STOCK MARKET WATCH -- Wednesday, 7 March 2012

[Demeter]

8. London Calling: Why the Libor Affair Matters to You

http://www.businessweek.com/articles/2012-03-04/london-calling-why-the-libor-affair-matters-to-you

Stories about the London Interbank Offered Rate (Libor) typically don’t set one’s heart aflutter. This one should: Investigators in the U.S. Canada, Japan, the U.K., and the European Union are trying to figure out if a handful of brokers and traders manipulated a key benchmark rate that affects the price of $350 trillion worth of securities and loans around the world. That may include your car loan or even your home mortgage. No banks or individuals have been charged with any wrongdoing. Yet even if the case fizzles out, there is something weird about an internationally recognized benchmark interest rate set by a small group of financial professionals with little transparency or regulatory oversight.

Libor is the rough equivalent of the U. S. federal funds rate—that is, the interest rate that banks charge each other. These rates, set by a 16-bank panel and calculated and published daily by Thomson Reuters on behalf of the British Bankers Association, cover a variety of currencies and time durations, from overnight to 12 months. In theory, any given Libor rate is the average bank borrowing cost for unsecured funds, based on data supplied by participating lenders and representing market conditions. Think of it as a daily temperature reading of the money markets.

A variety of U.S. mortgage products are directly influenced by these market rates. The typical American adjustable rate mortgage is indexed to the six-month Libor, plus a 2 percent to 3 percent premium, according to Investopedia. Also, when the credit markets are in turmoil, as they were in 2008, a soaring Libor rate raises funding costs for global banks. Lenders in turn typically pass those higher borrowing costs to Main Street.

In mid-February, Bloomberg News broke the story of a court filing from Canada’s Competition Bureau in which an unnamed bank alleged a scheme by bankers to manipulate the yen Libor rate to increase trading profits. Canadian regulators are trying to figure out if traders acted in unison “to see a higher or lower yen Libor to aid their trading positions,” according to the court filing. Since then, other global regulators have joined the hunt...MORE