BankWest customers tell the Senate shocking stories of fraudulent foreclosures while Australia’s financial journalists are out to lunch — dining on the Commonwealth's Bank's record profits. Associate Professor Evan Jones reports.
ON THURSDAY 16 August, the Sydney Morning Herald reported the Commonwealth Bank’s approximately $7.1 billion profit, up $700 million from 2010-11. The Herald’s financial journalists fell over themselves in adulation. Here was a true national champion.
The previous week, a different story was being played out. The Senate Inquiry into the ‘post-GFC banking sector’ held hearings in Canberra (8th) and Sydney (9th & 10th). A couple of dozen spectators attended the Sydney hearings; it appears that the Herald was not amongst them. It was a spectacle. Transcripts of the hearings are available here.
The Senate Economics Committee instigated its banking inquiry in March, following pressure from myriad former customers of CBA-owned BankWest who claim that their foreclosures have been fraudulently obtained. The background is outlined here.
I admit to a mea culpa in forecasting that the BankWest victims would be marginalised in the inquiry which has diversionary terms of reference. Certainly, the representatives of the banks and of the regulatory agencies were true to form. But five victims were given leave to appear: Sean Butler (Bunbury & Freemantle hotelier); Geoffrey Reiher (Cobar hotelier); James Neale (Sydney property developer); Geoffrey Shannon (NSW Central Coast property developer); and Guy Goldrick (Sydney broker and property developer partner, and instigator of a class action). Allocated 45 minutes each, they had ample time to outline their case and express their opinions.
A range of Committee Senators repeatedly raised the CBA/BankWest shakeout: Senator Williams (Nationals, NSW); Senator Eggleston (Liberal, WA); Senator Bishop (Labor, WA); and Senator Bushby (Chair, Liberal, Tasmania). Senator Cameron (Labor, NSW) was active, but his concerns were generally on GFC-related matters. (Senator Xenophon, SA Independent, absented himself from the hearings on grounds of potential conflict of interest — his law firm is acting for a BankWest client.)
Brief stories of the victims who appeared will suffice to outline the parameters. They are not unrepresentative of hundreds more (some of which are much grander in scale).
Geoffrey Reiher and Paul French were experienced hoteliers in Cobar. BankWest pursued their business. Reiher and French borrowed $1.35 million on Cobar’s Grand Hotel, valued at $1.8 million (March 2007). The hotel’s takings dipped during the GFC — not least with the temporary closure of a mine employing 700 in a population of 4,000. But BankWest had promised support for the long term and the hotel’s takings soon edged up. No matter, BankWest foreclosed in March 2011. Reiher and French were not in default and were reducing their debt. The receivers sent in (Ferrier Hodgson), presuming unpaid debts as the cause of the foreclosure, couldn’t find any as they didn’t exist.
The hotel was devalued to $1.1 million, but the bank refused another valuation after takings had picked up. The hotel’s sale was advertised within the pub’s premises itself, claiming that ‘the hotel was trading very well under previous owners’. The hotel was sold for $700,000, less than the license value of the 9 poker machines, so the purchasers obtained the hotel and stock for nothing.
Sean Butler and his wife were successful hoteliers. They rebuilt and managed a profitable 70-room resort in Bunbury, valued at $20 million in 2007. BankWest had the property devalued to $14.7 million in November 2009, then to $11.4 million in June 2010. The 2009 devaluation is questionable, the 2010 devaluation transparently fraudulent. In any case, the business was profitable and Butler was at no risk of not maintaining his repayment commitments, so the valuations are irrelevant. In Butler’s words:
“We had record forward bookings and the profits in the June 2011 quarter were the best on record. Turnover for the year was the best ever and profits were trending upwards.”
Butler was also rebuilding the heritage National Hotel in Fremantle, valued at $7 million in mid-2011.
BankWest upped the interest rate payable on debt. The rate during 2003-10 was Bank Bill base rate + 1.25 = 6.13%, from August 2010 base rate + 3.05 = 7.93% (soon after the predatory June devaluation), from June 2011 base rate + 6.0 = 10.81%. The interest rate on additional debt fabricated from receivership ‘expenses’ was 18.81%.
On 31 March 2011, BankWest demanded repayment of all debt by 31 May. Butler was not in default. BankWest sent in Taylor Woodings as receiver administrators in mid-July. According to Butler, Taylor Woodings (‘We provide and implement strategies to maximise returns to creditors, minimise losses and assist with business restructures … and ensure [their] survival’) did not administer the business. They denied the Butlers access, they refused to answer requests for information, they sacked the Butlers without notice, stole business and personal documents, accompanied by threats, essentially treating the business as a cash cow. Butler belatedly discovered that Taylor Woodings had charged $1,055,000 for 9 ½ months ‘work’ (add the fraudulent BankWest penalty rates on enhanced debt from this fraudulent charge). By contrast, Butler had been drawing a salary of $87,000 per year.
