Wednesday, May 28, 2008

Joke Of The Day....."Libor"

Nice to see that almost $ 90 trillion ( according to the WSJ / FT Deutschland sees 350 billion, but i think the WSJ is correct. Update Bloomberg : .... benchmark rate for $350 trillion in derivatives and corporate bonds and 6 million U.S. mortgages ) are tied to a manipulated and unregulated rate.... It´s even more reassuring that the Britisch Bankers´ Association is still seeing no need to reform their methodology.... Chapeau!

Ist es nicht wunderbar zu sehen das fast 90 Billionen $ ( lt. WSJ / FT Deutschland sieht 350 Mrd., bin mir aber sicher das diesesmal das WSJ recht hat. Update Bloomberg :.... benchmark rate for $350 trillion in derivatives and corporate bonds and 6 million U.S. mortgages ) an verzinslichen Papieren auf einem Zinssatz basieren der erwiesenermaßen manipuliert wird. Und alles ohne das besondere Verrenkungen von Seiten der Banken notwendig sind....... Noch dummdreister wird es dann wenn die British Bankers´Association trotz alledem keinerlei Notwendigkeit einer grundlegenden Reform zu sehen scheint..... Glückwunsch!

Study Casts Doubt on Key Rate WSJ
LONDON -- Major banks are contributing to the erratic behavior of a crucial global lending benchmark, a Wall Street Journal analysis shows.

The Journal analysis indicates that Citigroup Inc., WestLB, HBOS PLC, J.P. Morgan Chase & Co. and UBS AG are among the banks that have been reporting significantly lower borrowing costs for the London interbank offered rate, or Libor, than what another market measure suggests they should be. Those five banks are members of a 16-bank panel that reports rates used to calculate Libor in dollars.

That has led Libor, which is supposed to reflect the average rate at which banks lend to each other, to act as if the banking system was doing better than it was at critical junctures in the financial crisis. The reliability of Libor is crucial to consumers and businesses around the world, because the benchmark is used by lenders to set interest rates on everything from home mortgages to corporate loans.

Faced with suspicions by some bankers that their rivals have been low-balling their borrowing rates to avoid looking desperate for cash, the British Bankers' Association, which oversees Libor, is expected to report Friday on possible adjustments to the system. That report isn't expected to recommend any major changes, according to people familiar with the association's deliberations. Update : The British Bankers' Association decided not to change the way the London interbank offered rate is set, rebuffing investors and strategists who said the measure has become unreliable as a gauge of borrowing costs.

> The first step to make Libor ( to put it mildly) "less important"......... Update : Libor Proxies Gain as Traders Seek Truth With Swaps

> Diese Unverschämtheit ist schon fast wieder bewundersnwert. Ohne Frage wird das mittelfristig zu einem erheblichen Bedeutungsverlust von Libor führen.... Update : Libor Proxies Gain as Traders Seek Truth With Swaps

In order to assess the borrowing rates reported by the 16 banks, the Journal crunched numbers from another market that provides a window into the financial health of banks: the default-insurance market. Until recently, the cost of insuring against banks defaulting on their debts moved largely in tandem with Libor -- both rose when the market thought banks were in trouble.

But beginning in late January, as fears grew about possible bank failures, the two measures began to diverge, with reported Libor rates failing to reflect rising default-insurance costs, the Journal analysis shows. The gap between the two measures was wider for Citigroup, Germany's WestLB, the United Kingdom's HBOS, J.P. Morgan Chase & Co. and Switzerland's UBS than for the other 11 banks. One possible explanation for the gap is that banks understated their borrowing rates.....

Confidence in Libor matters, because the rate system plays a vital role in the global economy. Central bankers follow it closely as a barometer of the banking system's health, and to decide how much to adjust interest rates to keep their economies growing. Payments on nearly $90 trillion in dollar-denominated mortgage loans, corporate debt and financial contracts rise and fall according to Libor's movements.

Impact on Payments
If dollar Libor is understated as much as the Journal's analysis suggests, it would represent a roughly $45 billion break on interest payments for homeowners, companies and investors over the first four months of this year. That's good for them, but a loss for others in the market, such as mutual funds that invest in mortgages and certain hedge funds that use derivative contracts tied to Libor.

At times of market turmoil, banks face a dilemma. If any bank submits a much higher rate than its peers, it risks looking like it's in financial trouble. So banks have an incentive to play it safe by reporting something similar -- which would cause the reported rates to cluster together.

In fact, the Journal analysis shows that during the first four months of this year, the three-month borrowing rates reported by the 16 banks on the Libor panel remained, on average, within a range of only 0.06 percentage point -- tiny in relation to the average dollar Libor of 3.18%.

