Lost Lobos

24 October 2014/8 Comments
By Nick Dunbar

For as long as most people can remember, UK municipal finance has been safe and boring. In the wild days of the 1980s, Hammersmith & Fulham council almost went bust speculating in derivatives, and was saved by a landmark House of Lords ruling. Since then, UK council borrowing has been tightly constrained by central government while derivative use has been banned.

Then again, the finance industry loves to innovate around regulation. It turns out that UK local authorities are still involved in derivatives after all. Many years ago, bankers found a way of embedding the pesky contracts inside perfectly legal loans, using so-called lender’s option borrower’s option (LOBO) agreements. These bank loans attracted councils because they offered a cheaper rate than offered by central government.Screen Shot 2014-10-24 at 12.02.27

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