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Interest rate swap mis-selling scandal: Difference between revisions
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====The interest rate environment in the early 2000s==== | ====The interest rate environment in the early 2000s==== | ||
Weird things were happening in the interest rate markets which had been pretty stable since — well, the Glorious Revolution: | |||
{{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 bright sparks at Salomon had invented the interest rate swap and tradable interest rate derivatives were a thing. | |||
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. | |||
Before swaps were invented, one did this by borrowing at a fixed term, and there is an argument that had interest rate swaps ''not'' been invented corporate borrowers fixing term loans in 2008 might have been just as badly burned, but would not have had anything to complain about. | |||
====The banks==== | ====The banks==== | ||
{{drop|S|kulduggery in the}} [[LIBOR rigging|LIBOR submission process]] was not the only saucy carry-on in the interest rate market. For something that is meant to be dullsville, after school chess club was quite the hotbed. | {{drop|S|kulduggery in the}} [[LIBOR rigging|LIBOR submission process]] was not the only saucy carry-on in the interest rate market. For something that is meant to be dullsville, after school chess club was quite the hotbed. | ||