Best of the Week
Most Popular
1.RED ALERT: Paris Terror Attacks - What to Expect Next - STRATFOR
2.Paris Terror Attacks, Death Pangs of a Dying Religion, and Impact on BrExit EU Referendum - Nadeem_Walayat
3.Paris Terror Attacks, Islamic State Attempting to Spark Civil War in France - Nadeem_Walayat
4.Three Shocking Charts That Prove Gold Price Rally Is Coming - Sean Brodrick
5.Stock Market Nifty-Fifty Becomes Fab-Five; Return of the 'Four Horseman' - Mike_Shedlock
6.Africa Population Explosion - Why Europe's Migrant Crisis is Going to Get A Lot Worse - Video - Nadeem_Walayat
7.Gold Mining Stocks May Be The Buy Of The Century - Jeff_Berwick
8.Grandmaster Putin Beats Uncle Sam at His Own Game - Mike_Whitney
9.BRICS? No, CRISIS - Raymond_Matison
10.UK Housing Market Affordability, House Prices Momentum and Trend Forecast - Nadeem_Walayat
Last 5 days
Vauxhall Zafira B Fire Danger Recall - What to Do Video - 26th Nov 15
Triggers In US Dollar Collapse - 26th Nov 15
Apple Stock is a 10-Year Short - Bear Market Environment - 26th Nov 15
U.S. Federal Reserve Rate Hike - 26th Nov 15
George Osborne's War on Buy to Let Sector Trending Towards Doomsday - 26th Nov 15
Will Turkey Drag NATO into War With Russia in Syria? - 25th Nov 15
George Osborne’s Autumn Statement and Spending Review Full Text - 25th Nov 15
Will Fresh QE From ECB Boost Gold? - 25th Nov 15
Sheffield, Yorkshire and Humberside House Prices Forecast 2016-2018 - 25th Nov 15
Investors Watch Out For The Auto Industry… - 24th Nov 15
BEA Revises 3rd Quarter 2015 US GDP Economic Growth Upward to 2.07% - 24th Nov 15
Stock Market Supports Are Being Broken - 24th Nov 15
Is Gold Price on the Verge of a Breakout? - 24th Nov 15
Fed’s Tarullo: U.S. Interest Rates Liftoff Should Wait for Signs of Inflation - 24th Nov 15
Silver Price, COT, US Dollar Updates and More - 24th Nov 15
UK Regional House Prices Analysis - Video - 23rd Nov 15
Crude Oil Swinging For The Fences - A 20 to 1 Option Play - 23rd Nov 15
US Dollar, CRB, Oil, Gas, Copper and Gold - The Chartology of Deflation - 23rd Nov 15
UK Regional House Prices, Cheapest and Most Expensive Property Markets - 23rd Nov 15
Stock Market Rally Losing Momentum? - 23rd Nov 15
Will Gold Price Drop Below $1000 Soon? - 23rd Nov 15
Gold and Silver Sector Big Green Light and Low Risk Entry Setup... - 23rd Nov 15
Limits to Economic Growth - Challenge and Choices - 22nd Nov 15
Long Dollar Trade and Current Copper Price Below Cost of Production - 22nd Nov 15
UK Housing Market House Prices Affordability Crisis - Video - 21st Nov 15
The Fed Has Set the Stage for a Stock Market Crash - 21st Nov 15
Stock Market Primary V Wave Continues - 21st Nov 15
Gold And Silver - Value Of Knowing The Trend - 21st Nov 15
UK Footsie Bulls Set To Foot The Bill - 21st Nov 15
UK Housing Market Affordability, House Prices Momentum and Trend Forecast - 21st Nov 15
GDX Gold Miners’ Strong Q3 Results - 20th Nov 15
End of Schengen, Stock Market’s Technical Strength Grows - 20th Nov 15
Justice for All and The Curious Case of Zambia - 20th Nov 15
Paris, Sharm el-Sheikh, and the Resurrection of Old Europe - 20th Nov 15
Silver Prices and The Management of Perception - 20th Nov 15
Stock Market Nifty-Fifty Becomes Fab-Five; Return of the 'Four Horseman' - 20th Nov 15
Waiting for Goldot Again - 20th Nov 15
Michael Curran Goes Down-Market Shopping for Gold Stock Winners - 20th Nov 15
Why Isn’t This Incredibly Bearish Bond Market Development Making the News? - 19th Nov 15
SPX Appears to have Stopped its Rally - 19th Nov 15
The Great Fall Of China Started At Least 4 Years Ago - 19th Nov 15
Using Elliott Waves: As Simple As A-B-C - 19th Nov 15
Has Deflation Been Ddefeated? - 19th Nov 15
Dow Jones Stock Market Index is Not Going to Crash - 19th Nov 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

Reasons to Get Excited About Japanese Stocks

UK Interest Rate Swaps Financial Armageddon, Bankster Mis-Selling Bigger than PPI?

Interest-Rates / Banksters Dec 21, 2012 - 01:53 PM GMT

By: Nadeem_Walayat


Following the multi-billion PPI Mis-selling scandal, just when you thought it could not get any worse, Britain's crime syndicate that is our biggest banks have been revealed to have taken another systematic bite out of thousands of unsuspecting small businesses on a scale that could end up resulting to be as big as that of the mis-selling of PPI insurance.

PPI Mis-selling Recap

The banks and building societies after losing a court case in April 2011 brought by the British Bankers Association, were forced to start repaying what a year ago was estimated as approximately £5 billion in mis-sold payment protection insurance to their customers that in the vast majority of cases proved totally worthless. Barclays started the ball rolling by trying to ingratiate itself with its angry customers by automatically refunding all legitimate claims that had been submitted to date, with the other banks seeking to write to over 3 million customers over the subsequent year which has seen the estimated total mushroom to now £15 billion.

