The BBC’s Robert Peston reported on the 10 O’Clock News recently the plight of Paul Adcock, proprietor of Adcocks Domestic Appliances in Watton. It was really quite moving as Mr Adcock is the 4th generation of his family to run the business and as he describes it he had “it has torn the soul out of the business”.
Mr Peston also interviewed Abhishek Sachdev of Vedanta Hedging who’ve we’ve spoken to. The whole of Robert Peston’s report can bee seen here. Mr Sachdev has explained the structure to us in some more detail.
As we understand it, the offending hedge was called an ‘Asymmetrical Collar’ which simply put actually increases Mr Adcock’s Interest Rate risk as rates drop. The way it’s structured means that the bank has effectively made Mr Adcock sell a ‘Digital Interest Rate Option’ to the bank – this is what derivatives traders do and can be extremely dangerous. We have heard from other sources that Barclays would have profited over £100,000 immediately on execution of the hedge. This is in addition to the profit Barclays make on the loan and regardless of what happens to interest rates. This paper profit would of course gone towards the bloated bonuses that are paid.
As we discover further details of how this odious structure works we will publish it here. If you have any further details you would like to share with us – please do get in touch. All of our sources are kept anonymous.
It does seem extraordinary that Barclays Capital, one of the premier league of Investment Banks, decided to trick Mr Adcock from Watton into being a derivatives trader. The motivation was not to hedge his risk, but clearly to fleece another unsuspecting client.