Toxicity of LOBO loans and Barclays sued

Wednesday 20th March 2019 08:49 EDT

Seven local councils are suing Barclays over “fraudulent” bank loans worth £550m, that they claim were wrongly sold to them following the 2008 financial crisis. 

These Lender Option Borrower Option (LOBO) loans are long term loans spanning 40-60 years with complex derivatives embedded within them wherein the lenders can charge varied interest rates. Lobos typically offer the borrower a low interest rate for the first few years of the loan in the beginning, to attract the customer but shoot up after a while. Councils taking the action against Barclays are Leeds, Greater Manchester Combined Authority, Newcastle, North East Lincolnshire, Nottingham, Oldham and Sheffield. Separately, the London Borough of Newham is also pursuing legal action against Barclays for approximately £250m worth of these toxic LOBO loans.

Abhishek Sachdev is the Conservative Councillor for Potters Bar, Parkfield and the CEO of Vedanta Hedging Limited who has been instrumental in bringing forward the case, and gave evidence about these loans to the Communities & Local Government Select Committee in 2015. 

“These councils are alleging that these frauds committed, in this instance, by Barclays which has been found guilty and fined for manipulating the Sterling GBP Libor. They also claim that Barclays are manipulating the Libor to their benefit,” said Sachdev explaining the quantifiable risks associated with these loans.

Libor is the common interest rate at which banks can lend and borrow with each other and almost all of these of loans were indexed against three months of Libor. According to Sachdev, these councils would not have entered into such loan contracts with the bank had they known of these “manipulating tendencies”, and now want the entire loan contract and any of the associated breakage costs that are payable today to be “ripped up and rescinded”.

But, an individual bank can only have so much impact upon manipulating Libor considering the system in which these interest rates are decided. Different interest rate estimates are submitted to the British Banking Association (BBA) from across the banks. The BBA then excludes the most extreme estimates from either sides and takes an average of the rest. The rates submitted are what the banks estimate they would pay other banks to borrow dollars for three months if they borrowed money on the day the rate is being set. 

“There was collusion among quite a lot of these banks including Barclays and JP Morgan. Principally, in terms of, Sterling Libor and investment banks there are others who have been found guilty by the regulators both in America by the Department of Justice (DoJ) in US and Financial Conduct Authority (FCA) in the UK. 

“They were colluding not just to make the bank appear healthier than it was but they were genuinely colluding to boost their own internal trading profits,” Sachdev explained. 

Between 2002-12 there have been approximately 805 such loans which have been issued to 250 councils. Today, Libor is in a difficult state where it is gradually being phased out and cannot be manipulated either. But, in existing cases, the councils can only file legal claims against these banks and basically force the bank to enter into a normal litigation process. This would either lead them to  trial or to some sort of negotiated settlement before going to trial. But not all councils have entered into a negotiation with the bank- and only a tiny fraction have taken action about it. At the moment, there are only eight councils who have instigated proceedings.

“According to the statute of limitations, there is a time frame of six years within which you could discover and report the harm or litigate the contract on it and now they have run out of time even if others wanted to file cases,” Sachdev explained. 

The best alternative for these councils, according to Sachdev, today as opposed to the LOBO loans is the PWLB (Public Works Loan Board) loans which the councils can borrow from the Government. These loans would not be as attractive as the LOBO loans but, he explains that also these loans won’t have hidden, breakage costs either.

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