“These are licensed thieves hijacking a good-cash-flow business.”
According to Butler, the receivers set about selling both the Bunbury complex and the Fremantle hotel. Butler (for or with associates) made offers for both properties, which were ignored. Both sale processes were corrupted. Bunbury apparently sold for $9.5 million, significantly under value (to Butler’s previous associate who had earlier offered $14 million, the latter offer rejected). Fremantle apparently sold for $3.5 million, significantly under value, and less than the Butler offer.
Butler took his experience to the regulators. The Australian Securities and Investments Commission told him to go away. The Financial Services Ombudsman gave him the runaround, belatedly also telling him to go away. The FOS story is related in Butler’s second submission to the Banking inquiry, #124.
It suffices to conclude Butler’s account with his summary of his experience and his expressions of disbelief.
Bankwest have artificially devalued our business, doubled and quadrupled their interest rate margins and demanded all their money back in one sum, making refinancing virtually impossible. We were forced to sell and the receivers gouged our business and lined their pockets. It is a disgrace. Our losses to date total over $10 million as a result of this. The regulatory bodies seem powerless to act. Appeals to lawyers and politicians for transparency are ignored. Where can we turn? …
If anyone had told me this story several years ago I would not have believed it. I thought it could not happen in Australia and I would have thought there would be laws and regulatory bodies to stop this sort of thing happening. … Our advisors inform us that the conduct of the banker involved in this situation is fraudulent, negligent, misleading and deceptive, and in breach of fiduciary obligation. … I believe there is a degree of criminality in this situation. … It is unbelievable. I have told friends and they do not believe me. They say, 'This couldn't happen.' Well, I have got all the proof of it here. Our lawyers cannot believe it and our accountants cannot believe it. They just think, 'This can't happen in Australia.' … It is just hopeless! It is just a joke that [the Financial Ombudsman Service is] there, and you wonder why you try.
James Neale was an ex-derivatives trader and developer client of BankWest. His initial Loan to Valuation Ratio, after refinancing with BankWest, was a conservative 55%. Apart from other properties, Neale had five acres of industrial land at Mt Kuring-gai north of Sydney, intended for development. He had an interested buyer at over $4 million. After BankWest foreclosed and sold the property it was valued at $3.58 million. BankWest sold the property for $635,000, crediting Neale’s account for $195,000. The receivers and real estate agent pocketed $440,000 of the takings.
Neale learnt, including from personnel within BankWest’s valuer Landmark White (‘the most highly skilled independent property valuation and property consultancy organisations in Australia’), that BankWest had instructed the valuer to misrepresent the nature of a property and to devalue Neale’s properties from existing valuations.
Neale was also hot under the collar regarding penalty interest rates imposed on him by BankWest. Neale claimed that:
“... [penalty rates] are civilly wrong because they are excessive. It is a breach of contract. … [Morever, d]eliberately concealing penalty interest is a crime.”
Quite, on both counts. Neale discovered that the scale of penalty rates was hidden deep in a massive, dense and convoluted appendix to the General Terms contract. The contract Financing Proposal referred to ‘Facility or General Terms’. Neale’s advice from BankWest was that Neale was applying for a business facility and that General Terms, applicable to overdrafts, was irrelevant. The contract was represented as a generic contract, and so the ‘General Terms’ elements could be readily ignored. The contract was subsequently changed to read ‘Facility Terms and General Terms’ (the latter having not been disclosed to Neale). Neale signed, although noticing the word change, but was under severe time pressure to refinance due to a divorce settlement deadline. The draconian penalty rate (5 + 7 = 12% above the upfront Bank Bill base rate + 1.65%) was hidden within the ‘irrelevant’ General Terms and labelled an ‘overdue’ rate. That Overdue rate is defined as the rate so described in the Facility Terms; but it is not defined there, and the General Terms say that where it’s not defined in the Facility Terms then it is Overdue rate + 7%. Confused? That could only have been the intention. More on penalty interest rates later.
Guy Goldrick’s own story is representative:
“We were left hanging for nine months, all the while being told our development was fine and then, in 2009, we were given 24 hours to pay back $6.4 million.”
A projected $15 million luxury three home development was sold uncompleted for $3.26 million. But Goldrick highlights two others of pertinence.
There was the high end waterfront resort development at Airlie Beach. The BankWest valuation was $255 million. With presales contracts at $106 million, the estimated realisation worth of the project was $375 million. A Middle Eastern investment fund was ready to pay out residual BankWest debt. A respected hotel group was ready to run the resort, with local community benefit. BankWest promised loan rollover after January 2009 but sent in receivers KordaMentha. (Mark Mentha was the bloke that the banks sent in to bat for them on the Four Corners program on 9 April). According to Goldrick:
“KordaMentha, allowed the property to sit idle for two years while extricating huge fees and penalties. They allowed all $106 million in contract presales to fall over.”
KordaMentha sold the development for $56 million. Insiders have claimed that BankWest approved the rollover but were overruled by CBA personnel.
