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

How did the EU regulators allow this whole Cyprus matter to get to the current position?

After all the EU bureaucrats are 'hell bent' on determining (interfering with) the dimensions of a carrot, banning curved cucumbers, or some such equally fatuous exercise, so why did they fail to spot the Cyprus situation brewing or address it in a timely manner

In reality it is a culmination of bad regulation, bad politics and EU incompetence which has brought about the Cyprus situation, resulting in savers and the rest of the Cypriot population paying the price for banking failure. Most of which was avoidable if the EU had displayed a modicum of competence

The Background

Lets just look at Cyprus in greater depth

Prior to joining the EU in 2004, Cyprus had a stable economy growing at around 4% per annum with a healthy budget surplus, underpinned by financial services, tourism and property

After joining The EU, two major Cyprus banks reaped the benefits of membership by trying to attract money from Russia, Europe & the Middle East, with keen interest rates , low taxes, laisez faire (lax) local expansion policies and special deals (Russia)

As a result, money poured into the country from the targeted regions and the greater the inflow of money the more the Cypriot banks lent out

The Problem

Now this is where it gets interesting

Traditionally the Cypriot central bank only permitted banks to use up to 30% of their foreign deposits to support local lending in order to avoid massive external deposits fuelling a bubble

However, all those rules changed when they joined the EU (2008) and Euro Region deposits were re-classified as domestic rather than external/foreign money - accordingly the Cypriot Banks loan books increased by about 32% over the period of a single year

In a very short time (by 2011) the Cyprus banks were almost 8 times the size of their economy and their financial services sector accounted for half of GDP

A huge bank bubble had appeared and all the danger signs were there. However, instead of addressing the issue, the Cypriot central bank exacerbated the problem by raising the limit on foreign deposits from 30% of capital to 90%; highly risky

At this point one might well ask - where were the EU checks and balances and why did no EU regulatory system kick in?

Cypriot banks purchased over €4bn of high-yield Greek debt and lent a further €22bn to Greek companies - this was more than the entire GDP for Cyprus. Cyprus assumed that even in a worst case scenario, the Ireland approach would be adopted and bond-holders paid out in full

Unfortunately for Cyprus, this was not the case and bond-holders took a massive 'haircut' to protect the private Greek creditors

Once Greece defaulted on its debts, the country of Cyprus, Laiki & the Bank of Cyprus all went bust overnight. Clearly the government was not in a position to take on the bank liabilities which would have amounted to 145% of the country’s GDP

Nevertheless, Cyprus had in fact been almost bust since 2009 and a great many knew about this but did nothing until it was too late - Why did the EU not intervene ?

Points at issue

The Cypriot people have every right to be angered at the conduct of the EU and most of the resulting disaster has been brought about by cause & effect

  • Greece should never have been allowed to join the EU in the first place. Many say that Greece with the help of Goldman Sachs 'cooked the books' by masking the true extent of Greek debt by the use of derivatives to 'legally' circumvent the EU Maastricht rules. Thereby deferring the cross-currency swaps maturity until after Greece had entered the EU and then bringing the problem back on Greece's books to increase the countries already bloated deficit
  • Once the Greece/Goldman 'scam' became apparent no-one in the EU did anything about either throwing them out of the EU or ensuring that Goldman Sachs under-wrote the liability of the Greek participation in perpetuity
  • Therefore without the collapse of Greece one could arguably say that Cyprus would at least be €4bn better off today and not in quite such dire circumstances
  • When it became apparent that matters had gone seriously wrong with Cyprus, the EU did nothing for 9 months except dither; thereby exacerbating a problem which needed to be addressed urgently rather than avoided
  • Finally a woefully inadequate plan was produced by the EU, led by the Germans. The EU wished to punish Cyprus for attempting to become and off-shore tax haven for Russian money laundering within the EU and the population would bear the brunt of the measures

Questions that need to be asked of the EU:

