News At 10 - Interest Rate Swaps For Small Biz

[spyguy]

Much handwringing, banks mis-selling etc.

http://www.bbc.co.uk/iplayer/episode/b01fd31w/BBC_News_at_Ten_03_04_2012/

16 minutes in.

In short, Barclays have been selling an interest rate swap to a small businesses.

Example story in Norfolk is

http://www.adcocks.co.uk/

100 year old family business, etc etc. Laying off staff is laying off family etc etc

Apparently he's paying a crippling rate of 9% now that the base rates have fallen.

Now admits he did not understand what he was buying.

My comments:

1) 9% is not far off a bank will charge for a commercial loan. 9% is not crippling. 20% is.

2) Banks should not be selling these to small business. They were being greedy.

3) Small business' should not buy these products. He was gambling, being greedy. The bet went wrong.

4) Now here's the killer - the loan was for 900K!!!!!!!

What in FFS! did he need or use 900K for?

The website shows a small, single shop in Norfolk. Buying the shop and putting stock - must of which would be on credit from the disti would not need 900K.

This business has been going for 100 years apparently. Surely someone in 100 years would have bought the shop.

I smell BTL, debt, gross stupidity - mainly by the borrower.

Anyone got any inside info?

[spyguy]

I should add the shop sells video and electricals. i.e small town Currys.

Stinks twice over - my business is failing coz the internet ischeaper. Its the banks problem for loaning me 900K and selling me a swap.

[57percent]

I'm off to Ladbrokes to claim back all my losing bets back because I didn't understand the horse racing form.

[okaycuckoo]

Banks have been settling these cases already, and including confidentiality clauses and conditions that the claimants not raise the issue with the FSA - they've apologised for the latter bit.

The reason the loans are so big is that it's very expensive to run and expand a bricks & mortar business in the UK.

My guess is this will match PPI misselling in terms of money the banks have to set aside.

[Harry Monk]

Apparently the issue is that the banks advised these businesses that interest rates were about to rise sharply, and if they had then these deals would have been to their customers' advantage. The suspicion is that the banks were privy to the information that rates were about to be cut sharply.

[Saving For a Space Ship]

The BBC were talking this back in Nov. with HSBC

http://www.housepricecrash.co.uk/forum/index.php?showtopic=172116

[@contradevian]

I get 2 to 3 PPI miss selling scam calls a day. I look forward to these in due course.

[Venger]

4) Now here's the killer - the loan was for 900K!!!!!!!

What in FFS! did he need or use 900K for?

The website shows a small, single shop in Norfolk. Buying the shop and putting stock - must of which would be on credit from the disti would not need 900K.

This business has been going for 100 years apparently. Surely someone in 100 years would have bought the shop.

I smell BTL, debt, gross stupidity - mainly by the borrower.

Anyone got any inside info?

It's always someone else's fault. £900K debt, on some 100 year old small retail business. Over expansion, or paying themselves too much over the years I suspect, when they could have fully secured their position with little debt.

Also here.

http://www.bbc.co.uk/news/business-17587580

In the comments someone said their bank told his company they couldn't take a new big loan unless taking this swap. Their finance director used to work for a bank and told the bank he didn't have any confidence in the product, they didn't wan't it, just give us the loan. And the bank just gave them the loan.

Can't get a loan without a bolt on protection policy incurring great risks? Well don't take the loan. You're not forced to. If you have to take a loan under such circumstances, then you're already in trouble.

Commercial borrowers are expected to be more commercially aware, taking advice when necessary, if they don't understand something. Not just give let me sign the forms to get a £900,000 loan and this interest rate protection, and I'll worry about it later.

[RufflesTheGuineaPig]

Apparently the issue is that the banks advised these businesses that interest rates were about to rise sharply, and if they had then these deals would have been to their customers' advantage. The suspicion is that the banks were privy to the information that rates were about to be cut sharply.

Correct - they were selling these while lobbying the government for a cut.

[libspero]

I remember speculation even on especially on this forum in around 2007 that it was inflation and interest rate increases which were going to push indebted home "owners" under.

It doesn't surprise me greatly if banks were only offering to lend to risky companies if they had safe guards in place in case interest rates rose further.

It seems the actual instruments they sold were far more complicated than was perhaps necessary, and I've no idea how much extra premium they are now paying because interest rates fell to near zero.. but in fairness, who would have guessed that would happen back in those days?

I don't remember any of us predicting it..

Businesses borrowing money should be careful. Banks should answer some questions about why they chose such complex products. If there is a good reason then I don't see they should be castigated for this. If there isn't and it was just about maximising profit then perhaps they should be "lent on" to help resolve some of these cases (or at least charge them interest at whatever an interest rate fix would have cost back in the day).

My only concern is that if banks are forced to pick up the tab for more feckless borrowers, it will be savers and new borrowers who will suffer from the larger spreads the banks will require to stay in the black. Bit of a familiar theme..

