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."​​

RBS LOBO loans a "fraud on the people"

Newham Cllr John Whitworth labels RBS 'inverse floater' LOBO loans a "fraud on the people" at RBS AGM, demanding further disclosure from the bank.

Newham Councillor John Whitworth who is also the Chair of the Scrutiny Committee at the Council posed a series of questions to RBS Chairman Sir Howard Davies regarding RBS LOBO Loans- which Mr Whitworth likened to a: "fraud on the people" at the RBS AGM in Edinburgh.

Sir Howard Davies said during BBC Question Time that PFI was a fraud on the people because "it is always cheaper for Government to borrow than anybody else." Mr Whitworth proceeded to outline that Newham was having to pay an interest rate of 7.6% on its LOBO loans, borrowed in 2010, when RBS was accessing credit from the Bank of England at just 0.5% interest.

Mr Whitworth noted local authorities were still struggling financially having received the bulk of austerity cuts, caused in no small part by RBS, which was the largest bank in the world when it collapsed in 2008. Yet despite this, RBS was looking to extract the "maximum interest possible" from local authorities struggling with cuts.

Commenting for Debt Resistance UK, campaigner Joel Benjamin said:

"Sir Howard Davies admits that it is always cheaper for Government to borrow than banks, and that PFI and by extension LOBO loans are therefore a fraud. What Mr Davies fails to recognise in an act of cognitive dissonance all to commonplace in the banking profession is the role of his own bank in facilitating those frauds, as one of the largest PFI and LOBO loan lenders to UK public authorities.

Frankly, I would have expected more from the man who once ran the Audit Commission and Chaired the Financial Services Authority"

Newham Council currently pays around 70% of all council tax income on servicing interest on debts including £563million of LOBOs borrowed from RBS and Barclays.

You can read the full transcript of Mr Whitworth's AGM question here and watch the video footage, including RBS's response.

Other major LOBO borrowers including Leeds, Kent, Edinburgh, Manchester, Cornwall, Liverpool and Glasgow  should now take action to ensure hundreds of millions in interest savings for local taxpayers can be delivered.

At least 240 councils across the UK have taken out LOBO loans, totalling £15bn. Auditors are currently considering legal objections from residents in 18 councils, filed under the Audit Commission Act last year, which could result in some LOBO loans being ruled unlawful.

Find out more about LOBO loans and if your council has them on the Debt Resistance UK website. For press inquiries email: press@debtresistance.uk  Phone: 07429637423
 Links to further information:
UK Local Authority Debt Audit website: http://lada.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

BBC "World Tonight" LOBOs Loans and why Councils including Newham are still being being ripped off by the Banks

On BBC Radio 4 "World Tonight" on Wednesday there was a feature on the LOBO derivative loans scandal  and how they have played a role in the recent bankruptcy of Northamptonshire County Council.

Check out World Tonight - 36 minutes 25 seconds into programme. (lasts about 10 minutes).

Northamptonshire had £150 million exposure in these toxic loans. Local Councillors were quoted as saying that they have to pay twice as much as they should - an extra £3 million per year. Paying up to 11.35 % interest per year, which is 22 times the current base rate.

Joel Benjamin from the campaigning group, Debt Resistance pointed out that these are 50-60 year loans and not only do you face financial mark risks from such derivatives but that you face crippling exist penalties of up to 90% of the face value if you try to get out of them.

The biggest LOBO derivative loans borrower in the Country is Newham with exposure at one stage of £532 million (now apparently reduced).

I was interviewed as one of the many Councillors in Newham, who are convinced that we have been totally ripped off by the Banks.

"We are paying far more than we should.  If we had taken out different loans from the government we would be paying about 1 or 2% per year but instead we are paying up to 7.6% in interest per year. We we are paying millions of pounds per year, to the banks, rather than spending that money on services to our residents"

I was pleased to hear on the programme Rob Whiteman, the CIPFA Chief Executive (which is the professional accountancy body for local government) made it clear that Council should actively consider suing the banks. Whiteman (a former Chief Executive of  next door Barking & Dagenham Council) said that councils could consider suing banks over the issue.

