New Money

The Low-Down on Libor: Why its Surge Signals Desperation in the Credit Markets

By Katy Marquardt

Posted: September 30, 2008

Turmoil in the credit markets has pushed Libor—the London interbank offered rate—to an all-time high, according to the British Bankers' Association.

So what exactly is Libor, and why is this significant?

Libor (pronounced LYE-bor) is an interest rate set in London each business day. It's the rate at which banks lend to other banks that need temporary funds, by way of the London interbank market. This benchmark is significant because it represents the rate at which the world's most preferred borrowers are able to borrow money, and it's also a widely used reference point for short-term interest rates.

After the rejection of the bailout bill by the House of Representatives, banks hoarded cash, driving Libor up to 6.88 percent. A week ago, Libor was at 2.95 percent. (Normally, it's slightly more than the Federal Reserve's target fed funds rate.) Points out MarketBeat: "It's more than a little ironic that while investors are buying banks' stocks—shares were up sharply across the sector—banks themselves were unwilling to buy each others' shortest term debt. Banks are so desperate for funds that they paid 11% for $30 billion in overnight funds from the European Central Bank, up from 3% just Monday."

The Associated Press answers the million-dollar question: So how does this affect my life?

A. More than half of U.S. adjustable rate home loans are tied to Libor, so a recent increase in this benchmark rate mean monthly mortgage payments will rise for affected homeowners if the rise is sustained. A typical adjustable rate home loan will adjust based on the six-month Libor, plus 2 to 3 percentage points. Plus, many home equity lines of credit, small business loans and student loans also use Libor as an index. Student loans, for example, can be set based on the three-month Libor rate plus, say, 4 percentage points or the one month Libor rate, plus 9 percentage points.

Meanwhile, The "TED spread"—which represents the difference between what banks charge each other to borrow for three months and what three-month U.S. treasuries yield—surged to its highest level in more than 25 years Monday. (It has since retreated from that high, dropping from 3.54 percent to 3.04 percent.)

Here's a more on the Ted spread.

Mortgage Modification - My Bank is not cooperating

Currently ASC Mortgage gets $6000 per month profit at 11% interest. They will only make $4000 profit if they lower the interest rate to 6-7% , where it wouold be affordable to me and I would not have to proceed with the imminent foreclosure, and it does not seem probable that they will lower anything, maybe they should lower their pants for a whacking by all the consumers that are already hurting.. In either case I only pay down the real mortgage $400 per month. Why can't they be satisfied with a "little" profit . I think judge's at least in bankruptcy court need the power to decide for the bank what is right. The bank's do not care! .

pizzajoe@netscape.com

pizza joe of CA @ Oct 10, 2008 12:00:26 PM

I'm sick of separating wallstreet and mainstreet.

Look let me make it clear to you people out there, Wallstreet is wallstreet because people over there bothered to know,try and risk in the name of investment. 9 of 10 times they would make nice profit.These is one of the 1 time the didn't make profit, but wallstreet is not a problem of this, its started from Politicians that you people voted for congress and white house. They are the one started this sub prime mess, they encourage home ownership and let even the people who can't effort it to own homes. What else you expect ? They can't pay and it becomes a mess in the chain. So who started the idea first ? Wallstreet ? No its your damn congressman and senators. Wallstreet will do what they do best make money in one way or other and you should thank them as without them you guys would be suffering like how you are suffering now. The wallstreet effect might not be direct but it plays a huge role indirectly. I'm not supporting wallstreet and the 700 billion plan but i'm saying that The system is corrupt and damaged from the very bottom because of politicians,lobbyist,greedy businessman. To fix this next time you vote open your god damn mouth and ask your representative about the economy and what plans he have to make it better. Before that take some effort to learn a lil about the economy and how it effects the country. It won't kill you if you did. If only you mainstreet did this in first place, you would understand and stopped this stupid politicians supporting unverified homeownership and that would stop a lot of mess that we face now. The only way we can change this is to stop relying on politicians and government to make decisions and mainstreet live a life in such a ignorant way. If mainstreet just bother to know a lil about congress and its actions and economy and how it effects us, then u can ask your congressman and senators to do the right thing and they would not think twice to to disobey you mainstreet.

So before blaming on the government,wallstreet,politicians and so on blame yourself as you could have made the difference from the very beginning.

All the speech that obama and mccain gives, till now i've never seen one person stepping up and asking the detailed questions with lazer sharp tone and demanding for an answer. You cant because you might as well don't know what to ask and how to ask even if you do, he would most probably outspoken you as they are bloody hell good in talking nonsense and make it appear like they know all the plans. I'm sick of people blaming everyone when problems happen. Blame yourself for not acting the last time. Now get up and understand a lil of economic and what congress been doing and wants to do and ask questions and demand answers not some lame old red or blue state speech !

Good luck !

John of CA @ Oct 05, 2008 11:30:55 AM

Why use LIBOR

Why do we here in America even use LIBOR

Philip Pirozzi of TN @ Oct 03, 2008 20:54:08 PM

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New Money

Katy Marquardt, a senior editor at U.S.News & World Report, takes a contemporary look at happenings in the financial world and aims to help young investors get going with their portfolios--or just sound cool at cocktail parties. Have a question? E-mail Katy at newmoney@usnews.com

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