Traditional borrower facilities – personal or commercial – are subject to variable interest rates. The borrower rate varies (roughly) according to the lender’s funding costs. Some bright spark(s) decided that, with the spate of sophisticated derivatives, the lender could offer the borrower a fixed (or partially fixed) interest rate (giving borrower “security” of financing costs against potentially rising rates), but with the lender’s variable costs relative to fixed returns mediated through an interest rate swap agreement (IRSA) with a third party.
Formally, the bank lender thus eliminates its risk carried by offering fixed rate loans. But the IRSA attracts a commission (why?) and a breakage fee is applicable (determined by the swap’s "mark to market" saleability) if the agreement is voided prematurely. Who pays the costs associated with the IRSA?
After 2001, the NAB pushed the bulk of its loans to Clydesdale small to medium enterprises (SMEs) and farmers in this fixed interest rate with swap form. They were part of a larger package labelled "tailored business loans" (TBLs). A group set up by Clydesdale victims, the NAB Customer Support Group, outlines the facility on its website.
The NAB pushed the fixed interest swap TBLs partly because it was taking the IRSA commissions in house, thus raking in a sizeable extra sum. The breakage fee was attributed to the borrower — thus the labeling of the facility as an embedded swap (although see below).
The fixed interest swap TBLs were pushed to the borrowers with minimal information and with no advice (indeed implicit denial) as to the potential dangers therein. Documentation developed initially for the new product was discarded for documentation that omitted key information. Flyers that were supposed to provide crucial information were not distributed to customers.
The Commons Treasury Committee, in its March 2015 report, made the following claim:
Come the GFC in Britain, interest rates plummetted (after March 2009). The breakage fee is computed as a staggering percentage of the loan principal. Economic conditions have deteriorated dramatically. Business conditions are bleak, customer property has lost value and the customer is tied in to fixed interest rates significantly higher than the prevailing rate. The prohibitive breakage fee locks the customer into this parlous, often hopeless, situation.
Clydesdale sold 11,270 TBLs between late 2001 and 2012, of which 8,370 were fixed rate swap loans.
Abhishek Sachdev of Vedanta Hedging, interviewed by Adele Ferguson in March 2015, estimated that the typical fixed rate swap borrower would have claims for overpayment of interest, the break fees and consequent damages, summing to over £500,000. With over 8,000 such borrowers, the claims could total more than £4 billion ($7-8 billion).
But Sachdev also noted:
"… there are dozens of clever loopholes and justification within the internal review process that NAB will use to justify paying only a fraction of the actual claim value."
Clydesdale’s CEO David Thorburn (no relation to NAB CEO Andrew) and Debbie Crosbie, "Executive Director, Customer Trust and Confidence" (sic) National Australia Group Europe, gave evidence to the Treasury Committee on 17 June 2014. The most casual engagement with this testimony leaves one with a feeling of disgust.
One learns in this exchange:
"There is no individual swap associated with these loans. It goes into a portfolio that our parent company manages, hedged in its own balance sheet."
So the loans did not have embedded swaps, but the NAB and Clydesdale attributed break costs to the borrower as if they were. It would appear that attributed break costs are discretionary. More, the bulk of the profits on these loans (p34) was transferred to the parent group. Clydesdale was merely the unsophisticated sales front outfit.
The NAB Customer Support Group subsequently issued its own response, 3 July 2014, to Thorburn’s misleading answers to Committee member questions. The CSG response highlights that loan officers and commission-driven NAB Treasury staffers deliberately misled potential borrowers and Thorburn merely reproduced the patter.
The duplicity of Thorburn and Crosbie is comprehensive. The attempt to avoid criminal culpability for fraudulent selling and fraudulent misrepresentation is transparent.
There is an element in NAB senior personnel reactions that amounts to: “How was anybody to know that the GFC would turn up?”
