Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Mortgage Interest Rate Resets May Fuel LIBOR Market Manipulation

Interest-Rates / Credit Crisis 2008 Oct 23, 2008 - 10:51 AM GMT

By: Money_Morning

Interest-Rates

Best Financial Markets Analysis ArticleShah Gilani writes:It's panic time for U.S. legislators, regulators, banks and lenders. More than $24 billion worth of adjustable-rate mortgages (ARMs) are expected to “re-set” to higher interest rates in November – boosting the likelihood of further home foreclosures.

And it gets worse. That increase in borrowing costs will spread to other parts of the global debt market, representing an across-the board threat to corporate, institutional and sovereign borrowers. If interest rates remain high and interbank lending remains tight, the credit crisis is not likely to recede.


This raises two key questions. Are desperate times prompting desperate measures? Is LIBOR being manipulated by banks that are trying to make their financial positions appear better than they really are?

If that's the case, it's one more reason the credit crisis will fester and spread undetected: The artificially low interbank lending rates removed a key “early warning” indicator, leading investors to believe the credit market was healthy when it actually wasn't.

The Lowdown on LIBOR

LIBOR , or the London Interbank Offered Rate , is arguably the most important interest rate in the world. It is used to calculate the interest rates on hundreds of billions of dollars of corporate debt, mortgages and innumerable other loan products – including hundreds of trillions of dollars of derivatives.

It is important to understand that LIBOR is a “reference” rate, meaning it isn't imposed on a borrower by any regulation or law. Developed in the middle 1980s, LIBOR is the benchmark rate banks use when they offer to lend unsecured money to other banks in the London wholesale money market.

LIBOR was created to make sure that banks that offer loans with “floating” – or adjustable – interest rates know just what their constantly changing cost-to-borrow actually is.

Lenders offering floating or adjustable rate loans typically charge borrowers a “spread” above LIBOR. When you hear: “Your cost on this loan is three-month LIBOR plus 5,” it means the lender is charging you the three-month LIBOR rate – plus an additional five percentage points. If three-month LIBOR is 4%, your actual rate is 9% (4% + 5% = 9%). If your loan re-sets in the future, it will do so based on the LIBOR rate that day – plus an additional five percentage points.

LIBOR is calculated for 15 different loan durations, ranging from overnight to a year, and is listed in 10 different currencies. For this discussion, we are focusing on only the dollar LIBOR rate, which is the rate, in terms of dollar borrowings, that banks theoretically charge each other when buying and selling dollars in the London market.

Each morning, “panels” of banks submit loan data to Thomson Reuters PLC (ADR: TRIN ) in London, usually by 11:10 a.m. London time, and Reuters (a news, information, data and market quoting service corporation) calculates LIBOR, which is subsequently published each day by the British Bankers' Association (BBA).

Subverting the System

That brings us to the current problem in the LIBOR market: As Money Morning has previously reported, there's substantial evidence that LIBOR is being “managed .” This has been happening and the BBA is actively looking into it . In fact, several months ago, when the BBA announced it was speeding up its probe, LIBOR jumped.

 The dollar LIBOR rate, or “fixing,” as it is known, is calculated based on the submission of quotes from 16 major world banks. The banks send in data as to what they paid, or could pay, to borrow from other banks at each maturity level. Reuters throws out the four highest and four lowest quotes, and calculates the average of the eight that remain to come up with the dollar LIBOR fixing.

If banks are seeking to charge one another higher rates, that's telling us one of two things. Either:

  • Banks don't have excess cash to lend.
  • Or they are unwilling to lend freely to other banks, which they fear are facing potential troubles because of bad loans, defaulted mortgages, and other pending hits to their capital and threats to their solvency. [Pending hits to capital could include anticipated higher foreclosure rates brought on by mortgage re-sets].

No bank wants to admit it is being charged a premium to borrow: That sends a bad signal. If a reporting bank submits data that shows its own borrowing costs are higher than average, it will very likely raise questions about that institution's financial strength and stability – the kind of uncertainty that recently brought down such financial institutions as The Bear Stearns Cos. [now part of JP Morgan Chase & Co. ( JPM )], and Lehman Brothers Holdings Inc. ( LEHMQ ).

So what might that bank do? Since the submitting banks providing data to Reuters are on the “honor system,” maybe this institution has an incentive to not submit its actual borrowing costs? Maybe this bank submits rates at which it could borrow – which it is permitted to do, by definition, under the submitting rules – if those rates are lower by virtue of only being a quote it received?

Maybe this bank – and the rest of its brethren – would like to keep LIBOR lower than the interbank rate should actually be, realizing that if rates rise, bad-loan exposure increases. And if bad-loan exposure increases, derivative exposure will escalate, too. What if U.S. ARM re-sets (based on LIBOR) bump up the interest-rate charges that already-strapped homeowners have to pay? What will more foreclosures do to already-battered bank balance sheets?

