Vedanta Hedging continue to shed light on the scandal of mis-selling of LOBO loans to Councils.
Newham council continues to be in the spotlight, but unfortunately not in a positive way. The council had made big steps forward since the 2012 Olympics, but some part of the borough still rank among the most deprived in the UK.
Whilst all councils across the UK have had to make savage cuts due to the financial crisis of 2008 and austerity that followed, Newham and many other councils have another problem, a problem called LOBO (Lender Option Borrower Option). Whilst budget cuts from the central government since 2010 has clearly affected the borough’s financial position, some are now asking whether the borough’s financial exposure has suffered due to the LOBOs sold by the banks
During the early to mid 2000’s, these highly complex derivative based loans were sold as instruments that would protect the council from rising rates. This protection seemed extremely attractive to risk-averse councils at a time of volatile interest rates.
However, as a result of the financial crisis of 2008, interest rates were slashed to record lows. The structure of these loans meant the council still had to pay the higher rate. The problem is, the loan itself is very complex and hugely weighted in the favor of the banks. Abhishek Sachdev explains, “They are incredibly complex. It’s a loan which includes a derivative but whatever happens, the council loses out because the bank can also demand an increase in the rate”.
Vedanta Hedging has been studying LOBOs for years and is acutely aware of the problem faced by the councils across the country. Abhishek Sachdev, our MD, appeared on Channel 4 Dispatches in July 2015 interview to highlight the problem. It is not just the higher rate being paid, the exit fees are also exorbitant, and with £18bn worth of private sector loans on councils’ books, £15bn of which are LOBOs, according to Vedanta Hedging calculations, this is a huge problem the councils can’t easy solve.