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News At 10 - Interest Rate Swaps For Small Biz


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HOLA441

The shop apparently got the deal in 2007 (the news didn't say exactly when in 2007) when bank shares along with building shares e.g BDEV, had already started to tumble at the start of the year - some worse than others. I'll bet the bank had a fair idea what was coming along the pipeline (maybe not the person actually selling the product). Maybe not the exact numbers but a fair idea of the likely trend.

Even Blair managed to time his exit from government for mid 2007 - just before the Northern Rock scandal etc .

9% might not have seemed so "crippling" in 2007 when base rates had increased during 2007 from 5.25% to 5.75% - January to November 2007 respectively (before rapidly and suddenly tumbling to 0.5% in about a year).

Apart from the famous base rate dip starting in 2005 (before starting to increase again in 2006) they'd been rising year on year since October 2003 when the base rate was at 3.5%. For sure the media would have been playing their usual part in fear mongering and speculating all the time about rates rising in the future along with bank adverts about fix now while stocks last and before rates go up more and so on and suchlike.

In the BBC iPlayer report how many times did they have to refer to "complex" financial products. Knowing a bit of addition, subtraction, multiplication and division would probably have been enough to explain the "product".

Edited by billybong
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HOLA442
Guest tbatst2000

I really don't see what the issue is

It's the age old question of whether the state should protect people from their own lack of knowledge and/or intelligence. The general legal principle seems to be that retail consumers needs a lot of protection (e.g. sale of goods and services act, consumer credit act etc.) and that businesses should be smart enough to do their own research. I guess these cases will all hinge on whether there was any deliberate deception involved ('forgetting' to provide a detailed termsheet wouldn't be entirely unheard of for example).

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HOLA443

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.

I don't think so. The idea of a retail bank's business is to get as much risk as possible off their books. Things such as interest rate derivatives are easily shifted, so any derivative sold to a customer would always be hedged in the market. The fact is that banks always want low IRs because they reduce defaults and stimulate the economy, so they can sell more loans, while simultaneously decreasing the risk of those loans.

As it was, at that sort of time, the feeling in the industry was very much that interest rates were set to rise. I remember looking for a mortgage at about that time, and every adviser was telling me that interest rates are likely to rise, that inflation was heating up, interest rates had been rock bottom for years and the only way was up, blah, blah. And, indeed, at that time, those arguments were probably correct.

The trick with the collars was that the banks were able to sell a cheap product at a very high price.

Collars are a very cheap derivative construct. In a fixed rate, you exchange all interest rate risk. In a collar, you only exchange the risk of large interest rate moves (keeping on the wibble-wobble of a 1-2% fluctuation), which because you don't have to shift that risk, leads to a lower cost overall.

The trick was that banks were selling "asymmetric" collars. These would work like a regular collar for "normal" interest rate moves, but would expose the customer to a serious hit in the event of a massive downward move of interest rates. The banks could then sell this risk to the money markets, up front, for a serious wedge of cash - which they would keep as profit. In the case of a £1m loan, the sale of this derivative "hidden" risk to the customer could earn the banks anything up to £50k of up-front profit, fully delivered in cold-hard cash at the time of signing.

The problems seem to have been that:

1. The banks would pressure sell these derivatives, stating that they were the only option for a loan - that traditiional variable rate and fixed rate constructs were not available.

2. The banks did not disclose that these were very expensive contracts compared to more normal products (but that the fees were hidden as considerable excess risk).

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HOLA444
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.

I agree and I disagree.

Ultimately the problem is that people believed the banks had a responsibility to look out their customers best interests and treat them fairly.

The banks did not - and took advantage of their customers trusting in them to profit at their customers expense.

It's particularly important as most banks offer "small business advisers" who the banks claim will give the customers sound business advice, but in fact were doing their damnedest to hit aggressive sales targets.

Essentially people believed the banks were looking out for them because the banks TOLD them they were looking out for them, when in fact they were only looking out for themselves.

Essentially - If the business owners had thought they were dealing with salesmen with aggressive sales targets they would have treated them differently and taken what they said with a shovel of salt.

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HOLA445
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HOLA446

The trick was that banks were selling "asymmetric" collars. These would work like a regular collar for "normal" interest rate moves, but would expose the customer to a serious hit in the event of a massive downward move of interest rates. The banks could then sell this risk to the money markets, up front, for a serious wedge of cash - which they would keep as profit. In the case of a £1m loan, the sale of this derivative "hidden" risk to the customer could earn the banks anything up to £50k of up-front profit, fully delivered in cold-hard cash at the time of signing.

The problems seem to have been that:

1. The banks would pressure sell these derivatives, stating that they were the only option for a loan - that traditiional variable rate and fixed rate constructs were not available.

2. The banks did not disclose that these were very expensive contracts compared to more normal products (but that the fees were hidden as considerable excess risk).

Sounds like the "money markets" were the smart ones in all this.. they're the ones who walk away with the cherry and none of the baggage. Makes the retail banks look like dumb and greedy middlemen again (another recurring theme!).

The bullet points are pretty damning if true, I can understand them not wanting to lend without protecting their customers against interest rate risks (wow.. prudent lending!) but I can't understand why they would refuse more (on the face of it) expensive products as options such as standard fixes.

Unless they really didn't believe interest rates could ever drop so low.. which I guess is possible. What ever it is, it really wasn't that clever because the net result is their customers paying out more than they can afford on hedging products that the bank makes no money from and which is causing their customers to default on the debts entirely. Plus the sh1t storm which is currently being unleashed on top of it. Dumb.

I agree and I disagree.

Ultimately the problem is that people believed the banks had a responsibility to look out their customers best interests and treat them fairly.

The banks did not - and took advantage of their customers trusting in them to profit at their customers expense.

