Landlords need to be aware of mis-sold hedge products, says David Levenson
Hands up who remembers the margin calls on swaps that hit the housing association sector in December 2009?
Over £300 million additional security, £100 million of which was in cash, had to be put up by HAs to cover positions on swaps, due to the sudden rapid fall in interest rates the previous year. This was what the swap contract small print demanded when the margin calls were made, except the credit crunch and ensuing recession was an unknown and therefore unconsidered risk factor. In all probability no one paid too much attention to this section of the contract’s small print.
If this sounds familiar, then consider the news that has broken in the past two weeks about the alleged mis-selling of swaps by banks in the years before ‘the crunch’. Had it not been for the LIBOR-fixing issue and its repercussions for Bob Diamond, among others, the swaps story would have been much bigger news.
Is there a connection between the HA margin call problem and mis-selling of hedge products? Most certainly, yes. Housing associations are well endowed with available assets and the ability to raise cash from other sources. The problem was managed away quickly and efficiently.
Now consider what has happened to a small property company which took out a loan in 2006 when short term interest rates were 7 per cent (I know of such a case). The bank manager ‘pressured’ the company’s proprietors to take out a 25-year fixed price swap to guard against continually rising interest rates, which might affect its ability to service its debts. The opposite scenario happened: recession hit and interest rates dropped along with the value of the bank’s security for the loan. The bank legitimately (small print again) demanded more and more money to cover its risk and in the process the business is now on the brink of receivership.
I forecast that long after the furore over LIBOR fixing has died away, we will be reading more about the mis-selling of hedge products by banks and the consequences for many businesses. Housing association finance directors should reflect for a moment - this call came closer than we thought.
David Levenson is group finance director of Network Housing Group