My own personal PPI experience was when I opened a credit card account with Lloyds TSB Bank many years ago, despite specifically rejecting their offer to add payment protection insurance to the credit account they STILL signed me up to it and and started to charge me on a monthly basis. I immediately complained and stated that I specifically told them that I did not want it, against which they relented and stopped charging me for a service that I never wanted in the first place, though never refunded me for the payments they had taken. This type of behaviour illustrates why over 3 million people have been mis-sold PPI.

The mushrooming estimated compensation from £4 billion to £15 billion now has gone hand in hand with what is just as bad which are the relentless hundreds of PPI claims companies that constantly cold call throughout the day, it has got to the point where I am sure many people that just like me don't answer the phone any more to unrecognised numbers because it will likely turn out to be just another PPI claims firm or another cold caller such as "sign up to our broadband", "change your energy provider" etc.

DO NOT USE ANY PPI FIRMS - Instead as I covered 18 months ago (19 Jun 2011 - Warning on Banks PPI Complaints and Compensation Claims) this is what you need to do -

Write a simple letter of complaint to your bank requesting repayment of mis-sold PPI charges in full with interest to include:

  • your full name and address
  • PPI policy details / ref number
  • When the policy started and what did it exactly cover
  • Reason for complaint i.e. that you did not want it and nor was it explained properly, or if you are self-employed or part-time that the policy was not valid for you as you could never have claimed on it.

The financial ombudsman service has for a some time made available a detailed questionnaire that you can use as a further guide for a complaint, though this amount of detail is probably now no longer necessary (download the consumer questionnaire in Word format).

Interest Rate Swaps Mis-Selling - What are Interest Rate Swaps ?

Simply these are derivatives contracts that hedge against a change in interest rates. Very similar to the examples of Fixed, Capped and Discount rate mortgages. However most of the Swaps sold to small businesses were hedges against a rise in interest rates (usually linked to base rate), i.e. the contract would pay out the the difference between the strike rate and the prevailing higher market interest rate, or charge them if the market rate was lower than the strike rate.

No Swap No Loan

The problem at the core of the Swaps mis-selling scandal is that small business were bullied into signing up to these complex derivatives as a requirement for borrowing money from the banks so it was not as though the small business went looking for Interest rate swaps but were sold these complex products even over short phone calls in an hard sell of being tied to loans and that of only focusing on the risk of imminent rises in interest rate rises and that the Swaps would protect loans against such rate rises, all without ever properly explanation of or understanding by the customers of the consequences as they tended to perceive them in terms of capped or fixed rate mortgages and therefore failed to appreciate what would happen if interest rates fell which would have left the customers liable for the difference as the following example illustrates

Small business wants to borrow £250k from the bank over 5 years, loan requires to buy an Interest rate swap product (Fix the rate) to protect against a rate rise. Business given the impression it's like a fixed rate mortgage and unaware of the key consequence that the penalty for early exit would be 50% of the original loan £125k, also prompted to buy a fix that is longer than the loan term so that it generates more commission for the bank.

Base Interest Rate Swap Strike rate 5.5% - Credits for any rise above 5.5%, Debits for any fall below 5.5%.

Interest rates crash following Financial Armageddon resulting in a base rate at just 0.5% (for 3 years) making the small business liable for an extra 5%, or £12,500 per year (probably plus extra fees), Plus HIGH early exit costs of 50% of the original loan (£125k), despite being told that they could exit at anytime without cost.

The result is that these products have been directly responsible for bankrupting many small businesses and draining cash out of many more businesses which is the exact opposite of what the record low interest rates were supposed to achieve.

FSA Snoring on the Job Again

The FSA as usual has been deaf dumb and blind to the criminal activities of its bankster brethren as the the banking sector and regulator senior staff operate a revolving door between them, one day a banker, next day a regulator and then back at being a banker, which ensures that there is only ever 'light touch' regulation of the big banks crime syndicate.

However, the FSA under much political pressure is slowly starting to address Interest Rate Swaps mis-selling, though as explained above it is likely to take some time before businesses are compensated which means in the meantime many more businesses will go bust.

How Big Could Mis-Selling be?

It is early days, current estimates put the bill at £3 billion. However at a similar point the PPI was estimated at just £2 billion which has now mushroomed to £15 billion. So Swaps mis-selling could get to a similar amount if not greater than PPI's £15 billion.

The bill for all bankster crimes will ultimately be paid by ordinary tax payers as a continuous stream of Bank of England bailouts that is Quantitative Easing that inflates consumer prices.

What to do ?

AVOID THE Swaps Mis-selling Claims firms that will soon start springing up like mushrooms. Instead write a letter of complaint to your bank. Depending on their response, complain to the Financial Ombudsman, however compensation is capped at £150k so court action may prove necessary. In which case compile a full dossier of information, including requesting documents and transcripts of any phone calls from the bank.

UK Interest Rate Swaps Market

The current market rate is 1.5% for a 5 year swap - Which means IF interest rates go up then this should generate a credit / profit. However the RISK is that if market interest rates fall further then the difference is the price paid. Also market interest rates and those that the banks will sign you upto are not the same as banks add their commission on top of as much as 1%.

Will Interest Rates Go Up?

My long standing forecast (March 2011) is for UK base rates to target a rate of 4% by the end of 2014.

Source and Comments:

By Nadeem Walayat

Copyright © 2005-2012 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Stocks Stealth Bull Market Ebook DownloadThe Interest Rate Mega-Trend Ebook DownloadThe Inflation Mega-Trend Ebook Download

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History