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bvrial

"the Loans That Have Left Councils Impoverished And Saddled With Debt"

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boo hoo...they were too complicated for councils to price.

long term, the gamble was whether interest rates went up, or down.

way too complicated...

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The capacity of local government to squander taxpayer's money is genuinely depressing.

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I used to advise Housing Associations on loan agreements/swaps etc. and these LOBOs always seemed a complete scam. So many hidden costs due to the optionality given to the lender with a pretty much worthless option given to the borrower as a smoke and mirrors trick. Most clients initially thought they looked good due to decreased margins on lending facilities or some other headline metric which was lower than the existing deal, but after proper modelling it was very clear that they were a terrible idea for a borrower.

I suspect that most people who took these up wouldn't know their was around derivatives pricing though...

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If they were that complicated, why the hell did these councils put their signatures on the loan agreement?

Because the S151 officer wasn't doing their jobs. The only reason they're there is to make sure stupid decisions like that don't get taken.

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I used to advise Housing Associations on loan agreements/swaps etc. and these LOBOs always seemed a complete scam. So many hidden costs due to the optionality given to the lender with a pretty much worthless option given to the borrower as a smoke and mirrors trick. Most clients initially thought they looked good due to decreased margins on lending facilities or some other headline metric which was lower than the existing deal, but after proper modelling it was very clear that they were a terrible idea for a borrower.

Interesting - thanks for posting, and welcome to the forum!

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Because the S151 officer wasn't doing their jobs. The only reason they're there is to make sure stupid decisions like that don't get taken.

Wasn't this the time where the housing association bosses started getting massive salaries because you have to pay the most to hire the best?

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Come on. These loans aren't that complex.

You just need a Bermudan swaption pricer to know the relevant volatility surface, some kind of interest rate model calibrated to the appropriate processes and the full forward and spot curve.

Surely, anyone considering such a product would have done their due diligence and checked the competitiveness with this type of model. :P

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It really is simple:

'what is the worst that can happen'

'well, you'll be paying 8% interest if interest rates drop, but don't worry bec...'

'stop there - that would break the housing association. We can't take those risks'

Instead we seem to have

'what is the worst that can happen'

'well, you'll be paying 8% interest if interest rates drop, but don't worry because that's very unlikely'

'Don't worry about that - that'll be in the future - I'm mainly motivated by decreasing costs in the next 24 months so I can get paid more for being brilliant. I'll probably be in a new job by the time those risks materialise'

Over and over again the finance industry seems to kill everything, rather than adding support / reducing risks.

What is so so very depressing is that we've trained our brightest and best to go into finance. Just think what we could have had if all that brilliance had gone into something productive. We might have had a cure for cancer, 300mpg engines, innovations in the steel industry that could have resulted in jobs growth, not loss. But no, they all make up stupid derivative contracts or whatever - anything to keep up the finance industry income. And stupidly we just keep on supporting this malaise, thinking that these intermediaries at best (conmen at worst) actually make our society better.

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It really is simple:

'what is the worst that can happen'

'well, you'll be paying 8% interest if interest rates drop, but don't worry bec...'

'stop there - that would break the housing association. We can't take those risks'

Instead we seem to have

'what is the worst that can happen'

'well, you'll be paying 8% interest if interest rates drop, but don't worry because that's very unlikely'

'Don't worry about that - that'll be in the future - I'm mainly motivated by decreasing costs in the next 24 months so I can get paid more for being brilliant. I'll probably be in a new job by the time those risks materialise'

Over and over again the finance industry seems to kill everything, rather than adding support / reducing risks.

What is so so very depressing is that we've trained our brightest and best to go into finance. Just think what we could have had if all that brilliance had gone into something productive. We might have had a cure for cancer, 300mpg engines, innovations in the steel industry that could have resulted in jobs growth, not loss. But no, they all make up stupid derivative contracts or whatever - anything to keep up the finance industry income. And stupidly we just keep on supporting this malaise, thinking that these intermediaries at best (conmen at worst) actually make our society better.

Brightest and best? Hardly. Real engineers build and test. Financial engineers build and sell. Time-to-market is everything. New derivatives must be continually invented to mop up the vast floods of money being created by the banks and to generate repeat fees. Customers cannot be told honestly that these are risky products, prone to fail in unpredictable ways when the baths of liquidity against which they are calibrated suddenly evaporate. Slipshod, slapdash and largely unempirical, financial engineering is more akin to bad science than anything else.

