Reply to: Amortising Base Rate Swap

[aussielong]

Yes but why didn't they just offer a fixed rate loan?

They probably wouldn't offer her a fixed rate loan. I could not get one for investment purposes for 300K. She was only 19.

Actually, she got into a floating rate loan and a collar, not a swap. They apparently did not tell her she would have to pay if the rate fell below 4.5%. And she did not know upfront that she could not get out of the trade without significant cost. That is bad if it's true. I find it hard to believe though. Maybe she thought she had limited risk on the rising rate (capped at 5.5) and would pay back the loan if rates indeed fell below 4.5, then taking out a new loan at a lower rate - but the T&Cs of the collar have burned her.

[SimonMac]

Yes but why didn't they just offer a fixed rate loan?

It is the same isn't it.

What happened is the customer went in and said "I want a floating rate loan", then the bank wizz kids said they'd make more money if they sold a fixed rate loan so they said "sell her a floating rate tell her it's capped and we'll stick in a swap deal" bingo the bank sells a fixed rate loan to a customer who wants a floating rate.

If the customer had agreed a fixed rate loan they wouldn't be complaining, but then they probably wouldn't have agreed to the terms and shopped around for a cheaper rate. What they got sold was an expensive fixed rate loan because they didn't know it was one. There 's nothing special about a loan that doesn't go up because the interest rates do, that's why people enter into fixed rate loans.

By hiding the details of the contract meant that the bank could offer something at an apparent cheap price. It's like a second hand car salesman selling a car without the engine and then saying yaa boo sucks I never said there wasn't an engine in it.

Then who's fault is that the banks or the customers for not understanding what they are signing up to?!

[BlasterBates]

The old adage of you can't con an honest man, yes I am sure there was a bit of smoke and mirrors when selling the product but I can guess the conversation went alone the lines of this:



And if rates had rocketed I doubt people would be complaining that they are being unfair towards the bank, the customer could have asked, what happens if BoE rates drop to 0.25%, but no one could have predicted that rates will fall that far. Its not that this product has COST them £200k, they pay the same now as they did when they agreed to the loan just as with a normal personal loan its just they are whining that they could have saved money

Yes but why didn't they just offer a fixed rate loan?

It is the same isn't it.

What happened is the customer went in and said "I want a floating rate loan", then the bank wizz kids said they'd make more money if they sold a fixed rate loan so they said "sell her a floating rate tell her it's capped and we'll stick in a swap deal" bingo the bank sells a fixed rate loan to a customer who wants a floating rate.

If the customer had agreed a fixed rate loan they wouldn't be complaining, but then they probably wouldn't have agreed to the terms and shopped around for a cheaper rate. What they got sold was an expensive fixed rate loan because they didn't know it was one. There 's nothing special about a loan that doesn't go up because the interest rates do, that's why people enter into fixed rate loans.

By hiding the details of the contract meant that the bank could offer something at an apparent cheap price. It's like a second hand car salesman selling a car without the engine and then saying yaa boo sucks I never said there wasn't an engine in it.

[SimonMac]

The old adage of you can't con an honest man, yes I am sure there was a bit of smoke and mirrors when selling the product but I can guess the conversation went alone the lines of this:

RBS: If rates go up you will be capped at x%

SW: Great, I can't lose!

And if rates had rocketed I doubt people would be complaining that they are being unfair towards the bank, the customer could have asked, what happens if BoE rates drop to 0.25%, but no one could have predicted that rates will fall that far. Its not that this product has COST them £200k, they pay the same now as they did when they agreed to the loan just as with a normal personal loan its just they are whining that they could have saved money

[BlasterBates]

They sold her a floater and a swap, which is fine I think. This gives her fixed rates. Yes the bank could of done that trade themselves and then given her fixed and took a spread but I don't think it is much different in terms of exposure.

The problem is that there was no way out of the swap without huge penalties. Paying off the loan would still leave the swap in place. So if the loan is matured for whatever reason, the user still has swap cashflows to service- only way out incurs a huge fee. That probably was not made clear.

That's all very well but they sold her a floating rate loan. That's the point. I mean floating on one percentage point is pretty useless isn't it?

No-one would have bought it had it been clear. If she'd wanted fixed rate she could have easily got one. But she wanted floating and then the bank said "oh we can cap it" but didn't tell effectively that is a fixed rate loan.

If they'd been honest and offered a real cap it would have been too expensive that's why they did it with a swap and didn't tell her that the Swap meant that it wouldn't go below 4.5%.

In simple terms they offered her a floating rate loan and sold her a fixed rate loan.

There trick is the swap hedges it from going up and costs nothing and when the interest rate goes down you're screwed (assuming you want a floating rate loan). A cap would do what the cistomer wants but would have an upfront cost that means they probably wouldn't go for it.

[aussielong]

Well I see having read the case on the Landlord they sold her a capped floating rate, but actually it was a fixed rate loan.

That's still misselling because they could have sold her a fixed rate loan. They used her lack of knowledge to push out a "floating rate" loan which wasn't. Still bad, they could have been honest, and they could have used a cap derivative instead of a swap.

They sold her a floater and a swap, which is fine I think. This gives her fixed rates. Yes the bank could of done that trade themselves and then given her fixed and took a spread but I don't think it is much different in terms of exposure.

