6.875%: LIBOR Tags All Time High
"The money markets have completely broken down, with no trading taking place at all. There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.''
-Christoph Rieger, a fixed- income strategist, Dresdner Kleinwort.
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The London interbank offered rate reached an all time high yesterday on the failure of the bailout plan, and the market sell off. For those of you new to the site, this interest rate is frequently used by banks to lend money to each other. When this spikes, it means that credit is very tight.
What did the Fixed Income Markets see that the Equity markets completely missed? Was it availability of credit, the dollar, or unrealized risk?
Most likely, all of the above.
Note that the line below is where LIBOR first started breaking out -- late 2005. For those of you who believe that markets are future discounting mechanisms, what did that tell you?
Sure, markets remained irrational for quite a while, but there was no escaping the inevitable . . .
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LIBOR 5 year Chart
Chart via Bloomberg
TED Spread Chart since 1984
via Bill Laggner Bearing Asset.com
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Excerpt:
"The cost of borrowing in dollars overnight surged the most on record after the U.S. Congress rejected a $700 billion bank rescue plan, heightening concern more institutions will fail.
The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers' Association said. The euro interbank offered rate, or Euribor, for one-month loans climbed to record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, advanced to a record. Rates in Asia also rose...
Credit markets have seized up, tipping lenders toward insolvency and forcing U.S. and European governments to rescue five banks in the past two days, including Dexia SA, the world's biggest lender to local governments, and Wachovia Corp. Money- market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. Banks borrowed dollars from the ECB at almost six times the Fed's benchmark interest rate today."
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Source:
Libor Surges Most on Record After U.S. Congress Rejects Bailout
Gavin Finch and David Yong
Bloomberg, Sept. 30 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=alszNo3N0CHo&
Tuesday, September 30, 2008 | 09:05 AM | Permalink
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Comments
You think?
Posted by: Aunit | Sep 30, 2008 9:11:41 AM
US consumer credit, if variable rate, tends to be LIBOR + an increment.
This will be a further drag on consumer spending.
It's just as possible to stop a machine by putting sand in the gears as it is by shoving in a spanner. You don't need one big thing...just lots of little things.
Posted by: Davis X. Machina | Sep 30, 2008 9:24:59 AM
Tell me where I am wrong here. LIBOR is determined by a bunch of banks saying "this is what I think it would have cost me at a certain time". It does not have to match actual transaction rates, nor do they have to actually borrow or lend money at that rate.
Moreover, these banks are right now trying to get the govt's to give them insane amounts of money, any more indications of tightness and lack of lending increase their chances of getting that bailout....
Posted by: Moses | Sep 30, 2008 9:25:02 AM
Is this just lenders freaking out because of the end of quarter, or is this the start of something more sinister?
Either way my guess is that we are seeing the beginning of the end of low consumer interest rates.
Posted by: leftback | Sep 30, 2008 9:26:00 AM
question for people who know banking.
I get why it's important banks remain solvent, open, and offering lines of credit to businesses for legitimate operating purposes (but no longer offering insane mortgage loans).
But here is what i don't know yet. If banks get a lifeline from the bailout, will they resume/keep making loans to keep the engines of growth running or will they hoard capital and not lend enough to make a difference compared to getting no bailout package at all.
i'm an equity guy, not a banker, i'd love to hear from bankers on this.
Posted by: the man from Nantucket | Sep 30, 2008 9:34:47 AM
Does this mean that as a saver I can start getting a decent return on my savings accounts for the first time in my investing lifetime? YIPEEE!
Posted by: DavidB | Sep 30, 2008 9:39:05 AM
OK, dumb question. It seems like the federal funds rate and libor are the same thing, they are both rates for overnight interbank lending. The difference is the Fed maintains the federal funds rate at a particular level through open market operations. So if the two rates are different shouldn't there be some sort of arbitrage trade, borrowing money at the fed and lending it in london? Isn't this free money? Of course, that would make the difference between the two rates disappear, so obviously that isn't happening. Why not? I'm confused.
Posted by: spoonman | Sep 30, 2008 9:39:45 AM
The "bankers" know how much toxic CRE, credit card securitizations, auto loan securitizations, etc that they hold. Does anyone think that they will take the Treasury cash, if they get it, and start loaning? Or will they use it for capital to shore up the aforementioned crap.
Posted by: larster | Sep 30, 2008 9:47:43 AM
What's the real reason why LIBOR is high? Big Banks don't want to lend TO EACH OTHER. But are they still lending to consumers? In many cases, yes.
To my naive eyes, this just means that the healthy banks either know which banks are bad, or they can't tell (no transparency), and so they won't touch each other with a 10-foot pole.
Furthermore, what's the price of not lending to each other? Not much, for the healthy banks. By starving bad banks of credit, they are forcing the much-needed "creative destruction" process. Furthermore, whenever another bank collapses, the sound banks collect the deposits and healthy assets and become stronger. The economic incentives therefore favor pulling up the gates to the castle (high LIBOR)... meanwhile the healthy banks are still lending their money to people who can actually pay it back, albeit at interest rates that incorporate suitable risk premia.
The consumer credit markets have not frozen up; they've just returned to sanity. (Or am I just way off base and a consumer credit freeze is next on tap?)
If the government would unwind the rest of the bad banks, and enforce transparency so that the remaining banks had renewed confidence in one another, LIBOR ought to go down.
I think at this point we have plenty of evidence that throwing more money at the problem will not accomplish anything.
