BEING A HALFWIT IS NO DEFENCE

The news media report that Banks are currently gunshy on lending to farmers. Other considerations aside, who can possibly blame them after the recent Court of Appeal decision regarding some Taranaki dairy farmers and interest rates swaps?  The case involved the current media whipping boy, the ANZ, who sold interest rate swaps to a group of Taranaki farmers a decade back.

The Newsroom report described “swaps” in emotive language as “a financial derivative “product” (it’s not a product as so commonly financial accounts misrepresent, but simply a contractual arrangement) so complicated that most of the bank managers selling it didn’t understand what could happen if things go wrong”. What nonsense. A 10 years old could understand it.

In fact nothing “went wrong” in this case, rather the borrowers wanted to have their cake and eat it too. Their position was akin to changing their mind on a losing horse-race bet, after the race was over.

What happened was back a dozen years or so these farmers expressed concern over rising interest rates. The ANZ offered to freeze their current rates for a fixed term through the swaps system, namely buying future debt commitments at an agreed interest rate.

Given their concern the farmers agreed to the interest rate certainty which the swaps arrangement offered. But as we know, following the 2008 crash, interest rates fell and continued falling to unprecedented levels.

Locked into the swaps arrangement the farmers could not take advantage of this new world order without bearing the break cost, which given the gap in rates was enormous. But none of that expense went into the ANZ’s pocket had they done this, rather it paid out the differential to the punters, usually banks, on the other side of the deal. That’s all perfectly fair. What’s overlooked is the same position applied to the ANZ. Making financial commitments on future outcomes is always a gamble and with all gambling, you win some and lose some. This was a clear-cut contractual situation. Yet as we’ve seen so often before the farmers cried foul and made various allegations, such as claiming the Bank managers had assured them that far from a fixed interest rate which is what they’d sought, received and contractually committed to, the situation was in fact a flexible one. Well it can’t be both cast in stone as the farmers sought and simultaneously flexible. Nor should the defence that the borrowers are halfwits be tolerated.

I hope the ANZ appeal this decision to the High Court. I say that for the good of us all. The banking system is critical to the economy and for it to function well we don’t need banks to become gunshy.

But more important to a modern functioning economy is the upholding of contracts. It’s that principle which is why investors primarily plough their money into the advanced two dozen economies and despite the huge investment opportunities, largely avoid the other 170 plus nations in which graft and corruption prevail and contract are meaningless.

 

 

 

 

3 Comments

In 2010 I fixed part of my residential mortage for 5 years as I could not belive how low the rates were. With all the easy month central banks were issueing I could not believe that interest rates would not rise rapidly again. Well that was a decision I regretted for the next 5 years, but I never complained to the bank.

Last year I started a new commercial adventure and took a ladder of 1, 2, 3, and 4 year fixed rates on the property loans to give me some certainty of cash flow, It looks like the 1 year due to be renewed in a couple of months will be nearly as low if I fix for 4 years.

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Take out a fixed rate mortgage and it is the same gamble; no point in complaining if rates head south although that did not stop a lot of ill informed mortgagees.

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Bob. Depends how the contract was sold. IF it was sold as a capped rate with ability to fall in line with market rates then the farmers have a case…. if it was sold say as a pure x year interest rate swap then the farmers have no case… instead only have themselves to blame.
For a court to rule against the bank must mean their was something off about the selling process..
Always get a lawyer to check this stuff before you sign…

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