How Newham came unstuck with inverse floaters

In my research for Channel 4 Dispatches, I broke through Newham council’s wall of secrecy and learned that the council had at least £150 million of inverse floater LOBOs (believed to be with Royal Bank of Scotland), along with other councils such as Cornwall, Edinburgh and Newcastle that disclosed these RBS products in response to Freedom of Information requests. As discussed on the programme, these loans involve councils paying a variable coupon which goes up when market rates go down – coupons that recently have gone above 7 per cent. To understand these products, I priced a £25m Newham deal on a Bloomberg terminal, which allows the underlying cash flows to be modelled – from today until 50 years in the future. This is important because the concept of fair value involves combining all of a loan’s future cash flows into a single number.

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Shredded: Inside RBS, the Bank that Broke Britain

Ian Fraser Birlinn 2014 A bank whose bailout costs £45 billion deserves to have more than one book written about it. In September 2013 we had Iain Martin's Making It Happen (see my review here), and now fellow Scottish journalist Ian Fraser has published Shredded. Fraser's 500-page book piles on the detail as we meet a cast…

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ICAP, the half-way house on the road to Libor reckoning

What are we to learn from the charges that came out against interdealer broker ICAP and its staff over the manipulation of Libor rates? In three separate regulatory complaints, from the UK Financial Conduct Authority, US Commodity Futures Trading Commission and Department of Justice, once again we read emails and chat logs outlining intent to…

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Quantitative Easing, Interest-Rate Derivatives: A Toxic Combination

Quantitative easing has resulted in collateral damage. Municipalities, public-owned entities and small companies have been damaged as a result of derivatives contracts that locked them into paying high interest rates before the full effect of QE became apparent. Investment banks that sold such contracts have been accused of mis-selling them, lawsuits are winding their way…

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