This
is important. Many thanks to Travellerev!
Are
You Paying For Watercare’s Gambling With Derivatives?
18
April, 2013
A
couple of months ago Water Care started to charge incredible sums for
water in the Auckland region.
Here
is a Newspaper article about how derivatives trades can go (no,
areprogrammed
to go)
terribly wrong. In it Watercare is quoted as having made a $ 60
million loss on its Derivatives gambles. Could it be that Aucklanders
are paying the price for their bad decisions and for their
gullibility in buying into the international derivatives scam.
Aucklanders need to start asking questions and above all read up on
the manipulation
of the LIBOR rates by
all big banks.
From original
Farmers
were sold financial instruments that major companies manage through
specialist departments, says the man responsible for the interest
rate swap management programme at giant Auckland water provider
Watercare.
Jason
Isherwood, Watercare’s treasury manager, says companies must have
deep balance sheets and high levels of sophistication to take on the
risk of complex and volatile interest rate swaps.
The
latest Watercare annual report revealed a $60 million loss on
interest rate swap contracts in the year to June 30, highlighting the
risks of derivative positions on interest rates.
Isherwood
said that although $60m was not a “pretty number”, it was
relatively modest in the context of Watercare’s balance sheet.
The
Commerce Commission is continuing early stage inquiries into the sale
of similar instruments to farmers in 2007 and 2008 by banks including
Westpac and National Bank. The swaps were sold as protection against
rising interest rates, but had the effect of locking farmers in to
high rates just before a steep and prolonged downturn.
Claims
of interest rate swap misselling prompted a national scandal in the
UK with the Financial Service Authority finding banks culpable of
mis-selling swaps to tens of thousands of unsophisticated small and
medium-sized businesses.
In
a statement the Commerce Commission may take note of, Isherwood said
interest rate hedging was suitable for large organisations with big,
long-term debts as it allows greater control over the long-term cost
of funding by locking in attractive rates when available.
“I
believe that you need to have a dedicated treasury function to
adequately manage these risks and it needs to be staffed by people
with market expertise,” Isherwood said.
“It
needs to have adequate systems as well to monitor the risks and
report on those risks so that at any point in time you can tell your
exact risk position.”
Because
derivatives exposures can be volatile, companies not only need to be
able to understand when things are moving against them, they also
need to be able to pay break fees should they need to shut down their
exposure.
“An
organisation with a turnover of $50m per annum is not necessarily
going to have a sufficiently sized budget to justify having a
dedicated treasury function,” Isherwood said.
Around
the world, even organisations fitting that description have run into
serious trouble with interest rate swaps, and, like some farmers,
have found their businesses left paying crippling interest rates.
Some
farmers say they relied on their banks – notably National Bank and
Westpac – for advice and did not understand the true nature of the
risks they were taking on, though the contracts they signed stated
they did understand and that the banks owed them no fiduciary duties.
The
sale of the swaps to farmers, the scale of which is not yet fully
known, is a hot topic among derivatives experts who believe the
Commerce Commission needs to look at whether farmers had the
sophistication, size, tools and support to “manage” their
interest rate risk.
One
said banks have sometimes insisted that larger
corporates
wanting to manage interest rate risk through the use of swaps get
specialist advice. When banks had concerns over the capacity of a
borrower to cope with swaps, they have sometimes carried out due
diligence on the borrower’s treasury functions.
The
commission has been told by another derivatives specialist that the
swaps the farmers took out helped the banks manage the risks of their
own, rapidly growing overseas borrowing, leaving them with large
fixed interest payment obligations.
“It
is apparent that the local banks receiving the hedge swapped New
Zealand dollars have an asymmetric need to receive client fixed
interest rate swap flows to offset those required to be paid under
the terms of cross currency basis swap contract,” he told the
commission.
He
believed this would provide a motive for banks to engage in “a
concerted push” to engage borrowing clients into swap contracts to
pay fixed interest to offset the banks’ burgeoning exposure.
QUESTIONS
EXPERTS SAY THE COMMERCE COMMISSION MUST ANSWER: 1.
Were farmers advised it was prudent to protect themselves from spikes
in interest rates when using swaps, and what did the banks selling
swaps think was likely to happen with rates?
2.
Did farmers understand the risks of the swaps, and did the banks take
adequate steps to ensure they did?
3.
Did the farmers have balance sheets large enough to cope with
revaluations of their swaps, or the capacity to pay large break fees
if their swaps soured?
4.
How were farmers to monitor their swap position and make decisions to
neutralise their exposure should rates move against them?
5.
Did farmers realise that extra credit margins could be added by the
banks should the revaluation of their swaps erode their balance
sheet? 6. What risk modelling were farmers provided with, and did it
accurately show the risks the farmers were taking?
7.
What tools and ongoing support were farmers offered, and what support
did they actually get?
8.
What did frontline bank staff think they were selling, and are claims
they did not understand the risks of the swaps fair?
9.
What is the legal strength of the disclaimers that farmers signed?
One National Bank document states: “Each party was capable of
assessing the merits of an understanding (on its own behalf or
through independent professional advice), and understands and
accepts, the terms and conditions and risks of that transaction. It
is also capable of assuming, and assumes the risks of that
transaction.”
10.
Did the banks have any fiduciary duty to the farmers? One National
Bank swaps presentation reads: “No party is acting as a fiduciary
for or an adviser to the other in respect of that transaction.” 12.
Did the swaps sold to farmers differ from those used in the interest
rate risk management programmes of large, sophisticated borrowers?
On
Water Derivatives And Privatizing Water!
With
the financial system collapsing the Money junkies have to come up
with new and innovative ways to loot the “little” people in order
to protect their collapsing derivatives gambling system and one of
the ways they can do that is by privatizing water and ripping us
another financial hole by selling us water
without which we would die within three days while driving up the
price
with derivatives.
As
predicted the North Island drought has prepared the ground for the
introduction of the privatization of water. We are
being told that water is expensive and we are let to believe that as
a result of the “Climate changes” we should pay through the nose
for the privilege of using water.
This will go for everyone including farmers (Who will be bankrupted
for using water they harvest themselves with infrastructure they have
paid for themselves) and it will inevitably harm the most vulnerable
and poor while the rich can afford their pools and hot pools while
the rest of us will suffer
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