The problem is that there was no way out of the swap without huge penalties. Paying off the loan would still leave the swap in place. So if the loan is matured for whatever reason, the user still has swap cashflows to service- only way out incurs a huge fee. That probably was not made clear.

[BlasterBates]

In my view this is no different to being sold a BMW at a cheap price without being told that after 6 months it gets swapped for a Fiat Panda.

[BlasterBates]

Well I see having read the case on the Landlord they sold her a capped floating rate, but actually it was a fixed rate loan.

That's still misselling because they could have sold her a fixed rate loan. They used her lack of knowledge to push out a "floating rate" loan which wasn't. Still bad, they could have been honest, and they could have used a cap derivative instead of a swap.

[cojak]

I think that this bit got lost in the debate:

London restaurant entrepreneur Sami Wasif, who was the main financial backer of Hakkasan, said the state-owned bank had sold him a 10-year swap in 2004 without asking for his permission and that it has so far cost him £176,706.

[BlasterBates]

The payments shouldn't fluctuate. The swap is taken out WITH the loan. The swap payments net off with the loan payments (opposite direction) leaving no additional cashflows, only the fixed rate ones which are known at the start. That's the whole point of the setup.

The problem seems to be that they got into the swap and loan then decided not to take the loan, but could not exit the swap without a fee. So going forward, they were just paying the swap coupons, and no loan payments. This is why they had big cashflow surprises.

That's what happened here anyway:
RBS sold complex swap to 19 year old first-time landlord - Telegraph

Yes but that's the point they did fluctuate. The restaurant owner had a fixed rate loan and then noticed they were booking extra amounts.

Normally the bank can use a swap to hedge a fixed rate loan, but the client isn't involved, that's how they hedge loans. In this case the restaurant owner got a swap which was effectively a speculative derivative that did not hedge his loan. If anything it accentuated his loan. If you have a loan on fixed rate and interest rates go down you effectively lose out (without the swap) because you pay more than you could. In this case it was a double whammy because they actually took even more out of his account.

If the swap was there to maintain the fixed rate they wouldn't need to give you a swap would they? They just give you a fixed rate loan and that's the end of it. The bank owns the swap so they can finance it with floating interest rates.

[aussielong]

You can't compare a Swap to simply a cap on a loan, as the interest rates drop his payments go up quite dramatically.

The payments shouldn't fluctuate. The swap is taken out WITH the loan. The swap payments net off with the loan payments (opposite direction) leaving no additional cashflows, only the fixed rate ones which are known at the start. That's the whole point of the setup.

The problem seems to be that they got into the swap and loan then decided not to take the loan, but could not exit the swap without a fee. So going forward, they were just paying the swap coupons, and no loan payments. This is why they had big cashflow surprises.

That's what happened here anyway:
RBS sold complex swap to 19 year old first-time landlord - Telegraph

[BlasterBates]

You can't compare a Swap to simply a cap on a loan, as the interest rates drop his payments go up quite dramatically. This was not explained. What would have been acceptable iis f the customer paid a fixed premium on the fixed rate so that it would be clear what his cost was. What the customer wasn't told was that he had a huge bet on interest rates going up. If interest rates had gone up he would have made hundreds of thousands, but instead he lost hundreds of thousands.

This would have all been fine had it been explained to the customer. Basically a bank is expected to take on the risk of providing fixed rates by charging a premium. This is what happens when you take out a fixed rate mortgage. They didn't do this. In fact I can't see the point of this deal other than is simply seems to be a bet that the Swaps dealer at the bank thought he would win (and he did).

What business customers don't need is a huge bet on the interest rate swaps market but a plannable loan. The banks were just misselling.

A cap which is also a derivative sold in conjunction with a variable rate loan might have been more appropriate to the customer's need. Effectively this what the bank could have easily offered and packaged up as a fixed rate loan.

[aussielong]

What kind of ****ing loan is that?!?!

Are you seriously saying that it's ok for somebody to take on mortgage or car loan and then have to pay FAR more money than reasonably expected on a loan being locked into much longer term contract than loan itself?!?!

It's BS - this tulip was sold along side loans just like PPI was sold, same tulip only B2B - same way people who got loan probably were coerced into agreeing to another "good sounding" contract or they would not get loan in the first place.

That's why it was high margin product - selling tulip to people who could not say no.

A mortgage is an example of a loan like that. Anyway , I bid you good night sir

[AtW]

With unhedged floating rate loans you can get burned, as we all know.

What kind of ****ing loan is that?!?!

Are you seriously saying that it's ok for somebody to take on mortgage or car loan and then have to pay FAR more money than reasonably expected on a loan being locked into much longer term contract than loan itself?!?!

It's BS - this tulip was sold along side loans just like PPI was sold, same tulip only B2B - same way people who got loan probably were coerced into agreeing to another "good sounding" contract or they would not get loan in the first place.

That's why it was high margin product - selling tulip to people who could not say no.

[aussielong]

Do you really think businesses that got this tulip alongside loans really needed or wanted such gambles?

Yes, it's actually less risky because they locked in an interest rate at the start. With unhedged floating rate loans you can get burned, as we all know. These businesses failed to manage their cash.