He said, “If councils have made bad deals I think they should not be defensive about that but go to litigation and challenge the banks and say, ‘We think we have been mis-sold’, or, ‘We think there are bad deals here and we want to change the nature of the deal’.

“It is very difficult for banks to defend what may be demonstrably a bad deal and so I see no reason at all why councils shouldn’t try and remedy this through the courts if that is the right thing to do.

He did however couch his remarks with caution about making sure there was a proper legal case before spending money on suing the banks.

This is what Newham Councillors including myself, Cllr Roksana Fiaz and Cllr John Whitworth have been saying for years.

Finally, LOBO stands for the seemingly innocuous "Lender Option, Borrowing Option" derivative loans. However, LOBO is also the Spanish term for "wolves".

Apparently, it was the Bank's sale teams who coined the term "LOBO" and these City traders who earned millions in commission had a great laugh at our expense that they were really wolves ripping off local government treasury teams. Who had forgotten this biblical warning:-

Matthew 7:15:
"Beware of false prophets, which come to you in sheep's clothing, but inwardly they are ravening wolves".

Have LOBOs contributed to the “bankruptcy ” of Tory Council?

This is of relevance to Newham - it has a host of RBS LOBO loans including a 2010 RBS inverse
floater. We have £563 million exposure in Newham to LOBOs. Hat top Debt Resistance press release

"Northamptonshire County Council Joins CAPITA In Crisis

DEBT RESISTANCE UK

Major LOBO loan borrower Northamptonshire County Council lurches into crisis as s144 declared with Council unable to balance its budget.

Capping off a turbulent week for financial markets in which CAPITA shares collapsed by 50% into crisis territory, Northamptonshire Council Council (advised by CAPITA) issued a section 114 notice on Friday, meaning the council cannot set a balanced budget, has exhausted its cash reserves and no new spending decisions can be made until a full Council meeting is convened to solve the crisis.

Debt Resistance UK have been warning for several years that the toxic combination of austerity cuts, lack of scrutiny and independent oversight of council finances, conflicted financial advice from firms like CAPITA and ICAPand growing debt loading would soon lead to financial disaster in town halls.

Now, with the first Section 114 notice in almost two decades being registered at Northamptonshire - it is increasingly clear that local government finances, shredded by austerity are beginning to unravel.

Northamptonshire County Council borrowed £150 million in LOBO bank Loans, including a toxic 'inverse floater' LOBO from the bailed out Royal Bank of Scotland, signed in 2010 where the council are currently paying the astonishingly high interest rate of 7.22%. View source.



On Thursday, following the crisis at CAPITA, The Conservative Government was forced to concede it had contingency plans in place at Councils like Barnet, should CAPITA fail.

Commenting for Debt Resistance UK, Joel Benjamin said:

"It appears Northamptonshire County Council has fallen victim to a lethal cocktail of cuts, opaque and poorly run shared-services and outsourcing arrangements, and high interest, risky LOBO borrowing from banks including the bailed out Royal Bank of Scotland."

With Councils now joining struggling outsourcers on the rocks - taxpayers deserve to know what contingencies Government has in place for bankrupt councils?

The only benefactors from the financialisation of town halls are the conflicted advisors (in this case CAPITA) and the financial firms paying their wages. When services collapse and Councils fail to set budgets, we will quickly find it is the British taxpayer who assumes these costs, while the auditors KPMG yet again wash their hands of any responsibility for failure."

In a month in which Carillion has imploded, CAPITA is teetering on the brink and councils look set for join them, it is high time for Government and Treasury to reassure the local government sector that lender of last resort facilities via the Public Works Loan Board will be continued and the failed austerity cuts and the fetishisation of outsourcing will now be halted."

Find out more about LOBO loans and if your council has them on the Debt Resistance UK website.