Posted by: Wisdom Seeker | Sep 30, 2008 9:49:13 AM
Q: Is this just lenders freaking out because of the end of quarter, or is this the start of something more sinister?
A: The quarter end has something to do with it. For your information, HKD bills rate are negative up to 6 month! Bank simply do not lend to each other anymore beyond O/N (and in restricted amounts). Many banks are just relying on precarious funding, and at this pace, defaults could occur in a couple of days.
Q. I'm an equity guy, not a banker, i'd love to hear from bankers on this.
A. Do bankers have any credibility left?
Banks are clearly stopping to lend to custys as well. The bond markets are moribund and there's real pain out there for second tier and high yield borrowers.
Also, as banks will demand much higher risk premium on new assets, there's a real risk of the whole system stopping to a grind without the easy credit lubricant.
Age of Turbulence indeed!
Thank you Alan. Good luck to Ben and Hank!!!
Posted by: Fred | Sep 30, 2008 9:49:22 AM
Exactly spoonman. You just blew my mind. It's because banks are warring factions.
The world bankers thought Uncle Sam would pay for sucker investments. I hope they are wrong.
Posted by: John Thompson | Sep 30, 2008 9:50:44 AM
Firstly Spoonman, LIBOR and Fed Funds are NOT the same thing. Fed Funds refers to loans between banks of their surplus reserves held on deposit with the FED (bit more complicated than that but good enough). Only members of the federal reserve system have these accounts and can borrow and lend fed funds - most transactions are overnight. LIBOR stand for the London InterBank Offerred Rate and is a benchmark set at 11.00am London Time for multiple maturities - overnight to 12 months. LIBOR is a guide of where the global banking system is lending money to each other.
Leftback is very true - end of month / end of quarter are having a big impact - look for the biggest ever drop in libor rates soon - whats the money it doesnt get reported !
Posted by: Steve Bowles | Sep 30, 2008 9:51:05 AM
Well, I got screwed this year because my adjustable rate mortgage resets based on Libor. All these banks borrowing from the fed are making a killing on this.
Posted by: dan in michigan | Sep 30, 2008 9:58:23 AM
Looks like George Bush has finally found the weapons of mass destruction: MBS, CDS and CDO’s.
Posted by: D.L. | Sep 30, 2008 9:59:33 AM
Isn't this situation straight out of 'Reminiscenses of a Stock Operator'? It sounds just like the section that details the Panic of 1907...where none of the banks would loan to each other. Anyone agree?
Posted by: Big J | Sep 30, 2008 9:59:48 AM
do tape painters earn Union scale?
Posted by: Mark E Hoffer | Sep 30, 2008 10:00:54 AM
Steve,
So the federal funds rate is only available to depositors at the fed, I understand that. But it would still seem like there is free money out there for those banks, which should tend to keep the two rates aligned - at least for the same duration loans. I've searched around the internet and I can't find any reason why this shouldn't happen. In fact, it seems that in normal times it does happen, as the two rates track each other closely. So I don't see what's breaking down right now that causing this huge spread. Sorry if I'm being obtuse about this, but I really am confused.
Posted by: spoonman | Sep 30, 2008 10:06:55 AM
One more thing - be aware that the commercial paper market is actually thriving with quality corporates issuing commercial paper very very cheaply - this is a banking problem - not an economy wide problem.
Posted by: Steve Bowles | Sep 30, 2008 10:10:28 AM
Is this an implicit writedown/writeoff? Dollar destruction? That's what it smells like...
Posted by: Dr. Kenneth Noisewater | Sep 30, 2008 10:20:41 AM
Steve,
The CP market is thriving ?! Sure, but what is the average maturity: 3 months?
I wouldn't read too much into it.
Posted by: Fred | Sep 30, 2008 10:37:36 AM
Spoonman:
It's only free money if you get paid back. Right now no one can tell with any certainty that the bank their lending too, even at the incredibly high rate offered, will be there in the morning.
Posted by: Brian | Sep 30, 2008 10:37:40 AM
What about the Federal Reserve becoming the unique central lender of all the world's dollars, and at the same time controlling the chinese by the means of their debt?
Posted by: michange | Sep 30, 2008 11:02:16 AM
"Does this mean that as a saver I can start getting a decent return on my savings accounts for the first time in my investing lifetime? YIPEEE!
Posted by: DavidB | Sep 30, 2008 9:39:05 AM"
Don't count on it. Banks love to take your deposits but are rarely too keen on giving you anything back.
Posted by: JoJo | Sep 30, 2008 11:14:03 AM
@Posted by: JoJo | Sep 30, 2008 11:14:03 AM
I know, but at least we are headed in the right direction. For the last two decades the fed has been the friend of debtors and the enemy of savers. It looks like the pendulum is beginning to swing again. For someone who despises debt like me that is great news indeed.
@spoonman
You might want to google 'what is a carry trade'. You'll probably find the answers you are looking for
Posted by: DavidB | Sep 30, 2008 11:51:12 AM
Brian,
Thank you, I lost sight of that in my confusion. So my understanding now is that libor represents a rate that is entirely market determined and would be roughly the same as the federal funds rate IF the fed did not intervene. The fed does intervene, though, to keep the federal funds rate where the FOMC wants it, which may or may not correspond to where the market would put it. Most of the time the two rates correspond, because there is an arbitrage so long as banks aren't worried about defaults. Is that a good understanding in broad terms? Thanks for the clarification, Steve and Brian.
Posted by: spoonman | Sep 30, 2008 11:53:42 AM
