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Council Faces Probe Into Time-Bomb Lobo Loans

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Newham was one of the biggest borrowers of controversial bank loans known as Lobos. Scores of other councils bought these loans in the hope that they would secure low interest rates for taxpayers, but they could potentially end up behaving like time bombs in future. Lobo loans were designed to protect the borrower from rising interest rates. In the early-to-mid 2000s, the protection they offered seemed extremely attractive to risk-averse councils. The trouble was, if interest rates fell — as they have — the borrower has to pay, big time.

Derivatives expert Abhishek Sachdev of Vedanta Hedging has been studying Lobos for years. He says: “They are incredibly complex, but the upshot is it’s like you’ve been given an umbrella to carry around by the bank and then when it starts to rain the bank takes the umbrella away from you.” Such derivative-based loans are so complex that they have traditionally been the preserve of high financiers, not local government officials. Yet these councils bought Lobos on an industrial scale from 2002 to 2011. Financial analyst Nick Dunbar claims that the decision has cost the council at least £10 million — and counting — more than it would have if it had borrowed directly from the Government.

http://www.standard.co.uk/business/council-faces-probe-into-timebomb-lobo-loans-from-city-amid-cuts-in-children-s-services-a3199581.html

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What are Lobo loans?

Lobos — an acronym for lender option, borrower option — are long-term bank loans with interest rates that can be re-fixed by the bank in the future. They were invented in the mid-1980s but took off from 2002 onwards with their sale to councils but the market for them has effectively been closed since 2012 due to shrinking demand. A bank would offer a council an interest rate typically 0.5% below what they could borrow from central government. The bank has the option to increase the interest rate in future and the council can accept the new rate or pay fees to exit the loan.

Edited by rollover

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"Lobo" is Spanish for wolf. I guess these loans are named thus because eventually they come back to bite the payee on the bum?

I like your comparison with wolves.

Wolves are opportunists. They test their prey, sensing any weakness or vulnerability. They chase their prey, often over longer distances. On the hunt, wolves work together with certain individuals typically carrying out their specific role in the hunt, often based on age, gender and social standing. Wolves work together to take down prey much larger than an individual wolf; prey that may otherwise elude them. While individual wolves have been able to subdue large prey animals, their advantage is in collaborating with their pack.

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I wonder who in local councils okayed the use of such loans as I reckon the average councillor or finance person would have been way out of their depth with something like this. Another case of financial services getting one over "muppets". Trouble is we all pay for it with cut backs or increased council tax.

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Let's not forget Councils started Help to Buy Bail Banks before Osbanker

From today first time buyers, who choose to buy in Peterborough, will be able to borrow up to £123,500. The "buyer" only needs a 5% deposit. The council will underwrite an additional 20%

http://www.housepricecrash.co.uk/forum/index.php?/topic/173078-peterborough-council-launches-local-lend-a-hand-mortgage-scheme/

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