Former derivatives trader ‘deeply uncomfortable’ over LOBOs

A House of Commons select committee has heard concerns about the relationships at the heart of LOBO lending to local authorities, including a former derivatives trader who described being “deeply uncomfortable” about the arrangements.

MPs on the communities and local government committee opened a probe into LOBOs this week (Monday) following a broadcast earlier this month by the Channel 4 Dispatches programme.

The committee heard from former Barclays Capital derivatives trader Rob Carver who described his misgivings about LOBOs.

Carver, who also appeared in the Dispatches documentary, said: “My feeling was that I wouldn’t do these deals if you put a gun to my head. So, I asked myself when I was doing this job, why were local authorities doing them?

“And one of the things was in terms of the mechanics of the markets. There is a chain of fees that flows from councils – to treasury management advisers, to brokerage houses like ICAP – to advise them and protect them, if you like, against being potentially mis-sold, or whatever you want to call it, these products.

“Now, we were paying commissions to the brokers as well, and this made me very very concerned because I didn’t see how brokers could be giving their ultimate client, the councils, independent advice when they were being paid by us. Subsequently, I found out that they were also being paid by the councils as well.

Carver continued: “The brokerage fees were quite large compared to the fees we normally paid. There was always a lot of pressure to pay higher fees. It just smelt and felt to me like there was something really dodgy going on. I can’t prove that but there’s clearly a kind of moral hazard and that made me deeply uncomfortable.

“At the end of the day we were dealing with councils rather than hedge funds or other people who, in my opinion, knew what they were doing. I have never worked in a local council but I just felt, if I was in their seat, I wouldn’t do them in a million years, so why are they doing them?”

Evidence was also heard from Abhishek Sachdev, chief executive of Vedanta Hedging Ltd, who was another commentator in the Dispatches programme.

Sachdev described his concerns about the relationship between brokers and treasury advisers over LOBO loans. He cited the advisers Butlers, formerly owned by broker ICAP.

“It happened that ICAP owned Butlers at the time and where Butlers were the treasury adviser ICAP happened to be the chosen broker on 77% of the occasions.”

Sachdev also spoke about the relationship between advisers Sector and brokers Tullett Prebon.

Sachdev said: “They weren’t owned by, but had a financial relationship with, Tullett Prebon and where, again, Sector were the treasury management adviser we found that Tullett Prebon were chosen on 58% of the occasions.”

He added: “So on both occasions it was above 50% which suggests, potentially, some financial incentives were skewing some of the relationships.”

Reporter Anthony Barnett, who presented the Dispatches broadcast, also appeared before the committee to describe his findings. The committee is now taking written evidence before considering what action to take in September, according to a spokesman.

The Local Government Association has already written to the committee, stating that the Dispatches claim that councils have taken £15bn of LOBOs overestimates the scale.

It said: “The only national figures currently available show a total of £8bn for LOBOs, and the total is unlikely to be above £10bn.”

The LGA added that it believes LOBOs are a legitimate financial instrument for local authorities to use and criticised comparisons made in the programme between LOBO rates and today’s interest rates.

“Any borrower, however expert, can only make decisions based on the information and the offers available at the time. Comparing the costs of managing an historic debt portfolio against what they could have been in other circumstances is rarely a valid comparison.”

The London Borough of Newham, which also featured in the Dispatches programme, also submitted evidence vigorously defending its use of LOBOs.

It said the impact of LOBO debt had resulted in a dramatic reduction in its average rates of debt.

“In 2007/08 the average rate of external debt was 9.02% – the impact of debt restructuring using LOBO debt had reduced that average rate to 5.96%, one of the lowest rates amongst London boroughs.”

In a statement to Room151 Barclays Capital said: “These loans have helped provide councils with the financing needed to build new schools, roads and parks. They are straightforward, fair, and easily explained to local councils.

“The average interest rate which Barclays charged for the loans was around 4.5%, which is typically cheaper than the public sector loans available to local councils during the period.”

Capita Asset Services (previously Sector, which acquired Butlers in 2011), declined to comment on allegations made in the hearing.

Tullett Prebon and ICAP were unable to comment by the time of publication.