Brent's LOBO loans at 68% premium merit deeper scrutiny

In April I published some information from Cllr Michael Pavey on the complex issue of LOBO (Lender Option, Borrower Option) loans. At the time Pavey was deputy leader of the Labour Group and lead member for finance. He confirmed that Brent Council had £95.5m in LOBO borrowing. LINK

In June 2014 journalist Ian Fraser published an article entitled 'How City banks and brokers stitched up local authorities with LOBO loans' and gave this Brent example.

Click on image to enlarge

In 2015 a Channel 4 Dispatches programme 'How Councils Blow Your Millions' revealed how banks had exploited local councils through LOBO loans and as a result a Communities and Local Government Committee inquiry was set up to examine the issue.  Bob Blackman MP was a member of the Committee.  He was leader of the Brent Conservative group on Brent Council and deputy leader of the Council when it was in coalition with Brent Liberal Democrats prior to the local elections in May 2010. The LOBOS borrowing  was arranged between November 2002 and April 2010.  Minutes of the Communities and Local Government Committee oral evidence can be found HERE

Department of Local Communities and Local Government statistics for 2015-16 showed Brent Council had total long-term borrowings of £423.7m of which £328.2m was Public Works Loan Board and £95.5m LOBOs.

The campaign Debt Resistance in covering Newham Council's massive exposure to LOBOS mentioned Brent LINK:

  At Brent Council where a similar £10m LOBO loan from RBS was analysed, it was found the council was paying £1.2m more for the loan from RBS, than if it had borrowed via the UK Treasury Public Works Loan Board (PWLB) – standard practice for councils. To exit the loan would cost Brent a further £3-4m in “break penalties  

Brent Cabinet will be receiving the 2015-16 Treasury Management Outturn Report at its meeting on Monday August 15th.  The report acknowledges the high cost of redemption of LOBOS loans:

No debt was restructured during the year and no lenders exercised options to vary the terms of loans on LOBO (Lender Option, Borrower Option) terms. The Council has borrowed £95.5m under LOBO transactions, all of which were entered into in the period November 2002 to April 2010. Unlike PWLB loans, there is no formula for the cost of redemption of LOBOs, and the price quoted would depend on any bank’s view on its commercial advantage. The banks’ positions have been insured through the derivatives markets and to renegotiate these arrangements would be very expensive. The average premium on our LOBO portfolio is about 68%: this would mean that it would cost £8.4m to redeem a LOBO with a nominal value of £5m. However, there is no established formula for the redemption price and the actual cost be higher.

The 68% average premium applied to total LOBO borrowings of £95.5m would give additional redemption costs of £65m with the possibility, as in the last sentence above, that it could be higher. It would be worthwhile for the Cabinet (or perhaps Scrutiny) to go into the issue a little deeper and particularly to explore what appears to be some complacency about the situation:

There are complex arguments made about LOBOs, by their supporters and by their detractors. The Council's position is simply that the LOBOs are part of its portfolio, and must therefore be managed as effectively as possible. There are no plans to enter into further LOBO contracts. However, it should be noted that the average rate of interest being paid on LOBOs is little different to that on PWLB debt (4.75% compared to 4.71% at 31 March) and the range of rates lower. The most expensive LOBO was at 6.234% on 31 March, compared with the most expensive PWLB at 8.875%.

Since, the end of 2015/16, Barclay’s Bank decided to give up its lender option to £15m of LOBOs. There were three loans of £5 million each, with interest rates of 3.95%, 4.35% and 4.5%, with maturities between 2048 and 2076. Barclays did this to ensure it could meet Basle III Capital Requirements that banks need to comply with by 2019. As these changes are to the borrowers’ advantages, it merely needed to notify us and provide us with the signed declaration of its change. It is likely, according to Arlingclose, our Treasury advisers, that other lenders will soon follow suit. 