  • Once the EU became aware of the Greece/Goldman Sachs issue, why did they not investigate the matter and throw Greece out of the EU, or at the very least pursue Goldman Sachs to underwrite a situation they had brought about by assisting Greece's membership of the EU ?
  • What rules were in place to prevent EU member country banking systems from over-stepping prudent lending ratios inside or outside the EU - Why were they not acted upon and and what has been done to strengthen these rules in the light of the Cypriot problems ?
  • Although they knew about the position, why did the EU put their head in the sand for 9 months whilst the position deteriorated, before addressing the issue ?
  • What has the Eurozone or any other politician done to prevent futures problems in the banking industry threatening global stability ? For instance, simple measures, such as allowing bank depositors to place their money with banks either on a Client Money basis (segregated from the bank and held as a Trustee) or Deposit basis allowing the bank to hold the money as a banker and not as a trustee - Banks And Your Money
  • What responsibility does the EU take for its part in this whole Cypriot matter - from not throwing Greece out when it became apparent that their entry figures were 'cooked' right through to inadequate (lax) rules and failure to address matters in a timely manner

All in all, perhaps the EU should be fined (say €5bn to start) for failures in their own regulatory systems, and not controlling the financial markets within the Eurozone for the benefit of the population in EU member states

Perhaps any such fines could come directly from the pockets of individuals in the entire EU administration system with EU politicians (they have clearly failed in their mandate) bearing a greater percent of the fine personally - say 50%-75% of their entire salary and perks for all the years they have been an EU politician; after all any failure in regulation occurred on their watch, so it is only fair they should be held accountable and pay the price.

Any shortfall or balance needed to make up the rest of €5bn should be provided by Goldman Sachs as recompense for their contribution to this whole mess as well as having them indemnify all future Greek related problems for the duration of their EU membership

Only by taking such measures, will it be brought home to inventive 'chancers' such as Goldman Sachs, that they cannot simply come up with schemes that impact on the wider population, without being accountable for any ensuing fallout. After all they take the upside of lining their pockets initially, so they should also be subject to the downside of covering the eventual outcome of their actions - cause and effect!

Tags: | Categories: Banking | European Union

The Government seems to be totally incapable of encouraging the banks to lend and as a consequence of their abject failure in this area we now have a whole new breed of opportunist operating in the loans market place

Businesses such as Wonga have sprung up to fill the void left by banks refusal to lend and 'oh boy' are they avaricious

These are predatory companies with a business model based on extracting as much money as possible from the most vulnerable in society and now they have moved into the business arena

Surely one of the duties of Government is to protect the electorate from 'operators' such as this - most especially as the climate for this type of operation has, in no small measure, been brought about by Governments and their incompetence

So what is the answer?

Well for starters, how about re-introducing the usury laws to curb these organisations - at least placing a cap on their avarice should make them review their business model

Historically usury has always been linked to economic abuses, mostly targeting the poor or most vulnerable in the community and it is a complete disgrace that companies such as Wonga should be allowed to operate in a manner that takes advantage of this sector of the community

Tags: | Categories: Banking

Under normal circumstances if you give your money to someone for safe keeping you would not expect them to use it for speculating in high risk areas; so why are the rules different when it comes to banks

Clearly this 'custodian' concept does not apply to the banking system, which seems to be able to lose depositors money with impunity and then expects Governments to step in to bail them out; thereby mutualising their problems over the entire taxpayer base

Surely speculating with client money is not the function of the banking system, however attractive the idea of quick profits at someone else's expense may be? We are all quite capable of gambling/speculating/trading on our own behalf if we want to, so the very fact that most people do not risk their own money in this way must mean that they are not comfortable with the risks involved

Therefore with this in mind, why should depositors with 'risk averse' profiles be jeopardised by the greed of the banks which inevitably means breaking the 'trust contract' between bank and depositor

This type of 'trading' may be highly profitable but getting it wrong can prove disastrous and essentially leaves the depositor with all of the downside and virtually none of the upside - therefore the risk/reward ratio is all geared in favour of the banks and stacked against the depositor/customer

Client Money .v. Deposit

  • Client money - cash in you accounts is segregated from the bank's own assets and held in trust accounts
  • Deposit - banks hold money as a banker and not as a trustee

Why are bank customers not given the choice of how the banks hold their money (client .v. deposit)?

Taking this approach to banking would allow customers to determine their own exposure to the banking system and moreover would permit the Government to withdraw their compensation scheme (£85,000) for those who chose to accept the risks involved with allowing banks to handle their money as deposits

Finally, just to reinforce the whole subject - there needs to be proper accountability and in this context and in this context the proponent of 'Black Swan' events Nassim Nicholas Taleb has the right approach with the 'architect rule' - if an architect builds a house and it collapses killing the occupants then the architect himself if put to death

After all there is nothing quite like accountability to provide a wake-up call for ones actions

Tags: | Categories: Banking