Were the banks guilty of insider trading with interest rate swaps?

The banks are once again in the news over the long running issue of interest rate swaps and channelling commercial mortgage requests down the swap route. The alternative option in many instances was that if customers refused to take the banks advice their mortgage application was turned down - ergo. no loan.

Now events are catching up with the banks and to all accounts it looks as though they will have to pay the inevitable costs of these schemes in compensation.

For many on the receiving end, it has not only destroyed their businesses but also their lives and left a wake of destruction in the form of divorce, family break up and so on. Inevitably some may never recover and this is especially relevant bearing in mind how long these cases take to resolve. Often 5 years plus and in the meantime they live in limbo.

The cornerstone of these schemes was geared around a future rise or fall in interest rates and depending upon which way they went the borrower was either a winner or loser.

However, this simplistic explanation belies many underlying issues such as:

  • Normal business customers are not in the financial markets or the 'risk' game, which is completely alien to them and outside their field of expertise
  • Their customers had little or no concept of gearing and were way out of their depth with intricate financial arrangements
  • They were not in the business of 'gambling' on the financial markets - unlike the banks which use customer’s money to fund their risk taking
  • The requirement of those applying for mortgages was for a simple loan on known terms and repayment schedules. Whilst they accepted basic interest rate fluctuations could influence monthly repayments, most of them really did not understand the pivotal role of interest rates (swaps) or the ramifications of these schemes being recommended by the banks
  • Finally they believed the banks offered them a duty of care when offering advice or providing financial products

The banks knew full well that a 'normal' loan would in all probability not give them sufficient up-side - especially at a time when rates were in a downward trajectory and would in all probability continue to fall

There is a sound argument that because the banks were cosy with the BOE (Bank of England) they may have been a party to their thinking (overtly or covertly) over interest rates. In any event the banks were certainly aware of global policies in this area; whereas their customers were not so well informed.

Therefore, in the light of these facts, surely the banks had an inside track and have profited from information not available to their customers. However, to compound this issue, they went further than simply having this information, they tried to coerce prospective borrowers into disadvantaged loan contracts using this inside information.

All this must surely indicate that the banks actions were tantamount to insider trading. why else would the banks have introduced these schemes - after all no-one in their right mind is going to introduce a scheme where they lose out!

Solution

Clearly the banks themselves are inanimate corporate umbrella institutions and simply entities for those cooking up these schemes to hide behind.

RBS, Barclays, Lloyds etc. do not come up with these ideas - it is the employees & people behind the banks that do, in the knowledge that they will never be held personally accountable for the damage they inflict.

With this in mind it is about time that the rules were changed

  • Somebody must have come up with the idea
  • A group must have discussed the idea
  • Someone must have approved the idea in order for it to be implemented

Bearing in mind that every telephone call made to the banks is prefaced with a warning that the conversation is being recorded (for training purposes!), it should not be too challenging to arrange to a complete audit trail to be associated with every new idea (wheeze) the banks introduce for their customers

Once this process is in place it is then a simple matter to determine those responsible for introducing things such as 'interest rate swaps' and make them personally liable for any losses incurred as a result of their actions. No hiding behind the corporate entity and spreading the liability - you took the decision, so the liability is yours alone, although the bank will pick up any deficit one the individual employee(s) have been 'cleaned out'

After all this is what accountability is all about - being responsible for ones decisions and actions and having to pay the price if one gets it wrong!

Tags: | Categories: Banking

Shareholders & bondholder have a right to expect 'due care' when any organisation selects board members or a CEO. Especially if they are subsequently (bondholders) expected to suffer a 'hair-cut' in order to bail out the bank for any ensuing problems.

Banks should be run by proper proven bankers with an acknowledged track record and they should not adopt some woolly thinking egalitarian idea of including 'all comers' including those who have no experience or knowledge about banking

This is especially relevant to the approach used in this instance by the Co-operative bank and in any event a simple background check would have revealed that Paul Flowers had been:

Paul Flowers resigned from Bradford Council after pornographic material was found on his laptop

Flowers quit charity over '£150,000 false claims'

Interestingly this only initially came to light because someone felt they should blow the whistle on Mr Flowers, who then trotted out all the predicable excuses (we have heard them all before) which simply don't wash

And as for Mr Milliband - just take it on the chin and stop trying to muddy the waters by blaming the conservative party for other totally unrelated funding issues. The conservatives will have to answer for their funding sources in due course, but for now just deal with the matter in hand.