These are Brent Council's LOBO loans according to Debt Resistance. The tables on its website are interactive providing more information LINK:

Bennett: What got us into 'this mess' is the fraud, errors and mismanagement of the corrupt and still out-of-control financial sector

Summary of Green Party reactions to the Autumn Statement

·         Caroline Lucas MP on Tax avoidance announcement: ‘This is a small step in right direction - but we urgently need full tax transparency’ 
·         Green Party Leader Natalie Bennett: Problems with Autumn Statement start at foundations - deficit cannot be blamed on government spending and welfare 
·         Lucas on cold homes: No excuse left for the Government’s killer complacency on the cold homes 
·         Lucas on Fracking sovereign wealth fund: ‘It’s a cynical gimmick. The best thing for the economy and the environment is super energy efficiency, properly insulated homes and investment  in renewables,’
·         Lucas on Austerity: ‘The people did not cause the financial crash and they should not be punished for it. It’s time to expose the lie is that there is no alternative to austerity’ 

THE Government has shown what is akin to ‘killer complacency’ on cold homes in its Autumn Statement, Caroline Lucas MP has said.

While she welcomed some announcements, she said the Government’s energy policies had been ‘defined by chaos and contradictions’.

There was no excuse left for the Government’s killer complacency on the cold homes she said.

Lucas, Co-Chair of the All-Party Fuel Poverty and Energy Efficiency Group, slammed news that none of the Treasury’s planned £100 billion investment in infrastructure over the next Parliament would be allocated to measures to tackle fuel poverty, noting that allocating just two per cent of the Government’s current annual £45 billion infrastructure budget to housing retrofit would allow half a million low income homes to be made highly energy efficient every year.

The Government had displayed ‘wilful ignorance of the overwhelming fiscal, human and environmental benefits of energy efficiency* and the consequences for families and the NHS are plain to see’, she said.

She added:

“People are freezing in their homes, and it’s preventable. Cold homes cost lives and cost our NHS – to the tune of well over £1bn a year. The UK’s woefully draughty and energy-inefficient housing stock is an urgentinfrastructure priority. It makes no economic sense to ignore, but it’s exactly what the Government is doing. The Government has grossly failed the public today.

“A nationwide super energy-efficiency drive would lower household energy bills,hugely contribute to job creation and the economy, as well as being essential for carbon targets. It’s a win-win – the Government’s continued inaction flies in the face of all common sense.”

Meanwhile, responding to the Statement, Leader of The Green Party of England and Wales, Natalie Bennett, said:

 "The many problems with this Autumn Statement start with its foundations. Osborne is continuing the demonstrably false claim that our deficit problems can be blamed on government spending and welfare.

"But what got us into 'this mess' is the fraud, errors and mismanagement of the corrupt and still out-of-control financial sector.

"But to admit that would require George Osborne to explain why after more than four years in government he has not delivered the urgent action needed is to tackle the still out-of-control sector, the still too-big-to-fail banks and its hulking dominance of our imbalanced economy that sucks capital and skilled people into the City and away from places where they could be helping to improve the wellbeing of all."

On the Government’s flood defence announcement, Lucas said:

“Families have been devastated by flooding and investment in proper flood protection is critical. But the Government is offering a disingenuous, feel-good fix – dig just a little, and it’s perfectly clear that this spending falls far short of what’s actually necessary to protect homes and businesses from increased flood risk due to climate change. We also need prevention – we need concrete action and investment to tackle the roots of the issue, including climate change. This is just another example of the Government’s persistent failure to climate-proof the flooding budget.” 

Tax avoidance
Lucas said: 

 “The extent of tax avoidance, tax evasion and unpaid tax in the UK economy is staggering. The Government’s apathetic policies on corporate tax avoidance have smacked of elitist double standards. Corporate tax dodgers are allowed to get away with not paying their fair share in society, while workers and small businesses are left paying the price. Today’s announcement is a small step in right direction, but if we’re serious about stamping out tax avoidance, then we urgently need full tax transparency.”

Small business

The Leader of The Green Party of England and Wales, Natalie Bennett, said:

 "Measures to help small business are in principle welcome. Another way in which we desperately need to rebalance our economy is away from the tax-dodging, low-paying multinationals back towards strong local economies built around small businesses and cooperatives.

"But the plaster of business rate relief won't heal the gaping wound caused by parasitical multinationals. We need to make the multinationals not only pay their taxes - and it is good to see rhetoric on this, although past experience says the detail of action will need careful examination - but also pay their staff decently and give them stable, secure jobs. And we need to stop big business stamping all over small business suppliers with unacceptable payment terms, and ensure their operations obey the law." 

