The Tories have recently come out with two ‘ideas’ that involve financialisation packaged as ‘social benefit.’ These two bits of financial engineering will, no doubt, increase private debt and encourage more bubbling of housing. The first is their intention to build more council housing that is paid for by the future sale of the houses based on anticipation of their increase in value. The second is the funding of social care through the use of assets above £100,000. For most people this will be in the form of a house which will have to be re-mortgaged via a ‘financial product’ (hold crucifixes aloft), then, when the owner has died, the family or relatives will have to sell the house and pay the costs with interest. In short: more wealth extraction from the community. Given present household debt is at 130% of GDP this does not look good.
Financialisation has been the hallmark of neoliberalism. New ways of playing money tricks on people are legion. Perhaps one of the most nefarious is the LOBO loan. The acronym, reminiscent of a pop group of the 80’s and being, appropriately, the first two syllables of the word ‘lobotomy’, is one of the most lethal ‘instruments of financial destruction.’ LOBO stands for Lender Option Borrower Option and is a very long term loan ( 40-70 years). Cash strapped local authorities, who have been savaged by Government cuts, are using these loans as they have, at first sight, a very low interest rate, called a ‘teaser rate.’ BUT embedded into the complex structure is the right of the lender to set a new rate with the borrower who then has the ‘option’ to repay the loan with a hefty ‘exit fee’ or accept the new rate. This type of loan has appeared in the news hard on the heels of other ‘scams’ and scandals such as PPI, Libor and interest rate swaps and has left some local councils so much in debt that they are having to cut basic services to their communities. The LOBO loans involve complex derivatives called ‘Bermuda Swaptions‘ and it has been pointed out that their complexity is of such an order that only experienced brokers would be able to understand them; yet they were sold to council officials who would have had limited expertise in this area of finance. Moreover, the brokers who sold these loans were usually highly rewarded and thus incentivised to ‘flog’ them to local authorities. One of Britain’s poorest boroughs, Newham, took out LOBO loans with banks via these brokers and by 2015 had bank debts to the tune of 0.5 Billion.
On top of this it faced Government cuts of 35%. Facing this debt and a housing bubble it found it could not provide enough housing for its own community. Many other councils have been similarly affected and only recently, at great cost has Newham escaped the clutches of the LOBO.
And guess what? Debt Resistance UK tells us that a brokerage firm dealing in these loans was run by an ex-Tory Treasurer, Michael Spencer whose company had connections with another brokerage firm run by present defence secretary Michael Fallon. There is no suggestion of anything illegal here just your common-or-garden wealth extraction destroying communities, hope and creating real intergenerational debt.
All strong and stable as you can see.