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!

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