Realist, not conformist analysis of the latest financial, business and political news

The Strange Claim About Newham And The RBS Lobos

That the British banks might have sold someone something that wasn’t entirely and exactly the very best product for them, well – but there’s still a rather strange claim here about Newham and the Lobos it bought from RBS. The contention being that Libor manipulation meant that the price was too cheap. Thus the contracts aren’t valid, or should be changed, or we’re suing anyway.

Note that this isn’t about the case itself – that’s all in court now. Instead, it’s about this specific claim being made:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Newham council is suing Royal Bank of Scotland over the terms of about £150m in complex bank loans, making it the latest UK bank to face a lawsuit over lending terms that critics say piled undue pressure on local services. The east London authority filed a high court claim against RBS earlier this week, the Guardian can report. The claim centres on terms of its lender option borrower option loans, known as Lobos, which proved popular with local councils in the early 2000s. One of the main attractions were the Lobos’ teaser interest rates that kept costs low in the short term but later proved expensive as austerity and spending cuts took hold. [/perfectpullquote]

Hmm, well. Lobos would have been great if interest rates had stayed high. They didn’t, tant pis really. But it’s this:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] The seven councils say the bank knew customers would rely on Libor rates, which Barclays was accused of lowballing, when deciding whether to enter into contracts. Barclays then has the power to raise interest rates over the lifetime of the Lobo loans as part of the central terms. This week marks six years since RBS was fined a total of £87.5m over Libor manipulation by the City watchdog in 2013. Research for Action, a research cooperative that involves members of Debt Resistance UK, said the anniversary meant the six-year time limit for potential claims linked to Libor manipulation was also coming to a close. The research group claims that 42 local authorities in the UK have suffered losses on about £1.4bn of RBS-issued Lobo loans due to Libor manipulation. The organisation says it has sent letters to the chief executives of all the potentially affected councils to notify them of the deadline. [/perfectpullquote]

OK, the Libor manipulation. Well, not so much. There were two sets of it. One proven and fined, the other not so much. The one proven?

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Royal Bank of Scotland was handed a £390m fine on Wednesday for “widespread misconduct” in rigging the Libor rate until as recently as November 2010, two years after it was bailed out by the taxpayer and even after regulators had begun to investigate the key benchmark rate. Regulators found that corrupt payments of more than £100,000 were made to those involved and that the bailed-out bank had “abetted” Swiss bank UBS – fined £940m – in manipulating the rate used to set prices on £300tn of financial contracts around the world, from ordinary household mortgages to business loans. [/perfectpullquote]

Well, no one rigged “the” Libor rate as there isn’t one. There are many and any rigging was of each individual one. We can have Libor in Yen, £, $, € and so on. We can have it over a time span, the “tenor” of overnight, a week, a month, 90 days and so on. So we can have overnight $ and 90 day Yen and so on. Each of these is “a” Libor. Any rigging was of one of them, not of “the”.

It’s also true that the rigging wasn’t of the sort of scale that’s going to make much impact to a borrower looking for £150 million or whatever. For the rigging was by futures and options and swaps people. Their derivatives changed value as a result of changes in the underlying Libor. With massive gearing, this being a feature of derivatives. They might move “a” Libor by a basis point or three. 0.01% to 0.03%. That’s enough to move a derivatives position from loss into healthy profit. It’makes damn near no difference to someone borrowing £150 million. £15,000 a year in interest per basis point.

Sure, not nice but not really material.

Rather more importantly, the rigging wasn’t all one way. Sometimes those positions would be put into profit by a higher Libor, sometimes by a lower. As it happens, about 50/50 in fact. So whatever we are saying about how the criminally changed rates affected borrowers it’s both small and could be in either direction.

That’s the Libor manipulation that’s proven. And it’s not enough to show that the loans were out of order.

Then there’s the bit that’s unproven although strongly suspected by people like me. In the depths of 2008 there was no Libor. Banks wouldn’t lend to each other – Libor is a measure of the rate at which banks lend to each other. Therefore Libor was, effectively infinite. This wasn’t something anyone wanted to have to say. You know, entire meltdown of capitalism stuff. Thus they didn’t say it. Libor was reported and Libor didn’t really exist then.

That would be an interesting case to make but difficult, as it hasn’t been proven at all. The loans, righteous or not? Dunno, the court will tell us. But this specific claim is really very odd.

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Matt Ryan
Matt Ryan
2 years ago

The Finance Director is probably the one ‘exec’ in councils where it’s worth paying the going rate equivalent to the private sector.

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