Infantilism over Interest-Rate Swaps

Kerr-ching !

It is possible to envisage the mis-selling of an interest-rate swap - see below - which would be deserving of punitive action.  But has this really happened on the scale we are led to understand ?  I find it very hard to believe.

Interest-rate swaps are not "absurdly complex" products as has been stated - in combination with a floating-rate loan they result in a fixed-rate loan.  What sort of businessman borrows millions who cannot understand this ?  And a 'collar' is only a tad more difficult.

We read that some borrowers were told there would be no loan unless they took a swap.  This means, the bank in question was unwilling to offer a floating-rate loan.  But (for various reasons we could go into) they frequently have a practice of quoting on a floating-rate basis, and swapping it out when the loan is agreed.  The two-step process is a bit unnecessary, perhaps, but it's how things are often done (and not just for loans - it's quite usual in energy contracts, too).

So - a very simple product, sold in a somewhat redundant two-step way.  And yet we are told that 90% of the borrowers hadn't a clue what was going on - to the tune of £10 billion in compo !  Someone's surely avvin' a lucrative laugh: and we are allowing the Great British Businessman, Mr Diddums, to walk away from any responsibility for his own affairs.

So what would have to happen for genuine mis-selling to occur (which, to repeat myself, would certainly merit redress) ?  I suggest it would need to be one or more of the following:

•  the bank rep lied through his teeth, and stated that the swap was in fact a call-option ('cap', or 'ceiling'), and would only operate if interest-rates rose
• the bank rep asserted strongly and convincingly that interest-rates were definitely going to rise, and that a fixed rate was the best choice
• the bank rep stated that floating-rate loans were not available anywhere, from any lender
• it was self-evident the client was as thick as shit, or spoke no English whatever (see below)
• the loan was much bigger than the client needed 
• the strike-price on the swap was way off the money (in the bank's favour) at the time the deal was struck

If 90% of customers can demonstrate one or more of those, I shall be very surprised.  They will take the compo anyway, of course, and a new claims industry will be born, adding several points to GDP growth.

Footnote: these little cameos from the Telegraph make interesting reading.  I particularly found the case of the non-English-speaking Turkish patisserie owner instructive.  Taking the numbers cited at face value, Mr Bey must have borrowed several millions.  Quite a patisserie, I'd say.

ND    

The Mighty, Fallen: Tales of Two Leaky Banks

1.  Leaking Information

So then, Robert Peston.  Live by the leak, die by the leak, eh ?  His epic fail on calling the new Bank Governor is surely the final nail in the coffin of his reputation.  All those reporting scoops in the heady days of '07/08 - but not proper scoops, just his being used as a privileged conduit by a couple of highly-placed leakers.  Except now, he gets fed garbage.

Everybody has his number.  Here's how C@W can scientifically assess his decline: back in 2008, if we got a link on his BBC blog, we'd get thousands of hits.  Two years later and this had dwindled to hundreds or less.  Nowadays we don't even notice.

"As it happens, I did not think Mr Carney was in the frame because a well-placed Treasury source told me - in terms - that the unknown fifth person on the short list 'was very unlikely to get the job'". Pathetic. And wasn't he subdued yesterday, interviewing Boy Osborne?  Hope his fat Beeb package is success-based.

2.  Leaking Money

UBS - what a shower. When Kweku Adoboli was being sent down, the news channels played extracts from tapes of calls between UBS Compliance and the talented trader, with such gems as:  

Financial Controller: "So you're going to confirm exactly which counterparties are involved, and the quantum of the exposure".  

Adoboli:  "OK, will do". 

WTF ?  I fell off my chair.  There shouldn't be a trading floor on the planet that doesn't have deal-capture systems, confirmation processes and risk metrics which make these issues 100% transparent and subject to checks by staff who are independent of the traders, by the end of each trading day at very least, but near-real-time is the standard.  It should be like trying to do a transaction on the web: a required field pops up, and if the entry doesn't compute perfectly, instantly, you can't progress to the next stage at all.  (Given that Adoboli was in a 'Delta One' outfit - deals with the simplest risk profile - there aren't even any complex sums to do.)  

Phantom counterparties ?  Trade books he 'set up himself' ?  And all this 3 years after the banking crisis.  So UBS indeed deserves to get it in the neck.

