Interest rate swap mis-selling scandal: Difference between revisions

Interest rate swap mis-selling scandal (view source)

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 {{quote|''For two hundred years the Rate hovered between 2 and 10 per cent, and in the gloom of Threadneedles’ cave, it waited. Darkness crept back into the forests of the world. Rumour grew of a shadow in the East. Whispers of a nameless fear. And the Rate of Power perceived its time had come.''}}
-Since the early seventies, interest rates had bounced around mainly staying between about 8 and 15 per cent. But after the UK’s exit from the exchange rate mechanism in 1992 they had fallen towards thirty-year lows. As the Cool Britannia vibe suffused the nation, rates stayed abnormally low, around six per cent. In the meantime some [[First Men|bright sparks at Salomon Brothers]] invented the [[interest rate swap]] and the era of tradable interest rate derivatives was upon us.
+Since the early seventies, interest rates had bounced around between about 8 and 15 per cent. But after a brief spike when the UK unceremoniously exited the Exchange Rate Mechanism in 1992 they fell towards thirty-year lows. As the Cool Britannia vibe suffused the nation and Gordon Brown banished boom and bust [''subs: can we check this?''] rates stayed abnormally low, around six per cent.
+In the meantime some [[First Men|bright sparks at Salomon Brothers]] had invented the {{strike|One ring to bring them all and in the darkness bind them|swap}} and the era of {{strike|Sauron|tradable interest rate derivatives}} was upon us.
+JC has written elsewhere about the [[LIBOR rigging part 2|revolutionary confluence of technologies that led to the interest rate derivatives market]] What didn’t change — what hasn’t changed since the invention of credit, and which will not change until the apocalypse, is a business’s basic need borrow funds for working capital at a predictable cost.
+This is a cost of business as inevitable as employees, plant and machinery. Businesses are figured out ways of managing employee costs: discretionary bonuses. These are ''ostensibly'' tied to business performance — the better we do the more you get paid — but really are tied to ''market'' performance: the higher your bid, the more you get paid.
+It would be fun to develop employment derivatives. They would be like interest rate swaps. A bunch of large employers would submit, daily, how much they would be prepared to pay to hire established categories of worker, to derive some kind of London Inter-Employer Bid-Offer Rate (can we call this LIEBOR?). Then the British Human Capital Managers Association would compile and publish a list of rates. Employer could swap out their fixed costs for a floating rate, thereby hedging employment costs. Employees could do the same, hedging against their intrinsic [[loyalty discount]], and restricting employee moves to genuine changes in role, or idiosyncratic hatred of boss, rather than just the need to rebenchmark periodically.
+Lest you should think I am joking consider the cost of employment in a large financial services institution might be in the multiple billions.
 But we can surmise that businesses seeking to borrow money in 2002 might have been thinking rates were abnormally ''low'', and it might be a good time to lock in an interest rate.