Newham to save £143 million by terminating a big bad LOBO

Fantastic news! Newham will save some £3.5 million interest per year (including £1.5 million extra off our housing loans). Many thanks to all those who fought for justice so long including our new Mayor, Rokhsana Fiaz, Cllr John Whitworth as well as Newham officers and our advisers. Special thanks also to Joel Benjamin, Abhishek Sachdev and Nick Dunbar. 

NB We still have one wolf to terminate. 

(LOBO is also Spanish for Wolf) 

Newham Council to save £143m after terminating Lender Option Borrower Option (LOBO) loans with bank

"Newham Council has struck a deal with NatWest bank over its Lender Option Borrower Option (LOBO) loans that will save the Council up to £143m, allowing more money to be spent on services for residents.​

​The termination agreement will allow Newham to pay off the LOBO loans at a considerably lower rate of interest, saving the equivalent of £3.5m per year over 41 years, which was the length of time the loans still had to run.

Newham will now enter into agreement with the Public Works Loan Board (PWLB) to pay off the loans at much lower rates of interest. The PWLB is the Government body that lends money to councils.

The deal, agreed following lengthy negotiations with the bank, will put the Council in a better position to take advantage of current low borrowing rates.

The Council took out six LOBO loans, each worth £25million, with the bank in 2009. Terminating the loans will remove significant financial risk to the Council. This will improve its financial standing at a time of austerity and enable it to invest in services that benefit the Newham residents.

The Mayor of Newham, Rokhsana Fiaz, said: “I made a promise to Newham residents in my election manifesto last year that I would clean up the Council’s budget. A key element of that was to address the scourge of risky LOBO loans taken out under the previous administration.

“After just a year in office I have made an important step towards achieving this and it will save us significant amounts of money every year.

“Over the past ten years that the loans have been in place, it’s cost us an extra £31million in interest payments compared to borrowing from the PWLB. That’s money that should have been spent on Newham residents.

“Earlier this year, I made a promise to Newham residents that I’d make every penny count and that’s why this Council filed a claim against the bank in the High Court in February. The deal that we’ve successfully nailed down today means that we’ll be saving up to £143 million for Newham residents, which is a successful resolution of this litigation."​​

Select Committee Hear Damning Evidence on LOBO Loan Scandal And Conflicts

I was at the Parliamentary select committee hearing yesterday with Newham Councillors, Cllr Fiaz and Cllr Whitworth. Bearing in mind the savage cuts in our budget, I was incensed to hear futher details how Councils were duped into buying LOBOs when paid advisers were also receiving commissions from the Banks. I will post my thoughts later.

Below is a press release from Debt Resistance, who I do not always agree with but let us all say well done for their work in exposing this national scandal. 

"Communities and Local Government Select Committee Hear Damning Evidence on Local Government LOBO Loan Scandal And Conflicts Of Interest With ICAP and CAPITA Treasury Advice.

The Communities and Local Government Select Committee inquiry into LOBO loans to local authorities heard evidence on Monday from Vedanta Hedging CEO Abishek Sachdev and former Barclays Capital trader Rob Carver on the back of Debt Resistance UK FOI research featured in C4 Dispatches – ‘How Councils Blow Your Millions’. Presenter and C4 journalist Antony Barnett also fronted the committee, broadcast live on Parliament TV.

Highlights of evidence submitted during the hearing included:

Antony Barnett (C4 Dispatches):

'Based on data obtained via FOI's by Debt Resistance UK, Dispatches, and from Government sources, we estimate 250 councils have LOBO loans, and there are around 1000 individual LOBO loan contracts'

'Brokerage fees [on LOBO loans] are significant and this is public money, we can estimate from Freedom of Information requests councils paid £25,000.00 in brokerage fees on £10million pound LOBOs. So over all, we are talking tens of millions of public money, being paid to ICAP, Tullet Prebon and other brokers - who were also being paid commissions from the other side. On an equivalent Government PWLB loans, I think they only paid £75'. 

Rob Carver (former derivatives trader - Barclays Capital):

[LOBO loans] are: 'the kind of risk that makes traders and hedge fund managers wake up at night screaming. It’s just horrible, horrible stuff, and I don’t think anyone who understands it would do it.'....  ‘I wouldn’t do these deals with a gun to my head.'

'On average, looking at interests rates now, you'd expect LOBO loans to be worse value than Public Works Loan Board (PWLB) loans. The reason you know that is because thats what the loan breakage costs tell you. The break costs tell you the expected value of that loan going into the future. The fact the breakage costs are so much higher tells you on average all the derivative models think LOBO loans will be a worse deal than PWLB loans.'

