Interest Rate Swaps

Bankers. Is there any profession out there more hated right now by Joe Public?

Even the Governor of the Bank of England thinks they’re a disgrace. Perhaps it’s time he did something about it, rather than talk.

Not content with triggering mere global economic meltdown then seeing their greed sated by inexplicable bail-outs, their latest self-inflicted disaster is to knowingly sell products that totally ignore their clients’ best interests, yet line their own pockets.

In this case, up to 28,000 UK small business appear to have been potentially sold such.

The latest trick by the quartet of Barclays, HSBC, Lloyds & RBS, was to load loans to victims that even put them out of business. Many victims were no more sophisticated than a hard-working fish ‘n chip shop.

So what exactly did they mis-sell? Well. When a small business wanted a loan, they appeared to make it contingent on taking out an interest rate swap. These come in a number of flavours, with ‘caps’ and ‘collars’ among the hedging jargon.

Here’s one broadsheet’s reporting of the malaise;

[the City regulator] found poor sales tactics including failing to provide sufficient information on the hefty exit costs involved, failure to gauge the customers’ understanding of risk and found rewards and incentives were a driver of these practices.

They only gave them a positive slant. Explaining none of the downside, such as how pricey they were to exit, that they were loaded in the bank’s favour, were little more than naked speculation, and if things went wrong, then the business could be ruined. Incredible.

So what was the message across all the talk radio and newspapers in the aftermath of such revelations?

‘Why didn’t they explain it properly and fairly?’

There’s plenty of meat in this cautionary tale for the true solution selling superstar wannabe CEO.

In fact, in the dark days when I actually worked for someone, one of my bosses once said to me something along these lines;

Always expose the worst-case scenario yourself.

Expose it early.

It won’t seem so bad near the start anyway.

If you don’t, the prospect will work it out for yourself at the death.

And, having missed the chance to be up-front, you’ll lose the deal.

Which considering he was proud for having “the morals of an alley cat” was quite impressive thinking! And a compelling way forward.