Lucas welcomed the Chancellor’s acknowledgement that the business rates system wasn’t working but said that whilst a review is welcome news, we also need swift, positive action now.
She said:

 “We need policies with teeth - bold plans that deliver real change for small businesses on the ground.  The vast majority of businesses in my constituency are small or micro-level, and they’re are the backbone of our local economy. As well as forming part of community life, they provide valuable services and jobs. The business owners I meet in Brighton Pavilion tell me they’re struggling with business rates. This Government says it’s pro small business, so that needs to be reflected in its policies.

“We need the local business rates relief to be expanded to benefit more small businesses, who are being crippled by high rents and high rates. The Government has dragged its feet on this for years– and a review is welcome. But Brighton’s businesses need action, now.” 

Fracking

Lucas said: 

‘The Fracking sovereign wealth fund is a cynical gimmick. The best thing for the economy and the environment is super energy efficiency, properly insulated homes and investment in renewables.’

Crumbs for Londoners - Darren Johnson on the Mayor's housing policy

The Mayor expects 80% of new housing to be in these 33 regeneration areas

 Darren Johnson, the Green Assembly Member,  has published a thoroughly researched report on the London Mayor's approach to the housing crisis and the construction of  luxury blocks, such as those at Willesden Green Library, which Boris Johnson  supports as part of the solution.  The full report is available HERE

The Willesden Green apartments are being advertised in Singapore with the selling point that they have no affordable housing or key workers on site. Yesterday it was revealed that flats in Stratford are being adverised in a similar way.

Darren Johnson writes:

It is much easier for the big developers behind these projects to get the finance from banks if they can sell lots of housing off-plan (before it is built). Investor landlords are quite happy to buy off-plan and have little difficulty in securing the cash or mortgage.By putting the money in up front they have, in the Mayor’s words,“helped bring forward housing development”. The Mayor estimates that one third of all buyers of new homes are from overseas, and that two thirds of all new homes are sold to investors

.

Whether it is a Londoner looking for a buy-to-let investment,a pension fund investing in new private rented housing,or an overseas investor exploiting the exchange rates, the Mayor is a champion of anything that gets housing built.

After looking at a series of case studies and examination of the evidence Johnson concludes:

National government policy has put local councillors, planning officers and residents in a difficult spot. They are constrained by a free market dogma that says we just need developers to build more homes, and that ignores the potential for other approaches.


The law of supply and demand works with things we consume. If the price of TVs is high, produce more TVs to meet demand and prices will fall. But private developers are very unlikely to meet the demand for housing. If the supply of TVs doesn’t increase and prices stay high then demand should fall off.


But when house prices rise people see an opportunity to make money so demand can keep rising, especially if investors from around the world join the feast.


The Government is encouraging buy-to-let mortgages with tax breaks; helping people take out unaffordable mortgages with Help to Buy; encouraging overseas investors to buy new homes off plan.


The Mayor supports these policies because he says they increase supply, but of course they are also increasing demand.In fact, they are probably more successful at increasing demand than they are at increasing supply, so they are actually making the problem worse.


Councils and residents can’t do very much about this.


But the Mayor of London is in a unique position to advocate bold changes to housing policy. He has recently argued that stamp duty revenue in London should be devolved to City Hall, giving him a large budget for affordable housing.


He could go further and call for a housing policy that:


1. constrains demand by putting controls or extra taxes on overseas investors and second home owners, or by putting a tax on all land values to dampen speculation and stop developers sitting on large, unused land banks
2. gives councils, housing associations and co-operatives the money and powers to build affordable homes that stay affordable forever whatever the market is doing, instead of expecting the private market to build them
3. puts ordinary people in a better position to weather the crisis while it is tackled, for example with continental-style stabilising rent controls and protections for private tenants, ideas backed by the majority of the Assembly in its own reviews of housing and its majority support for the Let Down campaign

Comments can be sent to: darren.johnson@london.gov.uk or the researcher tom.chance@london.gov.uk

Break up the Banks: Too Big, Too Powerful, Too Risky

A  powerful  post by Green Party member Peter Tatchell in  Huffington Post LINK today

The calls for banking reform are growing. About time. The big crash was more than five years ago. Since then we‘ve had Libor rate-fixing, bonuses for failed financiers and massive fines for malpractices by leading banks. Plus mis-sold PPI, interest rate swaps, fraud, money-laundering and tax dodging. Scandal after scandal.