For press inquiries email: press@debtresistance.uk Phone: 07429637423

Links to further information:
UK Local Authority Debt Audit website: http://lada.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

copyright © 2015 Debt Resistance UK, All rights reserved.

LOBO Local Finance Hackathon - 14 January

please register here: http://bit.ly/LOBOHack2 

Through hundreds of Freedom of Information requests, Debt Resistance UK have obtained a dataset of LOBO loan contracts. These are risky and expensive loans miss-sold to local authority by financial institutions, to the detriment of public services.

We've already processed much of the information, but by opening it up to others we can realise its value. So join us on the hack day, to make new analyses or visualisations, to help complete the dataset or just to get to know others working on pressing issues in local finance. 

All of the data will be published online. Some is already there. See the council of Newham as an example: http://lada.debtresistance.uk/local-authorities/newham/

People with all kinds of skillsets are welcome. We will provide clear step-by-step guides on how to participate for those who prefer it.

The hackathon will be run online so you can participate from any part of the country as long as you have an internet connection. People in London are getting together at Newspeak house in Bethnal Green.

Please join if you are up for it and spread the word!

DATE AND TIME

Sat 14 January 2017

11:00 – 19:00 GMT

LOCATION

Newspeak House

133 Bethnal Green Road

E2 7DG

please register here: http://bit.ly/LOBOHack2 

"Residents Launch Legal Objection to Bank LOBO Loans at 24 UK Councils"

This report by debt resistance shows that the LOBO loan scandal is a national issue and local authorities must take action to protect residents from being totally ripped off by the Banks.

 

"Local Residents Lodge Legal Objections to LOBO Loans at 24 Local Authorities Demanding Public Interest Reports and High Court Strike Out Residents of more than twenty local authorities around the UK have mounted legal objections to risky council borrowing from banks, calling for public interest reports by council auditors, and requesting High Court declarations that controversial Lender Option, Borrower Option (LOBO) loans are “irrational” expenditure, and therefore unlawful. In an unprecedented, nationwide action, the 24 objections lodged by residents throughout July and August under the 2014 Local Audit and Accountability Act force council auditors (PwC, KPMG, Deloitte, EY, BDO, Grant Thornton) to investigate why councils chose to take out risky, derivatives laced loans from banks at high interest rates, when they could have borrowed directly from Government, with significantly less risk? (go here for live links) A local objector who has requested remain anonymous said: “The use of Lender Option Borrower Option instruments without appropriate justification compromises the work of s151 officers. They should exercise more prudence to the risks that they are exposing local authorities to. The only people who lose out so far in these arrangements are current and future taxpayers. They only way out without incurring more municipal debt is higher taxes or reducing services” External auditors will effectively mark their own homework at these Councils, after Eric Pickles closed the Audit Commission in March 2015, as part of his package of ill-considered austerity cuts. Commenting for Debt Resistance UK (DRUK), researcher Joel Benjamin said: “UK local government finance is completely unregulated, so it’s great to see local residents around the country taking action, demanding accountability over how billions of pounds of public money is spent. For the past 6 years, councils have been passing down savage cuts to the poorest in society, using bailiffs to violently recover debts from the working poor, claiming they have “no other option.” Debt Resistance UK research shows councils do have options, but councils are instead making the political choice that citizens wear the costs of the banking crisis, not the banks that caused it.” Debt Resistance UK are calling for full transparency over how public money is being spent and an end to CAPITA lining their pockets through fraudulent financial advice at the taxpayers expense. A significant proportion of the £15 billion in LOBO Loans taken out by councils amounts to “irrational expenditure” and should be cancelled, freeing up councils to refinance at lower rates of interest, making funds available for social housing and maintaining public services.” Legal objections raise the prospect of High Court legal battles, rekindling memories of when Hammersmith and Fulham and 137 other UK councils in the 1980’s took out speculative  interest rate swaps from US and UK banks. Hammersmith residents complained to the Audit Commission and a series of legal cases ending in the House of Lords, ruled the swaps contracts to be ‘ultra vires’ or illegal, because councils should not be speculating with public money. The deals were torn up, and the debts cancelled. Ludovica Rogers from Debt Resistance UK added: "When central and local government fail in their duties to act in the public interest, citizens are forced to use all democratic tools at their disposal to hold those in power to account. Local residents are now exercising their democratic rights granted by the Local Audit and Accountability Act to expose serial failings in the management of public finances, and we demand these concerns are taken seriously and acted upon." Of particular concern are the legally suspect “range LOBO” product offered by Barclaysand “inverse floater” LOBO loans sold by RBS. These loans were effectively crystal ball induced bets on interest rates by banks and council finance officers, loans now costing councils 7-8% in annual interest, when base rates are near zero, and loans from the Public Works Loan Board are available for less that 2%. In practice, this means councils like Newham London with £573m in LOBO loan bank debt now find that the equivalent of 80% of their council tax revenue is eaten up by debt interest repayments. Repayments on debt interest at Newham Council (refer to chart below) now make up a greater component of expenditure than housing. 240 Councils around the UK now find themselves trapped into LOBO loans, with breakage costs greater than 90% of the loan face value and increasing further as base interest rates drop. Comparatively, the breakage cost on PWLB loans is just 30% of the loan face value. Debt Resistance UK spokespeople are available for comment.  For press inquiries  Email: lada@debtresistance.uk  Phone: 07429637423   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 Conflicts of interest http://bit.ly/LADA3   As covered in the Media Financial Times: Local Councils suffer after taking out exotic loans Evening Standard: Council faces probe into “time-bomb” Lobo loans from City amid cuts in children’s services Independent: Sent loco by Lobos? The great council loan controversy RBS and Barclays made more than £300m selling questionable loans to UK councils MPs call on City regulators and Parliament to look at ‘lobo’ loans

