What is the swaps scandal all about?

By Deputy editor Tim Bennett Feb 07, 2013

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  1. Col

  (10 February 2013, 02:06PM)  Complain about this comment

  Still don't follow! Under the initial illustration shown, the customer is always paying 7%, as LIBOR cancels itself out. So it is effectively a 7% fixed rate loan. What not just sell a fixed rate loan? And why should the customer quibble. OK, rates fell, but they wanted certainty.

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  2. Tim

  (10 February 2013, 05:55PM)  Complain about this comment

  Hi Colin. The point is these are the only terms under which a client is offered a cheap fixed rate loan. The alternative might be a rate elsewhere of say 10% or no loan at all. So the bank has the client on the hook from the beginning. By combining a loan and a swap the bank can get away with a lot more in terms of hidden conditions. The more complex the product the better. My example is admittedly pretty simple. Tim

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  3. Rob

  (10 February 2013, 08:45PM)  Complain about this comment

  Tim, business owners like to reduce/mitigate risk, and to be honest these instruments done just that. I agree, the call option skewed the vanilla swap towards the interest of the bank, but again the client could have purchased a collar/floor product to mitigate that risk. Here's a question for you Colin - if you had to take out a Swap in 2008, to finance your Company that employs some 100 people, where would you see your interest rate exposure - if LIBOR went up or down? I'm almost certain you would view your Company risk on higher interest rates; especially seeing that LIBOR has never been as low as it is today... The unique World we find ourselves in today will not last forever; as soon as the worm turns I can assure you Swaps will be back in their old form.....small print and all.

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  4. Impromptu

  (11 February 2013, 02:05AM)  Complain about this comment

  I don't believe I'm about to defend the banks...
  While I sympathise with those who got caught by PPI and swaploans, I do find myself wondering at what point the principle of caveat emptor ceased to apply to financial products. If there was genuine misrepresentation then fine, bring down the hammer. But there isn't anything unlawful about a company issuing poor products - you don't have to buy them. I managed to avoid PPI by wading through the T&Cs and working out that the policy was never likely to pay out.
  This is a somewhat Hobbesian take, to be sure, but surely if you're going to take out something as important and complex as a mortgage or insurance, you should probably look beyond the glossy brochure of happy couples skimming stones out to sea? In the case of the low headline interest rate on swap-tied loans, a bit of "too good to be true" thinking would at least have led you to appreciate the complexities under the surface.

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  5. Impromptu

  (11 February 2013, 02:18AM)  Complain about this comment

  Further to the "too good to be true" thinking:
  Throughout the '00s Northern Rock perpetually topped the consumer best-buy tables for both mortgages and savings accounts. What were they supposed to be doing that allowed them such a consistent edge over their competitors?

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  6. Tom

  (12 February 2013, 03:01PM)  Complain about this comment

  Misselling? Banks sold PPI to people who couldn’t claim or said the insurance was mandatory = misrepresentation.
  However to sell a product that does what it says on the tin and only looks poor with the benefit of 20/20 hindsight is not misselling - its only being wise after the event.
  Not even financial experts could foresee government policy to keep interest rates artificially low and skew the marketplace.
  The FSA would be better placed looking at returns on capital for those who rely on interest rates to produce an income who have been let down by this policy.
  On one hand the govt tries to tell everyone to save and build up a pension pot - they then show that this effort is pointless by eroding the value and income from savings.
  Conclusion? - The only reliable plan is to spend to reduce your assets to nil so you qualify for benefits and let the state pay for everything - only downside is society will collapse, but at least then we truly will all be in it together!
  

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  7. Impromptu

  (13 February 2013, 02:40AM)  Complain about this comment

  Tom, in my case the bank recommended PPI but I refused it. It was cynical for them to try to sell polar-bear insurance in the Sahara, but they didn't demand that I buy it. Caveat emptor.

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