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Tuesday, May 13, 2008

LIBOR Correction Coming

by Tanta on 5/13/2008 08:08:00 AM

Bloomberg reports:

May 13 (Bloomberg) -- The benchmark interest rate for $62 trillion of credit derivatives and mortgages for 6 million U.S. homeowners faces its biggest shakeup in a decade as lawmakers question if banks are understating borrowing costs.

For the first time since 1998, the British Bankers' Association is considering changing the way it sets the London interbank offered rate, according to Chief Executive Officer Angela Knight, who appeared before a parliamentary committee in London today. ``We've put Libor under review,'' Knight said in an interview yesterday. While she declined to discuss specifics, the BBA will announce changes May 30, she said. . . .

While the BBA set the one-month dollar Libor rate at 2.72 percent on April 7, the Federal Reserve said banks paid 2.82 percent for secured loans later that day. Secured loans typically yield less than unsecured debt.

``The Libor numbers that banks reported to the BBA were a lie,'' said Tim Bond, head of global asset allocation at Barclays Capital in London. ``They had been all the way along. The BBA has been trying to investigate them and that's why banks have started to report the right numbers.'' . . .

Libor rates jumped after the BBA said April 16 that any member banks found to be misquoting rates will be banned. The cost of borrowing in dollars for three months rose 18 basis points to 2.91 percent in the following two days, the biggest increase since the start of the credit squeeze last August. The one-month rate climbed 14 basis points, its biggest gain since November.
For your information, the vast majority of subprime and Alt-A hybrid ARMs--plus a significant number of prime hybrid ARMs--are indexed to the 6-month LIBOR. Option ARMs are frequently indexed to one-month money, and as far as I know are roughly split between the one-month LIBOR and the MTA index (Moving Treasury Average or Monthly Treasury Average, depending on whom you ask. You will also see it called the MAT index. I just work here.) In any event, spikes in short LIBOR rates will most immediately be felt by Option ARM borrowers.

Style sheet question, for those of you in the reportorial class: when did LIBOR get to be "Libor" in the USA?