Newham draws curtain on Lobo loans scandal, but we'll be here again

The council will make big savings with a deal to switch to more sensible borrowing. But local authorities will be tempted by similar schemes until we have a grown up conversation about how to pay for services and infrastructure we both need and value.

Newham Town Hall

Here’s a chink of light in dark times: It looks like one of Britain’s poorest boroughs is set to escape being gouged by the City.

Our sister title, the Evening Standard, reports that Newham Council has agreed to overhaul some £248.5m of ruinously expensive so-called Lobo loans.

Lobos are the sort of complicated, derivative linked product City banks just love.

An acronym for Lender Option Borrower Option, they allow lenders to re-fix interest rates at any point during the loans' term.

Newham took out a boatload, arguing that they allowed it to take advantage of lower interest rates, and thus save money on repayments. Critics said that they were a one way bet in favour of the banks and consultants that punted them.

According to the Standard, moving to conventional fixed rate loans will save Newham £1.6m a year, and £94m in total. Given the pressure local government services are under everywhere, that isn't to be sniffed at.

Most of the loans are thought to be with Barclays, but Debt Resistance UK, which has pushed hard for reform of Lobo loans, says Newham should now challenge Lobo contracts with RBS.

It also wants councils such as Leeds, Kent, Edinburgh, Manchester, Cornwall and Glasgow to take similar action, and deserves a lot of credit for highlighting the issue.

The obvious lesson for councils to learn from the saga is to beware city bankers bearing gifts and to remember that superficially sexy deals can easily leave you ending up with a nasty hangover and the need for a large shot of penicillin.

Trouble is, they’re almost all desperately short of cash. This unfortunate situation is partly the fault of central government, which provides local government with the lion’s share of its funding.

Its ministers keep on spinning the line that we can have great infrastructure and world class public services without incurring the tax bills necessary to pay for those things.

But it is partly the fault of the electorate, of you and me. Politicians wouldn’t be able to spin such an obvious fiction without our buying into the deception.

Given the pressure this creates for the people charged with providing services, maintaining infrastructure, and building things we need, it's regrettable but perhaps unsurprising that they sometimes do silly things to try and square the circle.

This sort of thing will keep happening until we grow up and start being honest about the need to pay the going rate for the services we need and value.