Tuesday, August 28, 2012

Interest Rates Swaps being mis-sold to SMEs: a layman's guide to a textbook banking rip-off

To understand a rip-off of this scale, designed to be incomprehensible to customers, regulators and lawmakers, you need an insider's insight. Provided by our guest author Honestly Banking, the undercover banker.

At Honestly Banking we wanted to have a look inside the workings of Swaps, Hedging, Caps and Collars and throw some light into this obscure and complicated world. There has been a remarkable amount of media interest around the Swap mis-selling scandal. Inevitably it is hard to capture the real complexities of this involved area without over simplifying matters or getting highly technical.

A brief background: Banks have been selling Interest Rate Derivatives under the guise of ‘risk management’ for many years, firstly to big corporates, then to smaller companies and then when the greed got the better of them to anyone they could. You may think this sounds a lot like the sub-prime mortgages. Back then banks sold mortgages to unsuitable clients. Now they are selling swaps to unsuitable clients. Different product, same motivation – a quick profit. Read More