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Debt & Democracy in Newham: A Citizen audit of LOBO loans
by Research For Action
4 December 2018

Executive Summary

A dramatic withdrawal of central government funding in the last decade has exposed the crisis in local government. Austerity measures are forcing closures of youth centres and libraries, reducing bin collection and increasing council tax; the cuts are also forcing homeless people onto the streets and into crammed, sub-standard temporary accommodation and leaving disabled people and those in mental health crisis without adequate support.

Voluntary organisations plug the gaps where they can, as the local state is shrunk and withdrawn under the political smokescreen of the “big society” narrative that promotes free service provision by communities.

Within this framework of false “localism” promoted by the government, councils are expected to support themselves by raising more funds locally, including hiking council tax and making residents pay for services that were once free. This hits the poorest hardest.

The overhaul in the way local government is financed is just the latest chapter in an ongoing story. Austerity is more than just cuts to services. It marks a deliberate shift in power relations where, with declining public spending, public scrutiny and democratic accountability are also eroded. Decisions are increasingly made as purely administrative actions, imposed from on high by unelected officials, citing neoliberal economic rationale, not social necessity.

Local authorities need to be guaranteed stable funding to fulfil their duties towards residents. Instead, they are treated as commercial actors encouraged to borrow from capital markets, hedge against risk and engage in speculative activities. Through financialisation, risk is introduced into the funding of essential services. With financial loss comes service withdrawal.

In this report, we have focused on how this happens through a type of bank debt: Lender Option Borrower Option (LOBO) loans. We have used the London borough of Newham as a case study to evaluate the legitimacy of LOBO loans. These risky and expensive loans were sold to hundreds of councils across the UK, among which Newham is the most indebted. Experts have stated LOBO loans are far too complex for council officials to know they were signing up for a “lose-lose bet”. Exiting LOBO loans now would prove extortionately expensive.

Debt is central to disciplining councils to play by the rules of financial capital. Interest payments are ring-fenced in councils’ budgets, which means savings have to be made elsewhere as the failure to service debts would lead to hefty financial penalties and the imposition of government administrators. This forces councils to prioritise paying banks above everything else. It also lays bare the power dynamic between the cash-strapped public sector and financial institutions with balance sheets that are multiples of local authorities’ collective budgets. It is often forgotten that rescuing these very same too-big-to-fail banks with public money is what prompted the recent wave of public sector cutbacks in the first place. This is why it is important to challenge the legitimacy of the debt-trap mechanism.

There are few better examples of financialisation and the contradictions of austerity Britain than the east London borough of Newham that hosted the 2012 Olympics. One of the most deprived areas in the country, Newham has since the Games seen an injection of investment that many residents we have spoken to feel has not improved their lives. Instead, they experience a housing crisis exacerbated by gentrification and impoverishment brought on by debt, cuts and neglect.

As we were working on this audit, Newham Council – as well as 14 other local authorities across England – announced they are legally challenging Barclays over the LOBO loans the bank sold them. We welcome this development, and see it as a testament to the work grassroots organisations, concerned residents and experts have done alongside us to raise the profile of the LOBO loan issue.

LOBO loans are merely a symptom of an unaccountable, undemocratic system that places the interests of finance above those of the people. This is why this report focuses not only on local government debt, but also on the democratic deficit and poor oversight structures that have enabled the LOBO loan scandal to happen.
In this report we explain why LOBO loans can be considered illegitimate. We have found the following:

  1. LOBO loan contracts infringe the law and contain grossly unfair clauses that create excessive risk that was undisclosed to councils.
  2. Councils were encouraged to take out LOBO loans by central government through HM Treasury reforms to Housing Revenue Account and interventions on Public Works Loan Board (PWLB) rates and repayment penalties.
  3. LOBO loans result from an excessive power imbalance between too-big-to-fail banks and public institutions and were used by banks to circumvent regulation on derivative sales. Banks and brokers not only abused information asymmetries with councils, but also were involved in rigging the rates (LIBOR and ISDAfix) the loans were pegged to.
  4. Treasury Management Advisors (TMAs), who are hired by councils to provide independent advice, recommended LOBO loans to councils while receiving commissions from brokers arranging the loans. Brokers in turn were being paid high fees by both by the council and the banks, which is not standard brokerage industry practice.
  5. The council administrations committed actionable breaches when taking out LOBO loans, such as contravening national policies, borrowing from foreign banks without HM Treasury approval and not appropriately benchmarking the loans against PWLB debt. Councils are also destroying documents related to LOBO loans, or restricting access to them to councillors, journalists and residents.
  6. Councils were not obliged to specify for what purpose LOBO loan debt was taken on, however there is evidence that in certain cases funds were not invested to benefit the population, and may have been used to speculate in financial markets.
  7. Servicing LOBO loan debt in the context of austerity is exacerbating human rights’ violations for which Britain has been criticised by the United Nations.

We have evaluated Newham Council’s LOBO debt on the basis of the evidence above and concluded that Newham’s LOBO loans can be considered illegitimate. We have looked at the terms of each contract and the responsibilities of central government, banks, brokers and TMAs in the origin of the debt. We have highlighted breaches committed by the former administration in entering the loans and have looked at how the funds were invested for uses that did not benefit residents, such as potential interest rate speculation via Icelandic banks, or the Olympic redevelopment, including a loan for the West Ham stadium that has since been written off. We are particularly concerned that by servicing LOBO loans in the context of austerity, Newham Council is violating the human rights of its residents.

We recommend that central government and Newham Council take immediate steps to act on LOBO loans, avoid accumulation of illegitimate debt in the future and improve effective scrutiny of local government finance.

To denounce illegitimate debt and reclaim local democracy, we propose the following:

  1. Suspending interest payments on LOBO loans until their legitimacy is clarified.
  2. Cancelling LOBO loan contracts deemed illegitimate and returning all interest paid up to now.
  3. Terminating budget cuts, and implementing immediate steps to repair the damage done to people and communities by the financial suffocation of essential services.
  4. Introducing radical policy alternatives to ensure decisions are made transparently in the public interest, with meaningful resident participation and effective oversight not constrained by private sector profiteering and conflicts of interest.

Research For Action

is a workers’ co-operative producing research to support social, economic and environmental justice.