Have you been sold an "Interest Rate Swap" lemon?

Housing Market Written by John Bolton , May 9 2009

Business owners and farmers will be familiar with bank bill priced term loans combined with interest rate swaps. Essentially these are just fixed-rate loans dressed up a bit to sound sexy.

For the banks, interest rate swaps have been seen as a way of differentiating each bank from its competitors. However: A loan, is a loan, is a loan. It has a term and an interest rate... Simple. Don't let bank sales people tell you any different. With all the smoke and mirrors wrapped around these products, it is clear that in a lot of instances the product has been incorrectly sold.

I was talking to a farmer yesterday who is sitting on a $250,000 mark-to-market loss on his five-year interest rate swap. These products were marketed around the country at roadshows where financial markets "gurus" were dragged out from behind their Reuters screens to sell the idea with lots of panache. Whilst the markets team do unquestionably understand the product, it was then left with a rural or business manager. The mistake this particular farmer made was in believing that his rural managers actually knew what they were selling. They didn't. As a result there was no ongoing monitoring or advice given by the bank to the farmer as interest rates fell. In reality he should have broken the swap back in October when it was obvious that interest rates were collapsing.

This is the difference between a salesperson and an adviser, and it is as real an issue for businesses and farmers as it is for home owners. If you have one of these products and want some advice on what to do I'm more than happy to have a look at it for you.

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