Copyright © 2015 Debt Resistance UK, All rights reserved. Our mailing address is: Debt Resistance UK London London, London 10024 United Kingdom Add us to your address book

 

50 councils face residents’ objections to LOBO loans

Check out MJ article (Municipal Journal - you need to have a paid account unfortunately) on the up to 50 objections by residents in different Councils (including Newham) at the use of  "controversial Lender Option Borrower Option (LOBO) loans,

a campaigner has predicted. Joel Benjamin, of Debt Resistance UK, said the next step after that would be to ‘escalate the issue up the chain to the Local Government Association [LGA] Mr Benjamin revealed the strategy after Newham LBC’s cabinet member for finance, Cllr Lester Hudson, said his council had discussed the issue with the LGA and would consider participating in joint legal action’.

£238 million reasons to stop Barclays Bank LOBO cheats ripping off Newham Residents

This was the written question I put to the Newham Deputy Mayor and Cabinet member for Finance, Lester Hudson, at the Full Council meeting last week

To the Executive Advisor on Finance, Cllr Lester Hudson

"Last week 3 more employees of Barclays Bank were found guilty in Court of criminally conspiring to rig the Libor interest rate downwards between 2005 and 2008.

This was precisely the same time that Barclays sold £238m of so called “range lobos” loans to Newham Council. The interest repayment cost of these loans goes up if base interest rates and LIBOR go down.

So we had on the one hand, an arm of Barclays making huge amounts of money for themselves and the Bank from driving interest rates down and profiting from these moves, when another part of the bank was earning huge amounts of money from selling us loans that would cost more in interest if rates go down. This cannot be right.

In the light of these and other recent court convictions for conspiracy and fines for interest rate rigging will the Executive member please reconsider his decision not to take legal action against Barclays for fraud and damages and for us to recover the millions of pounds that Barclays and other banks have cheated from Newham residents and stop them cheating them further in the future.

 John Gray. West Ham Ward Councillor.

Cllr Hudson responded by saying that the impact of the Libor fraud was relatively minor and that it was too expensive for Newham to take on Barclays Banks by itself but he would be interested in taking part in some collective class action led by the Local Government Association.