The message is pull together on this one and stop trying to score gratuitous points

The questions are therefore:

  • When can we expect to see a 'class action' by the Co-operative bond holders?
  • Should those involved in selecting Mr Flowers be liable for all their assets (house, pension, investments etc.) to help cover the banks losses? If so, when can we expect to see his house on the market and a cheque to the Co-operative for the balance of his assets?

Both of these approaches would send a very clear message for the future - hit those responsible where it hurts, in the pocket; because that is the only thing people nowadays understand Whereas, yet another costly parliamentary investigation (whitewash) with no teeth or satisfactory outcome is hardly the way forward.

The rhetoric from Mr Cameron may sound good but in reality it is a complete waste of time and money funded by the taxpayer

Tags: , | Categories: Banking

For some, the concept of being able to transfer funds around the world without being monitored by Governments is an ideal solution

Historically, before present day banking, we only need to look at orgainsations such as The Knights Templar, who were the most powerful bankers of their day

Taking a leaf out of their money transfer methods for merchants which operated as follows.

The merchant visited the local Templar branch and handed over their money in exchange for a slip of paper containing an encoded message. On arrival at their destination this encoded slip of paper was redeemed by the merchant for the money - all very simple and avoided the money being stolen from the merchant in transit

Now compare this with the operation of BitCoin which can be deposited into any BitCoin address after a cash or SEPA transfer has been made. Who says money trafsfers are monitored?

What a simple and effective method of funding a transaction or any other illegal exercise

Tags: | Categories: Money

Installing a renewable energy source in one’s home is a fairly expensive exercise, which by its very nature limits the availability to those who can raise the funds or access it from their own resources.

The fact of the matter is that for those lucky enough to be able to afford the installation of solar PV, the benefits are huge and with Government imposed subsidies (Feed In Tariffs – FIT’s), ‘investment’ returns in double figures are easily achievable for the next 20-25 years. Where else could one achieve these returns?

Additionally, don’t forget that all these subsidies have to be paid for by someone, somehow in a two stage process:

  • Generation tariff – simply for producing
  • Export tariff – for selling any surplus over and above one’s own consumption

So who pays for the subsidies - Feed In Tariffs (FIT's)

This is just to provide a comparison - using the worst case scenario (but smallest installation & therefore cheapest) of Solar PV

Generation Tariff = £0.1490 (14.90p) per kW + Export Tariff = £0.045 (4.50p) per kW hour - giving a total subsidised price of £0.1940 (19.40p)

and at the time of writing the prices from EDF are £0.1368 (13.68p) per unit plus an annual £65.70 standing charge

The figures would seem to speak for themselves

 

It would seem as though these subsidies for the few are mutualised over the energy providers entire customer base

Quote

The suppliers pass on the cost of the Feed-In Tariffs scheme to all their electricity customers

... so the bottom line is that people who don't install renewable energy systems pay for those who do!

 

But what about the rest of the population (i.e. those in rented accommodation or first time buyers), who simply cannot afford to play the subsidy game and yet are expected to fund the fortunate minority who have their own renewable energy sources as well as handsomely subsidised income to go with it

Has anyone actually looked at the Governments Green Energy scheme (Energy Act 2008) from the point of view of the taxpayer, energy market or simply overall fairness in general?

In reality interference in this manner by the Government has completely distorted the energy market, furthermore the imposition of additional green levies has kept the energy price un-necessarily high and disadvantaged whole sectors of the population for the benefit of a few

Whereas another approach could have been taken

  • Firstly  remove all grants and subsidies
  • Then make renewable sources (i.e. PV) a mandatory integral part of all future new build houses and offices (domestic & commercial). With 200,000 houses anticipated every year the costs of installation would plummet (£5,000 down to say £2,000) and within a very short time there would be a substantial pool of renewable energy generating properties (in 5 years 1 million homes), covering their own needs and exporting surpluses to the grid

The prices of renewable energy would then be linked to supply and demand and not kept artificially high because of ridiculous Government imposed rules and hand outs

Surely a far better approach by allowing market forces to prevail, with little Government interference and no grants or subsidies - resulting in potentially lower energy prices

And it gets even better

BIM40520 - Specific receipts: domestic microgeneration: Income Tax exemption for domestic microgeneration

With effect from tax year 2007-08 there is an exemption from Income Tax for an individual’s income from the sale of electricity generated by a microgeneration system where:

  • the system is installed at or near domestic premises occupied by the individual, and
  • the individual intends that the amount of electricity generated by the microgeneration system will not significantly exceed the amount of electricity consumed in those premises

For the purpose of this exemption ‘domestic premises’ means premises used wholly or mainly as a separate private dwelling

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