Those reported rates "are far too similar to be believed," says Darrell Duffie, a Stanford University finance professor. Mr. Duffie was one of three independent academics who reviewed the Journal's methodology and findings at the paper's request. All three said the approach was a reasonable way to analyze Libor.

At times, banks reported similar borrowing rates even when the default-insurance market was drawing big distinctions about their financial health. On the afternoon of March 10, for example, investors in the default-insurance market were betting that WestLB, which was hit especially hard by the credit crisis, was nearly twice as likely to renege on its debts as Credit Suisse Group, a Swiss bank that was perceived to be in better shape. Yet the next morning, for Libor purposes, WestLB reported the same borrowing rate as Credit Suisse. A WestLB spokesman says the bank provides accurate data.

In addition to borrowing from other banks, banks can borrow in the commercial-paper market, where they issue short-term IOUs to investors such as mutual funds. In mid-April, UBS, which has suffered some $38 billion in write-downs on investments gone bad, was offering to pay an annual rate of about 2.85% to borrow dollars for three months in the commercial-paper market, according to a person familiar with the matter. But when it reported for Libor purposes on April 16, UBS said it could borrow for three months from other banks at 2.73% -- in line with all the other panel banks. A UBS spokeswoman declined to comment. ( see Interactive Chart )

Out of Whack
To gauge how much the borrowing rates reported by the 16 banks on the Libor panel might be out of whack, the Journal calculated an alternate "borrowing rate" for each bank using information from the default-insurance market.

In mid-March, the bank borrowing rates calculated using default-insurance data rose sharply amid growing fears about the financial health of banks, which culminated in the collapse of Bear Stearns Cos. But Libor actually declined.

Between late January and April 16, when the Journal first reported concerns about Libor's accuracy, Citigroup's reported rates differed the most from what the default-insurance market suggested. On average, the rates at which Citigroup said it could borrow dollars for three months were about 0.87 percentage point lower than the rate calculated using default-insurance data, the Journal's analysis shows. A Citigroup spokesman says, "We continue to submit our Libor rates at levels that accurately reflect our perception of the market."

The difference was 0.7 percentage point for WestLB, 0.57 point for HBOS, 0.43 for J.P. Morgan, and 0.42 for UBS. Royal Bank of Canada's reported rates came closest to the market-based calculation -- there was no significant difference. A HBOS spokesman says the bank's Libor quotes are a "genuine and realistic" indication of its borrowing costs. J.P. Morgan and UBS declined to comment.

UPDATE: Here are some other opinion from Alea and Felix Salmon that questioning the methodoligy from the WSJ. I think they are making a good point. That doesn´t change my point that the calculation of Libor is still flawed.

Hier ein paar andere Meinungen von Alea und Felix Salmon die die Berechnungsmethodik vom WSJ stark in Frage stellen. Und ich denke Sie liegen damit richtig. Das änderts aber nichts daran das die Berechnung von Libor nach wie vor mehr als fragwürdig ist.

Overall, in the first four months of this year, the three-month and six-month dollar Libor rates were about a quarter percentage point lower than the borrowing rates suggested by the default-insurance market, the analysis shows. After banks adjusted their Libor rates following news of the BBA review in mid-April, the difference shrunk to about 0.15 percentage point. ....

After the Journal reported on April 16 that bankers suspected rivals of intentionally understating their borrowing rates, the BBA said it was speeding up a review of Libor. It said it would kick out any bank found to be reporting inaccurate rates. Over the next two days, banks raised their reported rates, causing dollar-denominated Libor to log its biggest jump since August.

That increase surprised some homeowners, including Bill Petit, a real-estate broker with a $470,000 adjustable-rate mortgage on his Del Mar, Calif., home. "It doesn't seem natural," he says. "If it would have done this over a month or so, I could have understood it." He says the move caused his monthly mortgage payment to jump by $98 more than he was expecting, raising it to $2,056.25...

Ms. Knight, the BBA chief, says there's no need to replace Libor, which has been used widely as a benchmark for more than two decades. "I see no reason suddenly to up sticks and change a process that has actually served the financial community world-wide extremely well for a very considerable number of years," she says.

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Anonymous NC Jim said...

You refer numerous times to default insurance. I understand the correct term is default swaps for the simple reason that insurance products (which is what they are) are regulated by state insurance commissions and very expensive lawyers are paid big bucks to eliminate any suggestion of "insurance" from contracts.

I am not a lawyer so please correct me if this second hand information is incorrect.


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