Abhishek Sachdev (CEO Vedanta Hedging):

'I would categorically say I don’t believe you could find a finance officer or treasury officer in a council who could assess the risks and rewards of these LOBO products. Even FTSE 250 businesses wouldn’t be able to analyse these on their own.’

'We looked at exit (breakage) fees for both PWLB loans and LOBO loans. On PWLB loans the exit fees were 38% of the loan value. On LOBO loans, the exit fees were greater than 90% of the loan value'.
 

In response to evidence submitted during the hearing, Newham Council Labour Councillor John Gray said:

'I was incensed to hear of the massive hidden LOBO loan kickbacks that banks paid 'independent' council advisors that were supposed to be representing the interests of residents and taxpayers'.

Despite damning evidence of profiteering, amounting to the systematic manipulation of local government finance by the financial sector, the Commons CLG Committee has not announced a full inquiry, nor scheduled further evidence sessions at this stage.

Instead, individual named parties will be privately invited to submit evidence to the Committee, with no further action expected on this matter until at least September, when a summary report will be prepared.

In response to the news the CLG Committee will not conduct a full inquiry, Joel Benjamin of Debt Resistance UK said:

 "Instead of a full public hearing, where evidence is scrutinised and broadcast live on Parliamentary TV, the CLG Committee have allowed a situation where CAPITA, ICAP, Tullet Prebon, RBS and Barclays are granted preferential treatment and will submit written evidence to the Committee in private, with no scope for either forensic questioning by MP's, nor public oversight.

I fail to see how this opaque arrangement is in the interests of UK taxpayers, who are billions of pounds out of pocket as a result of LOBO loan borrowing from banks and demand answers as to why this scandal has occurred, despite attempts to toughen regulation since the banking crisis. Parliament and The FSA both failed in their duty to fully investigate Treasury Advisors following the Iceland banking crisis in 2009. This matter cannot be swept under the carpet yet again. 

Billions of pounds of taxpayer money is ultimately at stake here, with serious questions of impropriety to be answered. Parliament must fully scrutinise public sector borrowing from City of London banks and address conflicts of interest with the unregulated financial advisors that recommend LOBOs whilst accepting undeclared kickback payments from banks and brokers.” 

Failure of the CLG Committee to initiate a full public inquiry highlights the limits of institutions including the Financial Conduct Authority and Local Government Association that failed to spot the LOBO loan scandal to act in the public interest. DRUK insists citizen debt audit pressure must be applied to local authorities to ensure this issue is taken seriously.

Many local authorities which do not fully comprehend the long term risk and cost implications of LOBO loans have rushed to defend LOBO deals. DRUK's Jamie Griffiths observes:

"LOBO loans present terrible value for taxpayers despite arguments to the contrary. By extending the life of the loan and giving up the ability to repay when interest rates are low, councils end up paying significantly greater sums in interest than they would by borrowing from central government. While so-called 'independent' auditors look the other way, taxes collected by councils end up paying not for essential services but to feather the nests of bankers, brokers and advisers."

Already City Watchdog The FCA are seeking to distance themselves from responsibility for this fiasco, despite being directed to investigate Treasury Management Advisors by DCLG in 2009, yet refusing to do so.

The FCA claim to lack the powers required to investigate conflicts of interest within the very firms they are supposed to regulate – with an FCA spokesperson confirming that local authorities are "sophisticated" borrowers:

 

Ludovica Rogers from Debt Resistance UK continues:
"DRUK is calling for a UK wide audit of Local Authority debts, a thorough regulatory investigation into the systemic abuse of Local Authority finance by the financial sector and where appropriate legal and enforcement action.
 
We call on people and local grass-roots groups to join the campaign and start organising their own local action group. We need a localised decentralised campaign spread across the country run by citizens for citizens.
 
This is not a campaign against Local Government. It is a campaign to reclaim our democratic institutions from the clutches of the financial sector. We need to keep the pressure up and insist that our Local Authorities are run in the interest of their citizens and not the interests of the City of London.”

Debt Resistance UK intend to submit FOI evidence to the CLG Committee on LOBO loans, but as yet have not been called by the CLG Committee to provide evidence.

For press inquiries email: press@debtresistance.uk  Phone: 07543219635

Links to further information:
 UK Local Authority Debt Audit website: http://lada.debtresistance.uk/
Debt Resistance UK website: http://debtresistance.uk/
Interactive map of local authority debt: bit.ly/LADAmap
What is a LOBO loan? http://bit.ly/LOBOLoan
LOBO Loans are potentially illegal http://bit.ly/DebtTrap
The conflicts of interest http://bit.ly/LADA3