Gaol.  Only language they understand - and corporate fines be damned.

OK, not you Pesto - ignominy will suffice.

ND

JP Morgan: Rum

You don't need us to give you links to the current slew of lurid JP Morgan / London Whale stories: you can hardly move for them.  And what about that Ina Drew, eh?  (Must be OK with a name like that.)  Her with the "enviable reputation as one of its best managers of balance sheet risk" - and the $32m pay-off.  Nice work !

But if this seems to have come from out of a clear blue sky, here are a couple of suggestions for google searches in a quiet moment.  Try JP Morgan / silver:  the word 'manipulation' pops up before you've barely entered s-i-l-v, and you'll need a whole afternoon to sift what you find.  Or you could try prospecting for JP Morgan / gold -  blow me, it's 'manipulation' again, and away you go for another afternoon at the races.  (That Blythe Masters ... what a gal!  Imagine her pay-off when she retires.)

Then type in JP Morgan / coal: the word 'loss' will beat you to the punch, and you're off on another fascinating thread.

Seems these chaps have, errr, form: it's beginning to look distinctly careless.  Either that or Astonishing Bad Luck.  And some rather unenviable public relations episodes, too.  What are we to think ?

ND

So, Farewell, Hector Sants

So. Farewell (again)
Hector Sants

"It was nothing to do
With me
Guv'nor"

Yes
That was your catchphrase

"Sants is Pants"
That is what
Others said

Now you will never
Be
Guv'nor


E.J.Throgmorton
(0.5%)

Here's Why Banks Must Be Broken Up

... or at least, their retail operations hermetically sealed from their 'investment' banking activities.

And here's an illustration of why. In 2008, staid old Bank of America was bullied into buying the troubled investment house Merrill Lynch, as part of the emergency actions taken at that time. Needless to say, Merrill is stuffed to the gunwales with toxic waste, in the form of CDS liabilities etc. On the other hand, BoA, being a retail deposit taker, is covered by the Federal Deposit Insurance Corp, to protect its retail customers (just as individual depositors are protected by the government in this country).

So what does BoA propose to do ? Why, transfer the Merrill liabilities to the BoA itself, of course ! Thereby transferring billions of dollars of risk (or is it trillions?) onto the US Taxpayer. And it's even getting support for this scam from the Fed - though not from the FDIC, naturally enough.

So - good luck with that one, America.

Yes folks, we all know the score: bankers the world over will do whatever they are allowed to get away with - which certainly involves harnessing whatever security that is available from retail ops, to leverage their speculative dealings. Hopefully ... this brazen and blatant stroke by BoA will highlight the dangers and stiffen the resolve of our own banking authorities to carry through the rather half-hearted measures they have in mind.

Well - a man can hope, can't he ?

ND

Osborne's Bank Farce

Well, at last tonight we are to hear what Osborne has been agitating for so long - a real change of terms for the UK clearing banks.

With a proposed split into subsidiarised retail and non-retail businesses. The devil is in the detail thougth and it will be interesting to see where SME loans etc get parked - at the moment it seems all Non-Retail business is fair game. This makes sense to barclays where for a while now barclays Capital has been absorbing the UK Corporate bank. After all, you may as well make all the non retail banking high risk if you have to split the company anyway.

There are three downsides to the proposed model:

1 - it is not an international agreement, and it needs to be. The UK is no doubt hoping others will follow in its footsteps, but maybe HSBC etc will tire of the Regulatory change and upsticks. Even trying for an international agreement was beyond the wit of our politicians
2 - By saying 'Casino or Non Casino' you push the banks into taking more risks on the Casino side to make up for lost profits on the retail side. Great, we have a higher risk system and likely it will be more leveraged to with the removal of customer deposits. Worse for some of the banks, the capital needed to be held will be so much higher that they will be forced to take high risk loans on to try and generate some returns.
3 - Retail banking was not that profitable anyway, so now these banks will have to do something to help offset the extra capital requirements and regulatory burdens - there is only one sucker who is going to pay for this.

Overall, we will have a safer banking sector, but it will come with both more (albeit non-systemic) risks and higher costs. As ever, a great example of Government in action.