Fair enough.. we are perhaps arguing ideology.

Even as a retail customer if a bank tells me they offer the best savings account on the market I don't immediately think they are telling the truth and are looking out for my best interests. I assume they are selling me their product and I would consider it imprudent not to look elsewhere at what is available..

As a business customer I would expect them to be much more savvy than that.. but perhaps we don't know the full story.

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HOLA447

Sounds like the "money markets" were the smart ones in all this.. they're the ones who walk away with the cherry and none of the baggage. Makes the retail banks look like dumb and greedy middlemen again (another recurring theme!).

The bullet points are pretty damning if true, I can understand them not wanting to lend without protecting their customers against interest rate risks (wow.. prudent lending!) but I can't understand why they would refuse more (on the face of it) expensive products as options such as standard fixes.

Unless they really didn't believe interest rates could ever drop so low.. which I guess is possible. What ever it is, it really wasn't that clever because the net result is their customers paying out more than they can afford on hedging products that the bank makes no money from and which is causing their customers to default on the debts entirely. Plus the sh1t storm which is currently being unleashed on top of it. Dumb.

Fair enough.. we are perhaps arguing ideology.

Even as a retail customer if a bank tells me they offer the best savings account on the market I don't immediately think they are telling the truth and are looking out for my best interests. I assume they are selling me their product and I would consider it imprudent not to look elsewhere at what is available..

As a business customer I would expect them to be much more savvy than that.. but perhaps we don't know the full story.

What he was saying was the business had been looked after by the same bank for 100 years....he had no cause to visit the bank the bank dropped in on him and he TRUSTED their specialist, expert advise, he believed they were looking after his best interests...... ;)

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HOLA448

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

+1

I think I'm right in saying that my BofE at +0.17 started on the 10 August 2007 3 day's after the credit crunch I guess it was too far through the process for C&G to pull it.

Thank god we have the top talent running the banks.

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HOLA449

What he was saying was the business had been looked after by the same bank for 100 years....he had no cause to visit the bank the bank dropped in on him and he TRUSTED their specialist, expert advise, he believed they were looking after his best interests...... ;)

I guess we all have different views on this.

Personally if a guy from my bank dropped in at the flat to tell me he had a fantastic new savings account to offer me, my first thought wouldn't be that he was doing it out of the kindness of his heart.

I accept that perhaps I'm more cynical than some.. I just presume most business owners are business savvy :blink:

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HOLA4410
Unless they really didn't believe interest rates could ever drop so low.. which I guess is possible. What ever it is, it really wasn't that clever because the net result is their customers paying out more than they can afford on hedging products that the bank makes no money from and which is causing their customers to default on the debts entirely. Plus the sh1t storm which is currently being unleashed on top of it. Dumb.

Default on their debts entirely? Perhaps there are other assets for the bank to go for. Yes there are. Hundred year old company, there are probably some juicy assets to be redistributed away from them, because of their mistakes. Maybe even personal guarantees.

So at this time of record low interest rates, why is the long-established Adcocks paying 9% for a commercial mortgage fully secured by freehold properties?

100 year old small company somehow leaves itself exposed to £900,000 of debt with an instrument they didn't take independent advice over to ensure they understood it. Now paying high levels of interest rates. A hostile and ferociously competitive retail environment, including internet shops with big warehouses. From Adcocks website.

In 2005 Adcocks embarked upon another major refurbishment to increase the showroom area and ‘open plan’ the store. This was a massive project that took over 18 months to complete.
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HOLA4411

Default on their debts entirely? Perhaps there are other assets for the bank to go for. Yes there are. Hundred year old company, there are probably some juicy assets to be redistributed away from them, because of their mistakes. Maybe even personal guarantees.

100 year old small company somehow leaves itself exposed to £900,000 of debt with an instrument they didn't take independent advice over to ensure they understood it. Now paying high levels of interest rates. A hostile and ferociously competitive retail environment, including internet shops with big warehouses. From Adcocks website.

Does make you wonder why on earth they even bothered to borrow the money.. especially if it has been a successful business for over 100 years.

Plus debt funded expansion into highstreet retailing during the onset of a recession.. sounds like they timed it badly and want to blame someone else. As others have said, 9% is high at current rates, but was it much higher than a fixed rate loan taken out in 2007? I have no idea but I suspect it's not.

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HOLA4412

I accept that perhaps I'm more cynical than some.. I just presume most business owners are business savvy :blink:

And why beholdest thou the mote that is in thy brother's eye, but considerest not the beam that is in thine own eye? How many of us saw ZIRP coming?

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HOLA4413

And why beholdest thou the mote that is in thy brother's eye, but considerest not the beam that is in thine own eye? How many of us saw ZIRP coming?

Hi Harry

In 2006/2007? None of us I think if we're honest.

It's pretty much the basis of my defense of the banks.

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HOLA4414

As others have said, 9% is high at current rates, but was it much higher than a fixed rate loan taken out in 2007? I have no idea but I suspect it's not.

It's high, but not obscenely so for a commercial loan written at about that time. However, we don't know what the length of the loan agreement is, and that may affect matters.

However, as an example, in Jan 2007 I was part of the residents association for my block of flats, when the residents bought out the freehold from the freeholder. We got a commercial mortgage to finance this. The best deal we could get for a 25 year fixed repayment mortgage was 8% (LTV was estimated as 50% on the freehold).

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HOLA4415

Some very good points on this thread, pro and con.

The bottom line is that banks are settling these cases, which they didn't do in the PPI scandal.

Just heard of a niche solicitors firm in the city that has 20 settlements already, and there are claim-farmers (on percentage) raking in many more lower value claims from the publicity given by the Telegraph.

The banks know the score and don't want their practices exposed.

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