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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Henry Volquardsen who wrote (829)	3/24/1999 1:12:00 PM
From: accountclosed	Read Replies (1) \| Respond to of 2794

Henry, one thing I have seen is that banks are less willing to offer fixed rate credits over a certain size, such as a million dollars. The reasoning I hear given is that their infrastructure is set up such that an outright loan at a fixed rate must be kept in house for the bank's portfolio. What they offer instead is libor based pricing plus whatever spread you can negotiate and then a separate swap product which effectively converts the variable rate loan into a fixed rate product. But in fact the process is cumbersome. What happens is that the loan at libor plus is with one part of the bank and is settled on a monthly basis at whatever physical libor dictates and then the swap is settled separately as either a debit or credit to make the parties whole with respect to the agreed fixed rate. On top of that there is a bunch of legal paperwork that govern the rules of the swap in all sorts of scenarios/eventualities. My question to the bankers is why all the hoops? The bank could match their assets and liabilities internally on a daily basis and play the futures markets in appropriate response to their book the way a market maker/specialist would in the securities markets. The response I get that doesn't quite ring true to me is that the traditional underwriting side of the banks doesn't have the sophistication or infrastructure to do it. The rocket scientists that offer the swap products and the underwriting side are in turf battles and no one wants to spend the money on computers etc. to do the integration. As I say it doesn't sound right to me. Maybe some elements of truth. But less sophisticated customers I'm sure would appreciate not having to conduct such a complicated procedure to get a fixed rate loan. Perhaps it is lack of transparency at play that results in bigger spreads for the bank? Make the game complicated so the unsophisticated can't fight back? Thanks in advance for your thoughts.