[Brave New World]

As is the way with these examples of modern finance – the banks playing a morally questionable role with the recipient of loan also being questionable use/flagrant past spending.

In this example it is a retail model that is fooked even for the big players. For a local firm it is doubly impossible, for a local firm that has borrowed nearly a million pounds GAME OVER and rightfully so. This cash should/could have been used for a more commercially viable business/start up and therein lies the problem. The muppets borrowing the cash are an issue but the greater problem is the fools lending the cash – they have no commercial acumen at all and lend on the folly of the business owner not the viability of the business.

[57percent]

Where is this going to end?

Can people on fixed rate mortgages sue their bank?

[Georgia O'Keeffe]

Apparently the issue is that the banks advised these businesses that interest rates were about to rise sharply, and if they had then these deals would have been to their customers' advantage. The suspicion is that the banks were privy to the information that rates were about to be cut sharply.

which is clearly mince given that the number of these sold are monumentally dwarfed by the number of lifetime BOE trackers +/- fck all that were aslo sold at the time

Edited April 4, 2012 by Georgia O'Keeffe

[sun n sea]

Where is this going to end?

Can people on fixed rate mortgages sue their bank?

Listening to Peston carefully it was clear that the interest on this business loan INCREASED as the BoE rate fell.

Having paid for "protection" against higher interest rates the business owner is on a penalty rate because baserates have fallen. As far as I can see the loan is a basic SVR deal designed back to front... a proper fixed rate sees you pay the SAME interest for the lifetime of the loan... the product we are talking about certainly does NOT fit this criteria.

As far as rates on business borrowings are concerned...4.5% over base for SVR products is about average. For fixed for life dealls commercial mortgages at a fixed rate of 3.8% are available right now. Set in this context 9% is daylight robbery, especially when you consider the intial setup cost of the "protection vehicle" in question.

Sadly the chances of finding a refinancing deal are practically nought.... according to my business bank manager anything connected to consumer spend is lending territory which is strictly off limits.

[juvenal]

Anyone know this town of Watton? Is it the sort of place where a high street shop freehold can cost 900K?

[tomandlu]

The muppets borrowing the cash are an issue but the greater problem is the fools lending the cash – they have no commercial acumen at all and lend on the folly of the business owner not the viability of the business.

This. The problem with modern finance (IHMO) is that the complexity of the transactions has become a replacement for investing in, y'know, actual productive investments. Talk about hubris. My banking joke still stands...

3 bankers and a farmer are stranded on a barren desert island. When a ship rescues them several weeks later, the captain asks how they survived.

"Oh, it was easy," says one of the bankers. "We traded wheat futures with each other, and invested the profits in a water distilling plant. Then we realised the futures and took delivery of the wheat."

"Wow," says the captain. "Thats... amazing!".

"Oh, and we ate the farmer.

[libspero]

As far as rates on business borrowings are concerned...4.5% over base for SVR products is about average. For fixed for life dealls commercial mortgages at a fixed rate of 3.8% are available right now. Set in this context 9% is daylight robbery, especially when you consider the intial setup cost of the "protection vehicle" in question.

Is it though?

If the base rate hit nearly 6% prior to the crash, and you add on your 3.5-4.5% you are looking at lending at that time costing in the region of 10%. I would have been surprised if they could have fixed for much less than that at the time given the uncertainty.

So on the face of it they are only paying the same (or not significantly more) than if they had just fixed at that time. It is only if you factor in current rates with hind sight that it suddenly appears a terrible deal.. but that is exactly the hedge they were making.. stability over market fluctuations (in either direction).

If there is clear evidence of mis-selling then fair enough (ie, the customer thought they were getting a tracker loan when really they were getting a fixed or inflation hedged loan), but otherwise I really struggle to find sympathy for these people who have borrowed more than they can afford to pay back.

If you take on debt as a business and it drowns you it is unfortunate, and I'll buy you a pint in the pub for you to ease your sorrows.. but at least have the good grace to admit you've F'd up and move on. Don't start wingeing and expecting the rest of us to bail you out.

[Bloo Loo]

I dont think its the loan thats the problem.

Its the DERIVATIVE mumbo jumbo they bought with it.

[Lennon]

I dont think its the loan thats the problem.

Its the DERIVATIVE mumbo jumbo they bought with it.

Not really - all the derivative mumbo jumbo means (The asymetric cap and collar nonsense) is that within a small band, they were exposed to interest rate fluctuations - by the sound of it, if rates were between 4.5% and 6.25% then they were on a "normal" Base Rate + Margin deal with the margin at 2.75% - so there rate was "collared" between 7.25% and 9%. However, in order to pay for the 'Cap' at 9% so that they aren't exposed to high interest rates, they also have to pay high interest rates if the base rate falls below 4.5% - but clearly the cap still applies.