We already know the answers to those questions.

Since the interbank-lending markets here in the United States have not been freed up, the U.S. Treasury Department and the U.S. Federal Reserve have gone to extraordinary lengths to thaw out the frozen markets and get credit flowing across the economy. Included in their buckshot-pattern arsenal of misguided turnaround initiatives is one that forces the largest U.S. banks to borrow directly from the government . That initiative hasn't helped because banks are simply afraid to lend to other banks because of the problem of toxic balance sheets and future loan-loss probabilities. Worst of all, no bank's balance sheet has become a single bit more transparent. Nor will that ever happen if we do away with fair-value, mark-to-market accounting.

But, last Friday, at the same time Citigroup Inc. ( C ) reported November re-sets on adjustable rate mortgages will exceed $24 billion – which can only lead to further mortgage defaults – it was also revealed that some of the banks our government gave money to actually lent it to banks in London. Strange? Not really.

When JP Morgan, Citigroup and other big U.S. banks place money with London banks, specifically banks that submit borrowing cost statistics to Reuters that ultimately determines the LIBOR fixing, could it be that there's more than free-flowing lending going on? Did the London banks lend any of the pittances that the U.S. banks lent across the pond?

By simple virtue of actually having more money to lend, and without any lending between themselves, London banks have the cover to say: “There's money available to borrow, but we didn't borrow any, but we could have borrowed and the cost to us would have been lower than it has been.”

So, they submit to Reuters the lower cost at which they could have borrowed and, presto, the LIBOR fixing is lowered.

Blueprint for a Turnaround

Desperate times, it has been said, require desperate measures.

While it is imperative that credit flows freely here and around the world, the desperate and manipulative measures that banks, the Treasury Department and the Federal Reserve are employing are the equivalent of the Air Force using a carpet-bombing campaign when it's clear that a couple of smart bombs would do a better job. As a result, U.S. taxpayers are being bombed into a deeper, wider and steeper crater from which it will be very difficult – if not impossible – to climb out of.

There's just not enough dirt to fill in the craters created by the repeated pounding of the errant policy bombs, as well as the disinterested and abetting regulation, unencumbered Wall Street greed and the profligate orgy of spending that's come to define Main Street.

Fixing this massive problem – of which LIBOR is just an element – will take time. But we can start by taking all the lobbyists, ex-legislators and ex-regulators and their former staff members (and perhaps some current legislators who are serial enablers of such problems, and who enrichen themselves each time along the way) and burying them in the craters as we fill the holes in.

That rant aside, devising an actual fix for our problems starts by understanding just what it was that caused them. We can assign blame later. For now it's far more important to stop the flood of red ink that's washing down Main Street.

Understanding LIBOR and what's really going on is critical to understanding the motivation and maneuvering of the players that have us headed for a worldwide financial Armageddon.

[ Editor's Note : Contributing Editor R. Shah Gilani has toiled in the trading pits in Chicago, run trading desks in New York, operated as a broker/dealer and managed everything from hedge funds to currency accounts. In his just-completed three-part investigation of the U.S. credit crisis, Gilani was able to provide insider insights that no other financial writer or commentator could hope to match. He drew upon the experiences and network of contacts that he developed through the years to provide Money Morning readers with the "real story" of the credit crisis – and to propose an alternate plan of action . It's a perspective on the near-financial meltdown that more than 140,000 readers have read in Money Morning alone – to say nothing of the hundreds of other Internet outlets worldwide that have picked up and published Gilani's unique insights.

If you missed Gilani's investigative series, Part I appeared Sept. 18 , Part II ran Sept. 22 and Part III was published Sept. 24 . Gilani's plan was published on Sept. 25 as an open letter to U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. It actually contains contact information for readers who still wish to protest the government's action with the bailout bill by passing their disenchantment along to their elected representatives in each state's governor's mansion, and in both the House and the Senate. Check out Gilani's plan of action .

How can you protect yourself? Well, with the U.S. financial markets in such disarray, Money Morning is looking for profit opportunities beyond U.S. borders: For instance, just check out this new report on a Wisconsin-based company we've discovered that's posting quarter-after-quarter of earnings surprises - while the rest of Wall Street tanks. Not only does this company have a lock on China - the fastest-growing market on the planet - this corporate gem is also riding the profit wave of the most-powerful global trend we're following right now. If you act immediately  - as an added bonus - you'll also receive a free copy of CNBC analyst Peter D. Schiff's New York Times best-seller, " Crash Proof: How to Profit from the Coming Economic Collapse ." ]

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in