I had the right to ask a verbal supplementary question, so I asked why hasn't he taken up the offer given by Cllr Fiaz, who shares my concerns about Banks cheating and robbing residents over LOBO to actually meet some of the experts who think Newham has a legal case against them? Especially since now it seems that there could be a "no win, no fee" deal on offer to get our money back?

He replied that he was suspicious of "no win, no fee" lawyers since there was no such thing as a free lunch.

I argued back "just meet them" for "one hour" and find out!

The Newham Recorder covered the issue here, where I expressed my disappointment at the lack of progress but the pressure group, Debt Resistance, who were also at the meeting think that the Executive have moved their position in favour of "considering" at least some sort of collective class action.

We have to move this issue on. It just makes me sick in the stomach that the Council have had savage cuts in our budget at the same time we have been ripped off by the Banks for millions and millions of pounds. Many of these loans are 70 years long!!!

LOBOs and debt servicing of Council Tax Income

I am astonished at this graph. More evidence that LOBOs are indeed a National Scandal.
Hat tip https://twitter.com/DebtResistUK

LOBOs are a National Scandal

Last week there was extensive coverage in the Standard and Independent on the UK LOBOs scandal. I have posted before on LOBOs (see labels)

Yesterday the Independent published a new report that John Mann MP and Chair of select committee, Clive Betts MP, had called for a Financial Conduct Authority and Parliamentary investigation into the scandal.

This is not just about Newham's exposure to LOBOs but a real national crisis. Councils all over the country, regardless of political control, have been completely ripped off by the banks. At the time of unprecedented austerity cuts to services, 250 Councils have £11 billion in toxic loans. It is not only Councils but Housing Associations have huge exposure as well. 

It is clear that these loans have been mis-sold but there are allegations of wide spread "kick backs" by banks to Council advisors. At the same time the banks were selling these loans some of their own traders were criminally conspiring to manipulate the Libor rate (which most of the LOBOs are linked).

The FT waded in on Friday also with a measured article by Jim Pickard, its Chief Political Correspondent (see below).

This is also an urgent problem due to legal time limits since as pointed out by in the Independent  “If councils are not looking at this they should be,” said Janine Alexander, a partner at the law firm Collyer Bristow. “If they don’t act quickly, they may run out of time.” . 

Doing nothing is not an option. I hope that the Government, the regulators, all Councils impacted and the LGA will get their act together and do something urgently. 

"Local councils suffer after taking out exotic loans

In 2009, Newham Council took what it thought was a canny financial bet: that interest rates would rise. The east London borough, the second most deprived local authority in England at the time, was an unlikely participant in the complicated world of structured finance.

The council took out six loans worth £150m on which the rate of interest would fall if long-term interest rates rose: and vice versa. But interest rates did not go up: they fell to a historic low. And now the council is facing mounting questions about its gamble.

Newham is not alone. Across Britain, councils have taken on hundreds of opaque loans. England’s local authorities have about £70bn of debt, according to the Chartered Institute of Public Finance and Accountancy.

Of that, so-called Lobo loans (Lender Option Borrower Option) make up in excess of £11bn. They were all taken out before 2012. Freedom of Information requests by Debt Resistance, a campaign group, have discovered 805 such loans to 250 councils.

The loans usually have a lifespan of about 50 years. Many are regular fixed rate loans but some are exotic products with embedded derivatives.

Even on the “vanilla” Lobos, a lender has the option at certain dates — typically every five years — to impose a higher fixed rate. At that point the borrower must either accept this or repay the loan.

Newham is in the spotlight because it is the biggest borrower of Lobo loans in Britain. During the 2000s it took out 27 such products at a face value of £563m instead of turning to the usual source of municipal lending: the state.

In its last set of accounts for 2014-15, Newham admitted the “fair value” of those loans had jumped by £256m in a year: up from £703m to £959m. “The increase in fair value is largely due to long-term interest rates falling over 2014-15,” it said.

