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The Great Reckoning (Part 1) Olly Newland's Column, 27 January 2009 BY ANYONE'S STANDARDS, 2008 was not a good year. Banks, seemingly solid corporates, and finance companies collapsed like dominoes, 'bailout' was the new buzzword, and 'foreclosure' and 'mortgagee sale' were heard or read about on a daily basis. The world, we are told, is in the grip of a financial crisis, the likes of which has not been seen since the Great Depression of the 1930s. The question on everyone's minds is: will 2009 be any better or will it, as forecast, just get worse? Most of the pundits are saying (a) it will get worse and (b) it will take a long time before it gets better. This may well be true, but from my own past experience I am sure that whatever the scenario, the future holds out HUGE opportunities for those prepared to take cautious risks. Having said that, I would like to start this new year with my (often unorthodox) views on a number of topics by way of painting a background for what I see coming in the months and years ahead. The role of the banks Readers of my books and previous articles will have surmised already that I have a healthy disrespect for banks and bankers. I don't harbour any disrespect for the almost universally sweet and helpful tellers, or even the bank managers (who are, after all, only mere ex-tellers in drag ). No, it is the faceless ones I distrust. Those who hide in 'Head Office', whose names are unknown -- but who hold the power of financial life and death over ordinary folk foolish (or unlucky) enough to be ensnared by their cunning ways. Once upon a time a bank manager was your friend. You could talk to him or, increasingly, her. You could get real help and advice on a personal level. It was not unusual to have lunch together, or to meet for a beer after work, even to be invited home for a barbeque. That all ended in 1987 with the underhanded and often heartless modus operandi that followed. Now look where it has got us. This new breed of banker, the faceless ones -- untroubled by reality, out of touch with the customer, stuffed full of their own arrogance -- have driven the economy into the abyss. We, the people, their customers, have to pay for their stupidity, their profiteering and their reckless risk-taking with bailouts and government (i.e 'us') guarantees. Yet still, it seems, they do not learn. Break fees The loss of people's savings in the collapses and 'frozen' investment funds all over the world is a scandal. Surely, you would think, it should provoke chagrin and humility on the part of the so-called leaders of the financial sector. But no. not so. The astronomical cost of break fees being charged by all banks is a worsening scandal. When customers, groaning under the strain of economic pressure, seek to reduce the inflated interest rates being charged on their mortgages or borrowings, they often meet a merciless response from their once oh so friendly banker. I raised the issue last December in an article 'Merciless' banks fail customers published by the Herald on Sunday. For my pains I was roundly criticised by some who tried to argue that 'a deal is a deal'. Borrowers knew that fees were payable in the event of a break. Contracts had to be honoured. How would you like it if the banks broke depositer's term deposits etc etc ? Well I am sorry, but I do not agree with all this. If we really are in an unprecedented global financial crisis, then the rules must change. The old rules can no longer apply. There is a legal principle in contracts referred to as 'force majeure'. That is, where events occur that are of such magnitude that the performance of contracts and agreements simply cannot be fulfilled. I believe the time has come where the genuine excuse of force majeure can be used to help straighten out the system before we reach the point of no return. It's good to see that point of view getting some support from other quarters: 'Goff calls for Govt mortgage intervention' It is simply not true, as some argue, that banks will suffer great losses if they reduce interest rates to assist borrowers. They will suffer little, if any, real loss at all. The reason is that when a bank lends, say, $300,000 on a mortgage at 10% fixed for five years, the borrower may be stuck with this rate for the whole term, but the bank certainly is not. The bulk of bank borrowing is done relatively short term, anywhere from daily to a few months. The bank is constantly adjusting the interest rates it pays to depositers right through the term of the original loan -- so its actual costs are much lower. At the heart of the problem is that it is not level playing field. The system is totally weighted in favour of the banks. Even the Banking Ombudsman is restricted in what he or she can do. And as for impartiality, one has to wonder how an Ombudsman, appointed and paid by the banks, could ever be truly impartial. Borrowers are always at the mercy of the lenders and not the other way round. With the prospect of even further interest rate cuts by the Reserve Bank comes the threat of banks demanding even larger break fees. In NZ we have a banking system which is in reality a cartel -- much as how the main players dominate petrol distribution -- real competition is virtually non-existent. One possible avenue open to a borrower who chooses to break, but feels that they are being over-charged, is to grit their teeth and agree to pay (either in cash or by adding the fee onto a new mortgage). At the same time they (or their lawyer) could formally write to the bank stating (a) they are paying under protest, (b) they dispute the charges, and (c) that they 'reserve their rights' -- Then they could lodge a claim with the Disputes Tribunal (maximum claim $7,500 all free-of-charge) seeking a refund of all or part of the fees. I think the banks would have a very difficult job defending their position. It only needs one person to win for the whole banking system to be facing across-the-board refunds. Smoke and mirrors As far as the much-trumpeted lower interest rates for mortgages is concerned, it is all a charade designed for public consumption. New mortgages might be lower at 6.5% or so, but this is only for new borrowers or those lucky enough to be on floating rates. The majority of borrowers receive no relief. Worse still, the banks have greatly increased the amount of deposit required to purchase a home. This move effectively cuts out large of potential home owners who now need around $70,000-$80,000 deposit to buy the average house, where the median price is $427,500 in Auckland, $373,000 in Wellington and $313,000 in Christchurch. How on earth does a wage earner on anything resembling the average wage, save such a huge sum after paying for ever-increasing living expenses? Could you do it on the average wage of $800 per week less tax? I doubt it. Even allowing for two income families it would still be increasingly close to impossible for many, as this Treasury graph shows. Where the rubber hits the road I have many -- far too many -- clients who need finance to expand their businesses, or to buy gilt-edged investments. Is the money available? 'No' is the answer more often than not. One of my clients for instance, wants to buy a commercial building which ticks all the right boxes with a sound tenant, and a great cash flow. The best offer he can get is 40% of the purchase price. Tough times indeed. What makes it particularly astounding is that the tenant is a major bank. What does that tell you about confidence? The hidden face in action The banks are playing a two-faced game with us. One face is used to promote the clean green image that they are lending at low rates. This is strictly PR for the masses, you can be sure. The other face (which you don't see or hear about) is the fact that they are hoarding funds, reluctant to lend under any circumstances. You and I, through the government are (literally) bankrolling them and they are kicking us in the teeth as our reward. And how do they explain the following? Usury the practice of lending money at exorbitant interest -- Concise Oxford Dictionary I have in front of me a bank statement. Should the account go into overdraft, it records, the interest rate would be 18.5%. Likewise credit cards fees from the same bank. The interest rate: 22.5%. At time of this writing the OCR is 5% and likely to fall to 4%, perhaps even lower. A fair profit for the risk is one thing. A mark up of 300%-400% is usury, pure and simple. if you don't believe me, look up your own bank and credit card statements and then shake your head in wonder. What makes it even sadder is that the Reserve Bank continues to turn a blind eye to this rip-off. The silence from Wellington is deafening. Calling Dr Bollard. -- Calling Dr. Bollard! Where are you? Olly Newland 27 January 2009 www.ollynewland.co.nz © 2009 Olly Newland. All rights reserved. Next week: Part (2) Read more of Olly's columns here. Get the benefit of Olly's experience: Visit Olly's website for details of his Personal Mentoring Programme and consulting services. FEEDBACK: Do you agree or disagree with Olly? Send your comments, criticisms, counter-arguments or any feedback to him by clicking here. Order Olly's book: The Rascal's Guide to Real Estate (updated second edition). 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