Cart (0)
business newsLIBOR On Shaky Ground
Authority on bank lending spurns push for tighter control.
PRINT
 |
|
LIBOR measures the rate at which banks lend to one another. When banks become skittish and seek higher return for additional risk, LIBOR goes up. Conversely, LIBOR moves downward when fear abates and lending loosens up. Depending on whom you ask, the rate is tied to $150-$350 trillion in financial assets.
In recent weeks, the integrity of the data collected to determine LIBOR has come into question. Banks were accused of misrepresenting their borrowing costs to contain fears the financial markets were unraveling. As the demise of Bear Stearns (BSC) proved, those concerns were warranted.
Each morning, the British Bankers' Association, or BBA, surveys 16 banks -- including Bank of America (BAC), JPMorgan (JPM) and HSBC (HBC) -- about their borrowing costs. It tabulates the results by tossing out the four highest and lowest values and taking the average of the remaining data points.
After weeks of deliberation over the alleged misrepresentations, the BBA announced Friday it wouldn't change its methodology. Bloomberg reports the BBA said it would "increase oversight" and called the issue "very serious."
That LIBOR's integrity has come under scrutiny is somewhat worrying. That an unregulated body responsible for the maintenance of the most widely used benchmark in finance can't be bothered to safeguard its practices is cause for outright alarm.
One expert told Bloomberg, "LIBOR is an inherently flawed index. [It's] an unresolved problem as it's not based on actual trades and actual borrowing costs but on people's guesses. Either it will die or it will change."
But the likelihood of LIBOR going away is slim. According to The Wall Street Journal,
in addition to the trillions of dollars in complex derivative investments based on the benchmark, $900 billion in subprime mortgages are tied to LIBOR.
If the myriad of failed mortgage bailouts has proved anything, it's the inability of the mortgage servicing industry to coordinate its way out of a paper bag. Servicers have the thankless job of collecting mortgage payments and chasing down borrowers if they don't send in checks.
It was fantasy to assume the industry could have affected such broad change with any degree of success. Even if regulators had concluded LIBOR's flaws were serious enough to warrant a switch to another benchmark, little could have been done. Any attempt to alter such a vast quantify of mortgages would be a disaster.
The financial markets are already crippled by mounting losses that don't appear to be abating. They now must creep along on a shaky foundation, one which fewer and fewer participants trust to weather even a mild storm. Landfall, indeed, will be a doozy.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
