In June 2010 in Monte Carlo – Michael Spencer, CEO of interdealer broker ICAP and serving Tory Party Treasurer was awarded the EY “Global Entrepreneur of the Year.”
In a subsequent interview, reflecting upon his award, Spencer was asked: “are you going to be visiting the [Monte Carlo] Casino tonight? to which he replied: “No, I prefer to be the house rather than the punter.”
When visiting a casino, we expect the odds to be stacked in favour of ‘the house’. However few would have expected such honesty from Michael Spencer, by referring to his own firm ICAP in such fashion.
Fast forward to 2013 when ICAP were fined $87 million for involvement in LIBOR rigging, and it becomes obvious just what sort of ‘house’ ICAP have been running. A house with the odds rigged firmly in its own favour, be that through LIBOR benchmark manipulation, or twin zero’s on the European roulette wheel.
Michael Spencer’s problems with regulators don’t stop at LIBOR rigging. ICAP are responsible for the daily setting of the $379 trillion swaps benchmark, ISDAfix. A global exchange between floating and fixed rates of interest.
ICAP including its New Jersey office known as “Treasure Island” because it makes so much money has been the subject of a long-running US led CFTC investigation into the suspected rigging of the ISDAfix swaps market.
ISDAfix is inherently linked to the LIBOR rate, with the daily manipulation of UK LIBOR, feeding into the daily ‘fixing’ of the 10 year ISDAfix swap rate, set in NYC.
The recent FOIA disclosure of a 2009 loan agreement between RBS and Brent Council in London to Move Your Money has raised fresh questions of ICAP’s ‘market making’ activities, and the lack of regulatory oversight of UK local authority finance.
The loan agreement known as a ‘lender option borrower option’ or LOBO, is noteworthy for several reasons.
Firstly the firm who advised Brent Council to take out the loan in 2009 was Butlers, a subsidiary firm of ICAP – noteable for losing half a billion of council cash in Iceland when the banks crashed in 2008.
The loan deal was executed by Garban International – another ICAP subsidiary, earning tidy profits for ICAP on both sides of the trade.
Finally, the structured loan signed in August 2009 features a fixed “teaser” rate, reverting to a floating interest rate which can be “called” higher by RBS at regular intervals, references not just the manipulated LIBOR rate, but the suspect ISDAfix rate as well.
Brent agreed to pay RBS an interest rate of LIBOR +0.25%, fixed for 2 years, reverting to an eye-watering floating rate of 8.70% less the 10 year swap rate (aka ISDAfix) in a structure known as an “inverted floater.”
On Butlers advice, Brent agreed to pay an effective borrowing rate of 6.8% on a £10m loan. Twice the current mortgage lending rate available to you or I on the high street. Why?
RBS are charging Brent 6.8% interest to borrow, when RBS access credit via the Bank of England FLS window at 0.25% ?
Assessing the Brent LOBO, the impact of LIBOR rigging on the deal is counter-intuitive, with the loan costing the council more money as LIBOR interest rates were rigged lower.
In a scenario involving LIBOR rigging RBS as lender, and ICAP its conflicted adviser fiddling both benchmarks on which the loan is based, it appears Brent council (‘the taxpayer’) will be paying over the odds to RBS for as long as QE and low interests rates remain.
With £12 billion of these LOBOs on council books throughout the UK (60 year loans), rest assured this is not the last you will hear about these teaser rate loans, described by one analyst as: “payday loans for the public sector.”
Many of the loans, in places like Kent County Council (who have a staggering £441 million in LOBOs) appear to be designed by Barclays to blow up with higher interest rates in 2016-18, just as the worst of the coalitions austerity cuts happen to kick in.
Back at ICAP, it must be comforting for Michael Spencer to know that as ‘the house’, even when the punters lose (as in Iceland) – you still win!