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Brightest and best? Hardly. Real engineers build and test. Financial engineers build and sell. Time-to-market is everything. New derivatives must be continually invented to mop up the vast floods of money being created by the banks and to generate repeat fees. Customers cannot be told honestly that these are risky products, prone to fail in unpredictable ways when the baths of liquidity against which they are calibrated suddenly evaporate. Slipshod, slapdash and largely unempirical, financial engineering is more akin to bad science than anything else.

Sorry to burst your bubble, but many bright students with a STEM-degree indeed end up in the financial sector and typically the brighter ones. And frankly I can't blame them seeing the huge gap in salaries that exists.

btw) and this includes people having completed PhDs.

Edited by moesasji

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Sorry to burst your bubble, but many bright students with a STEM-degree indeed end up in the financial sector and typically the brighter ones. And frankly I can't blame them seeing the huge gap in salaries that exists.

btw) and this includes people having completed PhDs.

Agreed regarding brightest. Best is up for debate.

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Perhaps different for urban authorities, but the LA here (mostly rural) has shitloads of land it keeps trying to sell and develop (typically rebutted by nimbys). If they even sell a fraction of it I guess their pensions are sorted.

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Because the S151 officer wasn't doing their jobs. The only reason they're there is to make sure stupid decisions like that don't get taken.

yup.

'Predatory capitalism' (is there any other type!?) gets the blame. The mongs who infest local government, exonerated.

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Sorry to burst your bubble, but many bright students with a STEM-degree indeed end up in the financial sector and typically the brighter ones. And frankly I can't blame them seeing the huge gap in salaries that exists.

btw) and this includes people having completed PhDs.

I guess I fall into this category.

It'd be a better world if the financial incentives were there to do something more productive with my engineering training. My brother and I both graduated with a top 1st in engineering from a top university. He works as a civil engineer and earns ~40k a year in London and I 'earnt' >10x that last year writing trading algos. Personally I think it's ridiculous but it's just the way it is. Having taught maths for 4 years I'm hoping to get back to that at some stage as the only reason I'm doing this is to be able to afford a family home in a nice part of town...

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Agreed regarding brightest. Best is up for debate.

you dont need to be bright to make a financial decision where the result is either up, or down.

Einstein couldnt see into the future, and neither can slug.

What you have to be bright at in finance, is ways to dress up the up v down result in some fancy name, a glossy 50 page explanation with a short precis at the beginning, and which pen you pass the mark when they need to sign...

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Councils are not financially astute. It;s the "other people's money" problem. A load of them lost some of our coucil tax in Icelandic banks. :blink:

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I guess I fall into this category.

It'd be a better world if the financial incentives were there to do something more productive with my engineering training. My brother and I both graduated with a top 1st in engineering from a top university. He works as a civil engineer and earns ~40k a year in London and I 'earnt' >10x that last year writing trading algos. Personally I think it's ridiculous but it's just the way it is. Having taught maths for 4 years I'm hoping to get back to that at some stage as the only reason I'm doing this is to be able to afford a family home in a nice part of town...

Thanks for the insight JC - are the salaries in quant land now that good - last time I looked it wasn't quite so lucrative..

I fear that if I was going through the system now I'd try to take the same route. When I was being seduced by the finance industry the equivalent of quants were earning about 2x normal salaries, but it was seen as being a short career, so you had to look at the long term. At 10x salary though, you must forget the long term.

But this is the problem in the UK. Teachers are fighting for more money - when a starting salary for a teacher is now about £4k a year more than minimum wage (after tax). A junior doctor will be in the same position - and while they could be on £100k when fully trained and working hard - this is still less than your typical top line city worker.

It is our Dutch disease, and it is causing utter havoc in our economy and society.

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Thanks for the insight JC - are the salaries in quant land now that good - last time I looked it wasn't quite so lucrative..

I fear that if I was going through the system now I'd try to take the same route. When I was being seduced by the finance industry the equivalent of quants were earning about 2x normal salaries, but it was seen as being a short career, so you had to look at the long term. At 10x salary though, you must forget the long term.

But this is the problem in the UK. Teachers are fighting for more money - when a starting salary for a teacher is now about £4k a year more than minimum wage (after tax). A junior doctor will be in the same position - and while they could be on £100k when fully trained and working hard - this is still less than your typical top line city worker.

It is our Dutch disease, and it is causing utter havoc in our economy and society.

I've been very lucky to end up in a hedge fund that has been doing very well. I don't think it's typical and is unlikely to be repeated this year. Had a few quant jobs before on the derivatives side of things and the pay was more like the range you're talking about

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