Banking Bad

by Adele Ferguson

  The new Treasurer, Paul Keating, was sure the answer to this question was to open up Australia’s economy to market forces. This was not a novel idea. US President Ronald Reagan and UK Prime Minister Margaret Thatcher had already gone down that road. Indeed, in the coming decades, deregulation and privatisation would become de rigueur around the world as the free-market economic rationalists gained a stranglehold on mainstream economic theory.

  Over thirteen years, from 1983 to 1996, Hawke and Keating blazed a trail that paved the way for the Australian dollar to be floated, CBA and Qantas to be privatised, the end of collective bargaining, deregulation of the banking system, the entry of foreign banks into Australia, and the dumping of the country’s centralised wage-fixing system. It was a tidal wave of economic change and it would herald the rise and rise of the banks.

  Prior to 1981, the banks and the way they dealt with customers were regulated by the government. Banks weren’t allowed to set interest rates on deposits or loans, including housing loans, which constrained the amount of funds available for lending. It also made them less profitable because lending rate controls made banks a cheaper source of funds than finance companies. After deregulation, banks were allowed to set their own interest rates and savings banks were given more flexibility to invest in higher-risk assets.

  Keating ‘fashioned a new Labor for the modern age that he called “the Big Picture” – redefining the market as a friend of the battler and reforming Australia’s economic institutions to succeed in the international age’.2 The ACTU-Labor Accord of 1983, under which the ACTU accepted wage restraint in return for a social wage for workers, which gave them universal health care and a basic income guarantee, would also play an important part in Australia’s economic recovery.

  But although Keating was admired by the financial markets and was named Finance Minister of the Year in 1984 by the magazine Euromoney, the regulators were weak and the changes set off an era of irresponsible lending. At the time, the stock market was booming and the debt binge was spiralling out of control as the banks offered huge lines of credit to entrepreneurs, including Alan Bond and Christopher Skase. According to Reserve Bank figures, between 1985 and 1989 bank credit in the Australian economy rose 20 per cent.

  *

  Deregulation included a change in policy to allow foreign banks to enter the Australian market, to increase competition in banking. Sixteen foreign banks came to Australia in 1985, immediately doubling the number of banks in the country. Feeling under siege, local banks looked for strategies to defend themselves and retain customers and staff. ANZ, for instance, announced it would revamp its passbook savings account, which had been offering 3.75 per cent on balances of up to $4000, with interest calculated on a minimum monthly balance. Now it would pay 12 per cent interest, calculated daily, for deposits of $500 or more. Concurrently, favoured staff at all banks were offered golden handcuffs and pay rises to price them out of being poached.

  Soon, foreign currency loans, with terms of up to five years, were being marketed to mums and dads, small businesses – and farmers like Wacka Williams. Incentive schemes on all types of loans were introduced, which paid bank staff bonuses based on the number of loans they wrote. Ominously, bank staff weren’t trained in the intricacies of the loans; all they knew was they had to sell them.

  According to Evan Jones, a retired political and economics academic from the University of New South Wales, who has written extensively on this topic, thousands of foreign currency loans were sold post deregulation. Westpac flogged 50 per cent of them, followed by CBA, which sold between 25 per cent and 30 per cent of the loans; ANZ and NAB sold the rest. But few customers understood that the low interest rates attached to the foreign currency loans were a ticking financial time bomb, ready to explode if currency rates went the wrong way.

  *

  The ink had barely dried on Wacka’s $640,000 loan before the Australian dollar started to lose value against other currencies as the current account deficit worsened and the US dollar surged. ‘It was one or two weeks after I signed the loan that I realised the dollar was falling and wondered what it all meant,’ says Wacka.

  What it meant was that the size of his debt ballooned as the Australian dollar lost ground. Suddenly, it was a bloodbath for customers who’d been told by bank staff that the loans were safe. The banks reacted by demanding additional funds from borrowers to top up their original deposits. If the customers didn’t have the extra funds, their assets – in the form of family homes, farms and/or businesses – were seized then sold, sometimes at giveaway prices.

