Wednesday, March 23, 2016

LOBO

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We are writing in response to coverage of Lender Option, Borrower option (LOBO) loans sold to local authorities and housing associations – exposed by Channel 4 Dispatches and recently covered by the Evening Standard, The Independent and Financial Times (9-12 March), where banks are reported to have made up-front trading profits of £1.5 billion. [..]

A string of municipal swaps and derivatives mis-selling legal cases across Italy, France, Germany, Portugal and Belgium are testament to the fact that local authorities were not in a position to safely use complex products like derivatives, and could not be accurately described as “sophisticated” investors with full understanding of derivatives risks.

Banks pitched highly complex, opaque and risky products such as ‘inverse floaters’ and ‘range LOBOs’ which were inappropriate for the needs of local authorities. In the case of Newham council, this has had a significant adverse financial impact on its position.[..]

Unlike professional investors such as hedge funds, local authorities did not understand the inherent risks with LOBO loans, being reliant upon external treasury management advisers (TMAs) – who received undeclared income streams in the form of commissions from brokers when councils borrowed from banks.

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More of the over-the-counter banker-to-municipality non-sense, this time from Britain. The graph here says it all. Damn shame..