San Fran Fed Demonstrates Artificiality Of Libor
Contrary to the BBA's claims of the persistent objectivity of Libor, the San Fran Fed has released a paper demonstrating that the Fed's generosity has been singlehandedly responsible for throwing out that last somewhat objective money market benchmark into the gutter of unrelliable and useless indicators.
The conclusion, expected as it may be, demonstrates why Libor floors on credit deals using this metric for whatever reason, are going to be quite a recurring feature.
The Fed introduced TAF in mid-December 2007 to alleviate turmoil in the interbank market. An indepth analysis based on a six-factor model suggests that TAF may have helped reduce the TED spread for the first eight months of 2008. The failure of Lehman Brothers in mid-September 2008 temporarily eliminated those gains. But, following extensive government initiatives since then, including significant TAF expansion, the three-month Libor rate has again fallen to a level considerably lower than what it otherwise would have been.