  In an attempt to stem his losses, Wacka made an appointment to meet the loans officer at CBA’s Inverell branch, Peter Neale, to discuss whether he could insure against, or hedge, the loan. Neale told him he couldn’t.

  Neale, who quit the bank in 1994 after twenty-five years of service, admits he didn’t understand the loans being sold: ‘I hadn’t been trained in them so I asked the branch manager what he thought and our reading of it was it couldn’t be hedged. I was wrong.’ Neale’s advice was similar to that given by banks to thousands of other victims of these loans as they spiralled out of control.

  As things deteriorated, Wacka would turn on the television each day to check the exchange rate. The news got steadily worse as the Australian dollar continued to fall. ‘The stress was terrible,’ he recalls.

  Over the next two years, between 1985 and 1987, the Australian dollar continued to plummet against the Swiss franc, going from a value of 2.2 Swiss francs to less than one. Wacka’s $640,000 loan blew out to a crippling $1.5 million. It was at this time that he received a call from CBA’s head office advising him to trade the currency. ‘They said, “We want you to ring us every day. We’ve got an advisory room and we will trade the currency.” The manager of the trading room told me he would get me back to my original debt in two years.

  ‘I would get up every morning and ring the advisory room and say, “Should I go to Swiss francs? Should I go to Australian dollars?” and so on, and I reckon eight out of ten times I changed currency it was the wrong move and we lost more money.’

  The results continued to be financially catastrophic. At one stage Wacka was trading AU$1 million on the instruction of CBA’s foreign exchange dealers in Sydney. ‘Every time I traded, they made money out of the trade.’

  Things for Wacka went from bad to worse. He was being charged 25.25 per cent on an overdraft he had taken out, and the stress on him and his family was unbearable. At the time, Wacka was married with two young children under ten.

  In 1987 CBA forced Wacka to sell the investment properties he’d bought in order to reduce his debt. One, a double-storey, three-bedroom brick unit on the beach front of Byron Bay, was bought cheaply by the local CBA branch manager for $80,000. ‘It would be worth millions today,’ says Wacka.

  Then the bank asked Wacka and his brother to sell their farms. ‘I pleaded with them to come up with a plan so we could keep the farms, and they just said no. To me it was a complete failure of five generations of work and I was the loser, I was the one who caused it all. That was on my conscience all the time.’ To Neale it was the bank behaving like a pack of mongrels.

  Farmers like Wacka started rallying together and in 1988 set up the Foreign Currency Borrowers Association, which gained more than two thousand members. Wacka recalls: ‘We would meet in Sydney and share horror stories and support each other and give each other updates if anyone was taking legal action.’

  When articles on foreign currency loans started to appear in the media, the banks spun the line that borrowers had been greedy and the banks had warned them about the risks of the loans. Later, CBA’s chief general manager for credit policy, Barry Poulter, would say that the average foreign exchange loan was about $1.4 million, which showed CBA was not dealing with innocent small investors. Poulter’s inference was that borrowers who’d taken out loans in foreign currencies were savvy investors who’d known what they were doing. What Poulter didn’t mention wa
s that many of the loans had started at a fraction of that amount. Poulter also denied the foreign currency loans were faulty, saying, ‘There is nothing faulty about the product in the way in which one might consider a car which has a weakness in its braking system is faulty. There is no unknown defect in a foreign currency loan.’3

  Wacka Williams was one of a number of customers who rejected this argument and decided to take on the bank. He fought CBA for five years, then signed a deed of settlement in November 1992. But in 1995 he learned that the bank’s lawyers had misrepresented a statement by one of the key witnesses, Peter Neale, which prompted him to challenge the settlement.

  During his legal battles, Wacka would set his alarm clock for an early start, leaving Inverell at 4.30 am to drive to Sydney to represent himself in the Supreme Court of NSW. ‘I’d listen to the radio or think about what I was going to say in court,’ he recalls. After the CBA meetings he’d drive back to Inverell, dropping in at the local pub to have a stubby before arriving home at 10 pm, having driven a round trip of 1200 kilometres in one day.

