Los Lobos -‘The Wolves’

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.

References:

Newham Council and the LOBO loan scandal

How City banks and brokers stitched up local authorities with LOBO loans

Comments

  1. Sean Danaher -

    Very disturbing and scary
    Councils should be properly funded and if they need to take out loans they should be at the same rates as central government.
    This is capitalism at its most disgusting.

    1. Simon Cohen -

      Indeed, this is scary stuff and goes back to the 1990’s the decade of financialisation when the financial industry was given free rein to invent myriad ways to siphon wealth often using spurious explanations that these ‘instruments’ were ‘increasing liquidity.’

      Joel benjamin of Debt Resistance Uk has been hard at work exposing LOBO loans, he wrote recently:

      “We’d like the Treasury Select Committee to look into this. We’d also like some of the more problematic loans to be referred to the High Court. We think there’s some legal avenue or some sort of government regulatory intervention possible whereby some of the worst value loans are declared illegal, and potentially the breakage costs could be removed or reduced under pressure from regulators or local authorities.” (see: http://www.vedantahedging.com/bristol-cable-looks-lobo-loans/).

      Ironically, Micheal Fallon, the smooth talker with the ‘bedside manner’ was a former member of the Treasury Select Committee! Conflict of Interests?

  2. Mark Crown -

    This whole thing is reminiscent of the sub-prime crisis in America that led to the 2008 crash.

    Teaser loans were a big part of getting people to go into debt – especially those with no equity in the property (watch the documentary ‘The Flaw’). It is the ending of the teaser rates that was behind the shorting of the mortgage backed security market as seen in the book and film ‘The Big Short’ which was the main cause of the 2008 crash.

    The fact that this sort of behaviour by Banks has not been made illegal post 2008 is beyond me. Even more than that it is unacceptable.

    As much as I have been impressed with the Labour manifesto, there is much work to be done putting our markets back to work more fairly and also making them think more long term. The bonus culture has to be got rid of.

    This is what one of those people warning about the potential hazards said in 2005 (this chap also appears in the documentary ‘Inside Job’):

    http://www.nber.org/papers/w11728.pdf

    And in 2012, they were still saying that this issue had not been addressed:

    http://www.econ.nyu.edu/user/galed/fewpapers/FEW%20F12/yorulmazer.pdf

    So – if not now – when?

  3. Peter May -

    Don’t I recall that many of these loans were reccomended to them by their ‘consulting partners’- like Crapita (as Private Eye would say)? If that is the case I would hope the consultants can be held responsible for the excess payments. Well I can hope…

    1. Simon Cohen -

      Indeed, ‘Crapita’ is in there as well. It has a finger in lots of pies and is an exemplary manifestation of capitalism as the ‘maximisation of self interest .’ The also chase people for TV licences and like LOBO loan floggers they are incentivised:

      ‘The BBC has ordered an investigation into how an outsourcing firm collects the TV licence amid claims that it runs an aggressive incentive scheme to maximise collection of fees from non-payers.’
      (see: http://www.theguardian.com/media/2017/feb/27/bbc-investigation-tv-licence-enforcement-outsourcing-firm-capita)’

      Capita -spreading wealth and well-being to a place near you!

  4. Charles Adams -

    Thanks Simon. Why is this story not all over the news like PPI, Libor, etc?

    It seems that nothing was learnt from 2008. If we are not careful, the student loan book will become just another rent extraction scandal.

    Until, we move decisively from rent extraction to real production there is no hope.

    I am preparing a post on where all the money goes and will link it back to yours.

    1. Charles Adams -

      “The prevailing outlook of the municipal bourgeoisie was that of the rentier: the chief object of economic activity was to secure for the individual or for the family a placid and inactive life on a safe, if moderate, income. The creative forces which [….] produced a rapid growth [….]
      suffered a gradual atrophy, which resulted in an increasing stagnation of economic life.”

      Rostovtzeff, M., The Social and Economic History of the Roman Empire, OUP: 1957

      The only difference now is that they do not stop at moderate.

    2. Simon Cohen -

      That sounds interesting Charles. there’s a book by the Greek economist Costas Lapavitsas called ‘Profit Without Production’ and I think that phrase sums it up well.

    3. Sean Danaher -

      Great Charles
      I seem to live in artificial reality at present
      I will look forward to it

    4. Andrew (Andy) Crow -

      ” the student loan book will become just another rent extraction scandal.”

      Given the way that government contracted-out student loans provision to private finance (because there is no ‘money tree’ or whatever the euphemism of the time was) it is difficult to interpret the whole student loan policy as other than a ‘rent extraction’ scheme. You call it a ‘scandal’ but the popular view (and MSM) hasn’t yet caught on to the scandalous nature of the deal.

      I read recently that approx one third of the US (at that stage $20 trillion ) national debt is composed of student loans.

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