up a small component of our lending book. They are not sold without having a financial markets specialist give an explanation on how they work, so the customer can understand how they might fit their circumstances.”
Adam Boyd, ASB's general manager Global Markets New Zealand, said ASB does offer interest rate swaps to a limited number of rural customers to fix the interest rate on a customer's floating rate debt facilities, producing similar outcomes to fixed rate loans.
All customers are provided with a disclosure statement that outlines the benefits and risks swaps before entering into an agreement with the bank, he said.
"Modelling may also be provided on a case-by-case basis. In recent years there has been a general trend among rural customers towards floating rate debt facilities, with less demand for interest rate swaps."
An ANZ spokesman said interest rate swaps are one of a number of products that businesses, including farming businesses, have used to manage interest rate risk.
"We give customers general information on how the product works and, as with other products, advise them to seek independent advice before entering into a swap to ensure they fully understand the product and its suitability for their business."
Former farmer Jeanette Walker said the swap sales reveal much about banks, but also about how farmers wrongly trusted bank managers.
"People have to get to understand that banks are not your friends. Bank managers are not your business partners. They are in the business of getting the biggest return possible for their shareholders. They are not your mates." http://www.stuff.co.nz/business/farming/7462273/Farmers-fail-under-missold-swaps