What’s even more astonishing is that the gamblers and fraudsters in the City of London not only got away with their shenanigans, they were bailed out of the mess they created by the taxpayer. They won, even when they failed.

Are we mugs or masochists? Why do we put up with it? The rot has got to stop. The Bank of England and the Financial Conduct Authority are not up to the job. Many people see them as agents of corporate power. Their light-touch regulation allowed speculators to play fast and loose with the whole British economy.

Today, under the auspices of Occupy Economics - an offshoot of Occupy London - a few of us are gathering in the heart of the beast, Canary Wharf, to call time on the freeloading megabanks.

http://bit.ly/11PBhNY

We propose three simple ideas to stabilise the financial system: put a limit on the size of banks, reduce borrowing ratios and mutualise ownership.

A few megabanks are holding society hostage, reaping huge profits on the back of the state, despite their failings. By threatening bankruptcy, the big banks extract public support worth tens of billions of pounds each year. The bail outs have siphoned off public money that could have been spent on health, education, job creation and better pensions.

Megabanks have the taxpayer over a barrel. They're drinking the bar dry and putting it on our tab.

Over the past 30 years, the big banks have grown bigger, riskier and fewer. Through incestuous "intra-financial" lending sprees, they've become wired to one another like a string of exploding fairy lights. If one bank goes down, there’s a risk that they all will.

The megabanks are a clear and ongoing threat to society.

Now Justin Welby, the new Archbishop of Canterbury, has challenged George Osborne:

“You continue to defend the idea of a small group of absolutely colossal banks... Is that lack of will to break them up not simply a recipe for a repetition of disasters?”

He's right. We need to end bank risk and welfare. Here's how.

Britain suffers under the financial stranglehold exercised a few very rich and powerful megabanks. They're unwieldy, over-complex and cannot be safely managed.

The solution: Cap bank size at $100 billion. Smaller banks are easier to manage and internal accountability can be stronger. Checks and balances tend to be more effective. With many smaller diverse banks, if one or two fail the impact on the economy will be less severe.

Megabanks borrow a lot and own little. With the government and public beholden to them because of the fear of what would happen if they were allowed to fail, bankers extort government handouts whenever they get into trouble because of their reckless policies.

George Osborne would let banks borrow 33 times what they own outright. How irresponsible is that? No one would expect to get a mortgage worth 33 times their deposit. It's far too much and too risky. So why should banks be allowed such astronomical borrowing ratios?

A sensible precaution would be to cap bank borrowing at around 14 times their net worth

Most of our banks are run for the benefit of a very small, privileged group of people – their major shareholders – who always have the option to get out while the going’s good.

This drives banks to be permanently seeking profit maximisation, often regardless of the cost to their own organisations - never mind the wider society.

Many French and German banks are run differently – as mutuals or in public ownership for the benefit of the customers and the common good. Why not ours?

Mutualisation would establish a stronger ethos of public service and accountability; removing from banks the pressure to put the optimisation of shareholder’s gain as their sole priority. This would, in turn, make possible a greater sense of civic responsibility in banking operations.  

These proposals are all about creating a culture of safer, responsible banking, with checks and balances to thwart, or at least minimise, a possible repeat of the 2007-08 meltdown.

Richard Paton from Occupy Economics puts it this way:

“Why are those who are brave, or honest, enough to challenge the megabanks either Archbishops or technocrats?

“Public revulsion at the banks won’t be assuaged by superficial measures. The underlying ‘conduct issue’ is that a few megabanks are able to extort profits by imperiling the solvency of the state.

“No-one seriously engaged with the issue believes the problem has been dealt with – except bank execs and the Chancellor.

“The government is in denial, determined to frame the problem as one of the ‘culture’ of wayward banks. Trying to address ‘culture’ alone is forlorn, like trying to catch a vapour in a butterfly net.

“The banking crash was driven by blind stock market pressure for ‘shareholder value’ in a sector dominated by predatory plcs. These megabanks still have their finger on the nuclear button known as Too Big – and too interconnected – To Fail.”

BankWatch with Bill Oddie: HSBC destroys the environment

Bank robbery

Lucas attacks the 3 main parties on privatisation