  Despite Peter Neale giving evidence that CBA staff hadn’t been trained about the loans and so didn’t understand them, Wacka lost the case in May 1998, with the trial judge finding him to be dishonest. The judge also rejected Neale’s version of events, saying, ‘[Neale] has plainly acquired an antipathy to the CBA.’4 Wacka was ordered to pay $788,301 in favour of CBA, with interest accumulating at $204 a day. In the aftermath of the case, CBA took possession of Wacka’s and his brother’s farms.

  Despite losing his case, Williams refused to give up and took it to the Court of Appeal. On 28 September 1999, he won. In a seventy-three-page adjudication handed down by the three judges, the Court of Appeal overturned the 1998 ruling and said the judge had erred in facts and findings on nine key issues. It also noted that CBA had withheld a critical internal memo written in 1986 referring to hedging facilities, which was damaging to the bank.5

  Anne Lampe, an investigative journalist at the Sydney Morning Herald, wrote that Wacka had won a ‘significant victory that cleared his name and restored his credibility’.6 But it turned out to be a hollow win. The court found that the original trial had miscarried and that a new trial would have to be held. It said Wacka should be compensated for the cost of the appeal.

  Wacka might have had his credibility restored, but he couldn’t afford to go through another court case. He had lost his farm and his marriage had broken down. He moved into a second-hand caravan. Money was so tight that he rarely put the caravan’s heater on, even in cold weather.

  ‘[CBA] behaved like a pack of arseholes,’ he says.

  *

  A year before Wacka started his proceedings against CBA, a senior auditor at Westpac, John McLennan, decided to quit. It was February 1986 and he’d worked at the bank for twenty years, becoming one of the bank’s top ten executives. His final role at Westpac was heading an ‘efficiency audit’ team charged with eliminating waste in every department of the bank. It turned out that there were too many powerful interests defending cuts to their departments, and he wasn’t able to change much. Nevertheless, he gained detailed insights into the workings of every division of Westpac.

  Two years later, an accountant McLennan knew introduced him to an elderly couple who were in trouble with Westpac. Reg and Thelma Sonter lived in Laurieton, a coastal town in mid-north NSW, and had signed a AU$1.1 million foreign currency loan in Swiss francs with Westpac in 1985. The Sonters were an industrious and hard-working couple who ran a successful bus company, which they’d established in the late 1940s. Their company, which operated about thirty buses servicing the Laurieton area, had been virtually debt free when the Sonters had applied for a company loan, which they planned to use to develop a block of land they had purchased in the 1960s into a residential estate, hoping that would in turn provide a nest egg for their retirement.

  Echoing Wacka Williams’ experience, the Sonters had signed for a loan that was almost four times as much as they’d originally intended to borrow. The manager of the Westpac Laurieton branch had told them it was available only to ‘valued clients’ and they should take advantage of it, pointing to the relatively low interest rate on offer. The manager didn’t tell them about the risks, or the bonus he would get for signing customers up to the loan.

  As it transpired, soon after the loan was made, the dollar began to decline in value and the bank cut the Sonters adrift, saying they could not give them any advice. Senior representatives of Westpac refused to discuss the matter. Meanwhile the bank had set up an ‘asset management’ department to seize the assets of defaulting borrowers.

  By the time McLennan got involved in 1998, the Sonters’ loan had blown out to $2.4 million, pushing up the effective interest rate to 74 per cent. McLennan was shocked that Westpac had sold this elderly couple such a high-risk and complex loan without pointing out they could lose everything if something went wrong. It also struck him as the height of hypocrisy that Westpac could spend millions of dollars in marketing slogans describing itself as ‘the bank you can trust’ when it was selling dodgy loans to unsuspecting customers. What angered McLennan even more was that the Westpac Laurieton branch manager – who McLennan says would have had almost no knowledge of foreign exchange loans – had written to the Sonters saying the bank would look after them.