I really don't see what the issue is - yes, in hindsight it was a rubbish choice - exactly as choosing a Fixed Rate would have been, but that was the choice made to avoid the uncertainty of high rates. Party what happened was that the banks were playing to the greed / naivity of the businessman - Instead of a Fixed Rate at 8.5%, how about this cunning product which is a Max Cap of 9%, but in a "normal" environment of 5% base rates is only 7.75%.

[Bloo Loo]

Not really - all the derivative mumbo jumbo means (The asymetric cap and collar nonsense) is that within a small band, they were exposed to interest rate fluctuations - by the sound of it, if rates were between 4.5% and 6.25% then they were on a "normal" Base Rate + Margin deal with the margin at 2.75% - so there rate was "collared" between 7.25% and 9%. However, in order to pay for the 'Cap' at 9% so that they aren't exposed to high interest rates, they also have to pay high interest rates if the base rate falls below 4.5% - but clearly the cap still applies.

I really don't see what the issue is - yes, in hindsight it was a rubbish choice - exactly as choosing a Fixed Rate would have been, but that was the choice made to avoid the uncertainty of high rates. Party what happened was that the banks were playing to the greed / naivity of the businessman - Instead of a Fixed Rate at 8.5%, how about this cunning product which is a Max Cap of 9%, but in a "normal" environment of 5% base rates is only 7.75%.

ah, so its a variable rate with a fixed rate ranged maxed and minimum margin guarantee.....loan.

I wonder if he has a vehicle with which to pay it back?

[RufflesTheGuineaPig]

I really don't see what the issue is

It's that the bank gave their customer advice and then lobbied the government to make it so that advice resulted in a huge profit for the bank and a huge loss for the customer.

It's comparable to when those banks made those "assets" knowing they were junk, advised a customer to buy them and then once they had, shorted the f*ck out of them.

[libspero]

It's that the bank gave their customer advice and then lobbied the government to make it so that advice resulted in a huge profit for the bank and a huge loss for the customer.

It's comparable to when those banks made those "assets" knowing they were junk, advised a customer to buy them and then once they had, shorted the f*ck out of them.

It depends over what time frame we are talking.. let's face it, banks will always want lower interest rates as it makes their products more affordable! Pre-crash there was no realistic way they were ever going to lobby the BoE to drop base rates to 0.5%!

As the crash set in and the BoE were accused of sitting on their hands then yes, I would agree.. if the people selling the loans knew (and that is a big IF given how disjointed large organisations tend to be), that there was a very high likely hood that the rates were going to drop very soon then there is some ground for claiming that they deliberately misled their customers.. but at that time macro economics was all over the news, business owners could see as much of what was going on as the banks.

I find it hard to buy into this "nasty bank, poor stupid business owner" argument.. If monetary policy had gone the other way and we had decided not to print money and instead decided to ride out the storm, these guys would be smiling from ear to ear right now.

Edited April 4, 2012 by libspero

[57percent]

I find it hard to buy into this "nasty bank, poor stupid business owner" argument.. If monetary policy had gone the other way and we had decided not to print money and instead decided to ride out the storm, these guys would be smiling from ear to ear right now.

Exactly.

Unless the client has a piece of paper showing they were offered one thing, but got something else, then this whole thing is bollix.

IR Derivs is one of the things investment banks should be offering. In most cases the deal is hedged by the bank. There's no way they could take this risk of always being on one side.

The banks may have lobbied the govt for lower rates, but that's for cheap funding. Whether rates go up or down, the bank should make money in the IR Derivs market by charging a margin on each side.

It's really not rocket science.

[Ash4781]

Peston mentions that there are other issues than finance cost of the derivative. Just reading the article the loan got increased to do a refurb ( purely debt financed into falling demand and massive competition?), the company has over ten employees. Is this a tiny shop operation? Do they have a web operation? Peston also highlights that they may have a really poor financial understanding.

[scottbeard]

It's very sad for Mr Adcock and his business.

However, the bottom line is that as a business owner he has responsibility for the business. He took out an inapporpriate financial product. If that causes his business to fold then - regrettably - it is his fault.

I doubt there is any "foul play". I suspect that neither the bank nor Mr Adcock truly put any thought about what would happen if interest rates fell to 0.5%. They probably spent a couple of hours discussing what would happen at 5%, 8% and 12% i.e. the sorts of numbers they were familiar with. Most of us have a "blind spot" for things we haven't encountered in our lives before.

If interest rates were now at 10% pa, Mr Adcock would be sitting pretty and it would be Mr Jones from down the road who was on BBC News saying "My bank is incompetent - it should have told me I could have been protected from rate rises with an asymetric cap and collar derivative!"

EDIT to add - maybe I'm being a bit too kind on the bank: I'm not sure this is a product that Adcocks really needed. BUT I still bet even the bank was surprised by the sharp fall in interest rates.

Edited April 4, 2012 by scottbeard