This is a denial comparable to that by bank management iof the early 1980s in the offerings of foreign currency loans (FCLs) to unsuspecting SMEs and farmers in Australia. Loans denominated in Swiss Francs, U.S. Dollars or Japanese Yen were aggressively marketed to or imposed on SMEs/farmers with the drawcard of significantly lower interest rates. Who could believe, the “professionals” claimed, that the Aussie dollar (floated in December 1983) would plummet in value in 1985 against major currencies, especially the Swiss Franc? Apart from Blind Freddie, professional status demanded such acumen, but insider knowledge was kept well-hidden from frontline lenders. The prospect of a dollar devaluation was cynically denied as a real possibility to FCL borrowers.
Tellingly, senior NAB management under Nobby Clark knew that FCLs were a scam facility and declined to join the mad rush of the other three major banks into pushing same. Staff were advised that they were to offer FCLs only as a last resort to prevent existing customers going elsewhere.
So where is the collective memory for this essentially unforgettable period? Only several years after FCL cases are disappearing from the courts, the NAB is at the forefront of another madcap facility pushed to customers through misrepresentations, lies and silences.
Post-financial deregulation, there have been three large scale scams engineered (with subsequent attribution of all blame to the customer) by one or more of the Big Four banks against SMH/farmer customers – the 1980s FCL scam (Westpac, CBA, ANZ), the CBA takedown of BankWest customers after its takeover of Bankwest in late 2008, and the NAB/Clydesdale pushing of fixed interest swap TBLs. The first involved 4,500 to 5,000 borrowers, the second approximately 1,000 borrowers (some involving very large sums), and the third over 8,000 borrowers.
Numerically, the NAB/Clydesdale scam is thus the largest perpetrated against SME/farmer borrowers following financial deregulation. The FCL saga received massive media coverage, the BankWest takedown and the Clydesdale toxic facilities near zero coverage. The vibrancy of the small business and the family farmer sector are apparently no longer newsworthy.
Change of personnel at top — no change in NAB culture
The exposure of the 2003 disastrous speculative trades employed by the NAB’s “rogue” currency trading desk lead to the resignations in February 2004 of CEO Frank Cicutto and Board Chairman Charles Allen. Before resigning, Allen appointed Scot John Stewart as replacement CEO. It was a rushed decision, based on Stewart’s claimed “insider” status.
Stewart had been hired by Cicutto only several months previously, in September 2003, to head the NAB’s British operations. Stewart had gained his reputation as CEO at Woolwich Building Society, which he demutualised, expanded and flogged off to Barclays in early 2003. Stewart left his own toxic legacy to the NAB (he was himself forced out in July 2008).
Stewart sold the extremely troubled Irish and Northern Ireland subsidiaries in December 2004 — a sensible move. Clydesdale and Yorkshire was to be another matter.
The Scot had brought in Lynne Peacock, a colleague at Woolwich, to Melbourne in April 2004. Peacock was named “Executive General Manager, People and Culture” to oversee a culture-change program, expected to take 18 months to two years to complete. But a priority for Peacock was the linking of pay to individual performance. Apart from its shonky conceptual underpinnings and measurement difficulties, such a push was beside the point given the NAB’s then profound cultural problems.
Cultural change was readily consigned to the too-hard basket. Rather, Stewart engaged in a massive advertising and public relations program. The latter was represented by the issuing in August 2004 of a 'Statement of Corporate Principles', entirely platitudinal ('We will be open and honest / We will tell it like it is (no spin)') — designed to be flouted. The September decision to sponsor the 2006 Melbourne-based Commonwealth Games was part of the PR push.
NAB dysfunctionality further entrenched at head office and Clydesdale
Peacock returned to the UK in October 2004. Stewart had designated her as the new head of Clydesdale, with Yorkshire (decided in September and effected in December) to be subsumed into Clydesdale. Peacock’s salary was boosted 30 per cent to £525,000 for the occasion. The package involved a potential doubling of that figure if she met certain “performance hurdles”.
The NAB’s European operations had a regular turnover of CEOs. One person on the list was Fred Goodwin, later infamous as the man who drove the Royal Bank of Scotland to a gigantic loss during the GFC. Goodwin advised the NAB on the takeover of Clydesdale and of Yorkshire, and became CEO of NAB Europe for the period 1995-98.