  Westpac went in hard on the Sonters, threatening them with bankruptcy and asking them to sign an agreement to let the bank sell their assets as well as an indemnity clause clearing the bank of any wrongdoing. The constant pressure on the couple proved too great for their son, Glen, who sank into a deep depression then hanged himself a week before the Sonters’ mediation with Westpac was due to occur. ‘It was devastating for us all, but for the Sonters it was unimaginable grief on top of what Westpac was doing to them,’ McLennan wrote later.7

  In a desperate last-ditch attempt to save everything, McLennan advised the Sonters to take legal action against Westpac. They hired Garrett and Walmsley, a major commercial litigation firm, and McLennan helped them build a case. A statement of claim was made, which basically argued that the Sonters had been sold a ‘defective loan’.

  Westpac used every tactic to delay, muddy the waters and drag out the court case. It also withheld vital information that would have helped the couple. But eventually the bank was forced to present internal policy loan documents that substantiated everything the Sonters had said. In an out-of-court settlement in September 1988, Westpac agreed to write off all the foreign currency losses so that the Sonters’ debt fell to about $800,000. Reg and Thelma were happy with the settlement, but they had been taken to the brink of financial ruin and the emotional costs were incalculable. Without the help of McLennan, who had given the lawyers invaluable insights into the inner workings of the bank and lists of documents to request, they would have gone under.

  Despite these cases and growing public concern, the banks continued to promote foreign currency loans to customers and employees. Remuneration deals across the sector were restructured to offer incentives to staff, with lofty targets set and bonuses paid if targets were met. A culture of profit took hold and risk management became evermore lax. According to McLennan, there were no checks and balances, no quality controls. ‘That was the beginning of the end,’ he says. ‘Staff soon learned to flog products to achieve bonuses and, as the saying goes, “When profit is the only motive, all forms of corrupt and immoral behaviour can be rationalised.”’8

  The Sonters’ case put McLennan on the path to becoming an advocate for victims of foreign exchange loans. He set up a management consultancy in Port Macquarie, NSW, called Strategic Management Services, and in 1988 helped found the Foreign Currency Borrowers Association, which Wacka Williams joined. Over the ensuing decade, McLennan helped hundreds of bank victims win compensation of around $500 million.

  What became clear was the banks, particularly CBA and Westpac, had become aware of the problems with foreign currency loans in the mid-1980s but had failed to
warn borrowers. In fact, as with both Wacka and the Sonters, the banks had encouraged customers to take out bigger loans than they needed. When things turned sour, instead of helping, the banks seized whatever assets were left. They used legal action as a deterrent when customers lodged complaints or requested compensation.

  *

  It was against this backdrop of more and more customers going to the wall from bad banking practices that in 1987 Paul McLean was elected as a NSW senator for the Australian Democrats, after contesting seven elections in ten years. A self-described social actionist, McLean entered politics to take on tough issues on behalf of the Australian battler

  Within months of taking office, McLean began to hear disturbing stories about foreign currency loans and other types of bank misconduct. By now, bank share prices were trading at record highs. It was the time of ‘greed is good’ and power-dressing, yellow-tie-wearing stockbrokers and bankers taking clients out to lunch at topless restaurants and strip joints; when Wall Street character Gordon Gekko made his famous speech, saying: ‘Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.’

  But the boom came to an end on 19 October 1987, now known as Black Monday, when the US stock market plunged 22 per cent, its biggest one-day percentage loss ever, bigger even than the stock market loss during the Great Depression of 1929. The Australian Stock Exchange (ASX) followed suit, losing 25 per cent of its value – the worst-ever one-day fall on the Australian market. Investor confidence was shattered.

  Within months of the crash, Paul McLean was contacted by one of his constituents, Donna Batiste, who wanted to expose a scam being practised by the big four banks. Batiste told McLean the banks were deliberately sending companies to the wall, then selling their businesses to favoured parties at knockdown prices. She also alleged that CBA had deliberately emptied her trading account to prevent her making interest payments on her business loan before taking her to bankruptcy court.