In another case referred to Goldrick, the BankWest client had found refinancing from Westpac which had contacted BankWest with view to settle on a Wednesday; BankWest preempted settlement by sending in the receivers on the Monday previous.
Geoff Shannon was engaged in a waterfront development at Harrington Waters, just north of Taree, NSW. Described by another developer as ‘a true slice of paradise’, it was more hell than heaven for Geoffrey Shannon, it appears. BankWest stopped making payments in May 2008, with the project 70-80% complete (11 units complete, 5 units yet to be roofed) and completion cost at less than $2 million. The bank’s explanation for the cessation of payments changed, but both were lies, as there was no economic rationale.
Shannon had to call in an administrator on 26 September 2008 (midway between the publicised collapse of BankWest parent HBOS on 17 September and the CBA announcement of its BankWest takeover on 7 October). Shannon was advised by Stack/The Law Firm (Taree), his then lawyers, to go to PPB Advisory (Port Macquarie). But PPB wanted $500,000 up front, an impossible demand. PPB then demanded Shannon’s four other related (and unencumbered) companies. Reluctant but powerless, Shannon signed them over. The parties PPB (‘skilled in determining the course of action that will deliver the best possible outcome for all stakeholders’) and Stack (‘the expertise, knowledge and experience … to assist you in reducing risk in your project and transactions’) immediately proceeded to engage in funny business, including criminal activities (by now BankWest was directing the receivership) — details are outlined in Shannon’s Inquiry submission, #118. PPB also prevented Shannon from selling the Harrington Waters project. Meanwhile, PPB Sydney claimed that PPB Port Macquarie had nothing to do with them. Shannon sought assistance from ASIC but was told to go away. By default, Shannon has had to instigate private action against the receivers.
Shannon bought the land in 2007 for $3.2 million and gave it to BankWest for security. Shannon obtained approval from BankWest for a $6 million loan and a $100,000 overdraft. The whole project was expected to return $13.3 million; Colliers International had initially valued the project at completion at $13.8 million. The development comprised 16 units, 10 of which were already under contract with deposits paid and a cumulative value of $8.5 million. The buyers were all thrown away. The incomplete project (later completed) was sold for $2.215 million.
As for (de)valuations, Shannon obtained an internal BankWest email which included:
'I have spoken to the valuer again Friday to gauge his opinion and I suggested a reduction of, say, 20 per cent of the existing valuation …'
Colliers, the valuers, thought that that demand was a bit steep but could come at 10 to15 per cent off. The email goes on to estimate the desired devaluation on the (desired escalation in the) Loan to Valuation Ratio (LVR) — initially at a very safe sub-50% level. In the process, the previous formal valuation of $8 million was cut down to $6.7 million. But Colliers’ disinclination to give 100% satisfaction on this occasion led to that firm being struck off the job. Shannon claims that a new valuation was obtained, from Jeffrey Reid Flanagan of Port Macquarie, at $1.1 million. Thus the sale at a preposterous $2.2 million became an utterly reasonable transaction.
Shannon concludes with his family’s own plight.
… I would like to briefly convey to you the personal toll upon my family and myself. I share it on behalf of all Unhappy Banking members. Each has their own story. Although all stories are unique, we share one thing: the horrific toll that Bankwest actions have taken. … The toll upon my physical and mental health resulted in me being admitted to a private clinic for two weeks in a suicidal state — something I am not proud of, but I have learnt not to be ashamed to speak of it. It is a place that I never thought I could end up. But that is the depth, the lowest of the low, when you bottom out and the process just seems to make no sense, when a man feels that he has lost everything including hope.
Unfortunately, some have gone further into the depths of despair than I did. They can never tell their stories. It can never be allowed to happen again. I have spent the last 4½ years staying alive, financially and physically. … There is no end to their relentless pursuit of me. What I struggle to make sense of every day is how the bank that stopped funding me because it went to the wall can somehow turn the tables to paint me as a bad guy.
And from Shannon’s submission to the Inquiry (generalised from the victims who joined his Unhappy Banking website):
… vastly different businesses across Australia demonstrate the exact same patterns of above at the hands of BankWest, resulting in hundreds of people’s livelihoods being ruined. Bankruptcies, destroyed wealth, lost opportunity and local community downturns are but a few of the results of dodgy lending practices, then we believe a serious problem where institutionalised corruption exists within our biggest Bank [CBA]. At worst it is potentially corrupt, at best it is appallingly incompetent. Neither view is comforting …
In the next instalment, we get to hear from the representatives of the Commonwealth Bank and BankWest, and from senior representatives of the Treasury and the Australian Prudential Regulation Authority. The script from this dramatis personae is a gripping read. You couldn’t make it up, and all from the horses’ mouths. And our country’s financial journalists missed the high drama, elsewhere lunching on the fabulous $7 billion record profit attributable to the genius of the animal that is our very own Commonwealth Bank of Australia.
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