Newham’s debts are a sensitive issue because it is seeking savings of £50m in 2016-17 after government cutbacks. It took out the loans between 2002 and 2009 to refinance £179m of old state loans and then raise £385m for capital investment including the Olympic stadium.

Cornwall also took out Lobo loans, as did Edinburgh, Brent, Newham, Lancashire and North Lanarkshire

It says the borrowing — from lenders including RBS and Barclays — led to a “dramatic reduction” in interest payments compared to its old fixed-rate loans from the Public Works Loan Board (PWLB), a wing of government.

But critics question whether Newham is still getting a good deal. Some loans appeared cheap at first but are now generating interest rates of up to 7.6 per cent.

Joel Benjamin from Debt Resistance said Newham should have borrowed from the PWLB instead. “There was no need to enter into speculative derivative contracts . . . for what ultimately constitutes a gamble with local taxpayers’ money,” he said.

Newham’s 27 loans represent a mixed bag including some ordinary fixed-rate loans. There are nine “range Lobos” under which the council must pay a higher rate if Libor falls above or below a certain range — which has happened.

Most contentious are its six “inverse floating Lobos” from RBS under which the interest rate payable rises as the 10-year interest rate falls. If the rate had risen, this would have provided a hedge: instead it fell. The six loans have a face value of £150m but their “fair value” has leapt from £176m in March 2014 to £271m in March 2015.

The council says that it took out the loans in 2009 when yields were expected to rise, not fall. “This situation was not predicted by the best pundits,” it says. It admitted the inverse floater Lobos were “expensive” but said their rate should fall amid expectations of an interest rate rise.

Other councils which took out “inverse floaters” from RBS include Cornwall, Edinburgh, Brent, Lancashire and North Lanarkshire.

Overall, Newham claims to have saved money through its Lobos, calling them “prudent, affordable and sustainable”. It says its rump of £65m of PWLB loans have a slightly higher average interest than its Lobo loans.

But campaigners say this is an “apples vs pears” comparison because the legacy PWLB loans were taken out when interest rates were much higher.

There was no need to enter into speculative derivative contracts . . . for what ultimately constitutes a gamble with local taxpayers’ money

- Joel Benjamin, Debt Resistance

A committee of MPs last year held an inquiry into Lobo loans amid criticism of their opaque nature and high exit penalties. There are also concerns about the potential conflict of interest when firms which advised councils received commission from City brokers.

Robert Carver, a former derivatives trader at Barclays Capital, told the committee Lobo loans were “horrible stuff”. “I do not think anyone who fully understood it would do it,” he said.

Barclays said it rejected any suggestion that it had not acted in councils’ best interests. It said no council had ever complained about the “straightforward, fair” loans. A source at the bank said it had made losses on its council Lobo loan book. “This is a conspiracy without a victim,” he said.

RBS said council finance functions were run by “qualified officers”.

Meanwhile, three Labour Newham councillors have criticised the authority for initially refusing to hand over copies of the original loan contracts. “If we are spending more on interest rates than we should be . . . this is an extremely important matter of concern to our constituents,” they said.

Treasury management firms, which advised the sector, typically advised councils to hold less than 30 per cent of their debt in variable rate Lobos. Newham’s Lobos — by contrast — make up 90 per cent of its debt.

That figure spiked in 2012 when £544m of Newham’s PWLB debt was wiped out as a result of the government’s abolition of the housing revenue account system.

The Local Government Association admitted Lobos were “riskier instruments” in the long term. But it said low interest rates meant no lender had yet exercised their “lender option” to increase rates.

“Some local authorities may have been able to get better deals by delaying their borrowing if they had anticipated the credit crunch . . . they can hardly be criticised for not doing so,” it said.

"Dealing with debt", Osborne-style

Can someone please tell me just why the Tories have this reputation for economic competency? Hat tip Joel from Debt Resistance.

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