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IF YOU ARE TAKING YOUR LENDER BANK TO COURT OR VICA VERSA, HERE IS MORE FUEL TO THROW ON THE FIRE — THEY EVEN LIED TO OTHER BANKS — INTENTIONALLY SO THEY WOULDN’T APPEAR DESPERATE FOR MONEY. 

The Mysteries of Libor

And Other Revelations…

THERE CAN BE NO DOUBT THAT THE FINANCIAL SYSTEM IS BASED 100% ON TRUST AND CONFIDENCE OF THE PLAYERS IN EACH OTHER. U.S. BANKS HAVE NOW TAKEN THAT OFF THE TABLE. THE EFFECTS WILL BE FAR-REACHING. 

By JOSEPH SCHUMAN

THE WALL STREET JOURNAL ONLINE

More than most financial crises of the recent past, the 2007-2008 credit crunch has exposed plumbing behind the walls of global finance, and the result is a lot of re-examination.

Let’s start with Libor. The London interbank offered rate, a figure drawn from dollar-lending rates among the biggest global banks, is used to set interest rates for a broad spectrum of borrowers, and it has provoked concern beyond banking circles lately thanks to some erratic movements. The Wall Street Journal decided to compare the borrowing costs reported by the 16 banks on the Libor-setting panel with a separate market that tracks the risk of lending and borrowing by these banks — the market for credit-default swaps, a form of default insurance. What the paper found is that Citigroup, UBS, J.P. Morgan Chase and some other Libor-panel members have been reporting borrowing costs that are lower than what the credit-default numbers suggest they should be. That has led Libor “to act as if the banking system was doing better than it was at critical junctures in the financial crisis,” the Journal says, which could cast doubt on the reliability of a number used to calculate home mortgages, corporate loans and a host of other borrowing around the world.

Some bankers have grown suspicious that rivals were low-balling their borrowing costs so they wouldn’t look desperate, and Libor’s overseer, the British Bankers’ Association, is expected to report on possible adjustments to the system tomorrow. But people familiar with the group’s deliberations tell the Journal no major changes are expected. The Libor and credit-default swaps rates have been diverging since late January, when the credit crunch was worsening and central bankers at the Federal Reserve and elsewhere started pulling out all the stops to calm the tumult. The BBA says Libor is reliable and that many financial indicators have acted funny during the crisis, while the Journal cites a number of reasons offered by analysts to explain the risk-rate disparity it finds: Lending between banks came to a halt for months amid the uncertainty, which added some guesswork to the borrowing-cost estimates; or Citigroup and others’ ability to tap their customers’ cash deposits and extra funds from the Fed could have reduced their borrowing needs.

Still, the Journal says, five banks in particular had wider gaps than the 11 others: Citigroup, WestLB of Germany, HBOS of Britain, J.P. Morgan Chase and Swiss lending giant UBS. And “one possible explanation for the gap is that banks understated their borrowing rates,” the paper says. “If dollar Libor is understated as much as the Journal’s analysis suggests, it would represent a roughly $45 billion break on interest payments for homeowners, companies and investors over the first four months of this year. That’s good for them, but a loss for others in the market, such as mutual funds that invest in mortgages and certain hedge funds that use derivative contracts tied to Libor.”

Filed under: bubble, Bush, CDO, community banks, CORRUPTION, credit unions, currency, education, EMS, Eviction, foreclosure, foreign relations, GTC | Honor, inflation, interest rates, Investor, Mortgage, Obama, politics, securities fraud | Tagged: foreclosure defense, INTERBANK LENDING, Libor, mortgage meltdown |