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On The Worthlessness Of LIBOR
Much has been said about Libor, Libor-OIS, TED spreads and other Libor-based metrics, both here and elsewhere. It is no secret that liquidity conditions in Europe are at Lehman levels when looked at from a capital preservation and counterparty risk perspective, in terms of how much money the banks there have parked with the ECB. And yet the Libor as an absolute metric is far away from its all time wide levels seen in September 2008. Bloomberg's chart of the day provides a good reason for why Libor is not only no longer relevant, but why any reading for Libor (and potentially Euribor) no longer represents the true liquidity tightness experienced by member banks. As Bloomberg notes: "Banks have all but stopped lending to
each other, driving transactions in the interbank market to the
lowest level since August 1994 and undermining the validity of
the suite of interest rates known as Libor. “The interbank market died with Lehman Brothers,” said David Keeble,
head of fixed-income strategy at Credit Agricole Corporate and
Investment Bank in London. “Libor is a strange beast, because the
market that it’s based upon barely exists."
More from Bloomberg:
The CHART OF THE DAY shows loans between U.S. commercial banks have slumped to $153 billion from a peak of $494 billion in September 2008, the month that Lehman Brothers Holdings Inc. filed for bankruptcy protection. The London interbank offered rate is used to set interest charges on $360 trillion of financial products worldwide, according to the Bank for International Settlements.
“The interbank market died with Lehman Brothers,” said David Keeble, head of fixed-income strategy at Credit Agricole Corporate and Investment Bank in London. “Libor is a strange beast, because the market that it’s based upon barely exists. It’s going to take a couple more years to recover, and even then will never regain its former glory.”
Loans between banks have evaporated after central banks around the world pumped cash into the banking system by lending money in exchange for debt securities following at least $1.8 trillion of writedowns and losses by financial institutions as of May 18. U.S. commercial banks turned to the Federal Reserve for short-term borrowing after Lehman’s bankruptcy led to a collapse in trust amongst financial institutions, and the Fed opened its discount window to banks.
“There’s a lot more certificates of deposit that get issued instead of interbank lending, because they’re eligible if you want to turn them into cash more quickly,” said Keeble. “The whole structure has changed.”
The implications of this is that if even despite the massive deleveraging in liquidity needs vis-a-vis Libor that the overnight (and especially three month) funding rate has moved so aggressively over the past month, then one can imagine how much worse things would be if banks still had the $500 billion in the Libor market as of the peak, as opposed to the less than one third currently. With central bank backstops and the predominance of CD lending taking its place, it merely shows that even the smallest move in an otherwise useless Libor, likely has well over three times the implication it used to have previously. This means that the recent doubling in Libor is far more troubling than purists who only look at absolute levels in the metric and see a moderate move higher. As usual, when in doubt follow the money, and for the time being this means all open market operations by the ECB. Should the Discount facility usage continue to grow, it will be the purest indicator of just how bad things in Europe truly are underneath the surface.
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"for why Libor is not only no longer irrelevant". I think you meant "no longer relevant"
Thanks for the quick correction. I just don't want idiot MSM types busting your chops on grammar/sentence construction when your content is light years ahead.
Libor is massively relevant for the hundreds of trillions that are tied to it as a benchmark - RWR
Yes, then there's that. Perhaps it would be more accurate to say that it's no longer relevant in the terms it used to be.
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JC beat me to it
The guy writes 50 articles a day. He's entitled to an occasional brain fart.
+1000
It's already hard enough to keep up just readingTylers articles. I wouldn't even be able to do all the research and formulate it with my own team.
How close to reality is the survey that makes up LIBOR anyway?
Old joke:
Man approaches apple cart - "How much for the apples?"
"$4 a dozen."
"I'll take a dozen please."
"I'm all out pal, sorry."
Man goes to another apple cart at the other end of the stret and asks the price of his apples.... "$6 a dozen" the other purveyor says.
"$6 a dozen!...the guy at the other end of the street is selling them for 4 bucks!"
"Yeah, well, when I'm sold out they're $4 a dozen too."
Nuff said. [but this mostly touches the EUR denominated interbank lending, so I'm not sure can it relate to irrelevancy of $ Libor or not, but take a look]
http://narrowtranche.blogspot.com/2009/10/euribor-vs-euro-libor.html
Thanks. Seem to remember a pre-08 article about how the quotes that make up LIBOR are a bit slap-dash and don't necessarily reflect reality although obviously LIBOR based floating rates are the real basis of all kinds of loans. BTW, what ever happened to "the prime rate?" That figure used to be a big deal (like M1). It's still quoted in the paper...I guess it reflects the LIBOR based loans that banks are extending to their strongest commercial customers.
My understanding is that, in addition to throwing out half the values (the top/bottom 10% for outliers makes sense, but HALF the data?), LIBOR consists of asking each bank what its borrowing costs are.
So naturally every bank has the incentive to report that it can borrow all it wants for dirt cheap to demonstrate how strong it is. Nobody wants to be the one to report a higher number because that makes them appear riskier.
It seemed to me like the obvious solution was to instead ask each bank how much it would charge its peers to borrow, so there wouldn't be an incentive biasing the results. I think I even read an article suggesting that--about two years ago.
You weren't thinking of this Buiter blogpost, were you?
U?
www.soberlook.com
Considering that the big banks get bailed out no matter what bad decisions they make, where exactly is the risk?
LIBOR is irrelevant...why not just quote FFR because that is the ONLY interbank or CP lender in bulk at this point.
Brazil can't get a LT bond auction off FFS...doesn't bode well for the carry trade going forward.
Someone here posted that the Fed can't control the Libor rate, but, it seems like it can via swap lines.
Remember, the banks are perfectly solvent and sound. So says BB/TG/MSM. They just don't feel like sharing.
Why would banks actually lend to each other? They aren't lending to consumers, let alone to businesses. The only ones in need of loans are mostly already so deep in debt they won't get it anyway.
What strikes me these last few days is the option trading in general. Especially price movement on the options and volume.
The VIX may be high, but option trade is just gone, and stock can swing 5 to 7% any direction without causing a price change.
Today I adjusted my portfolio. I just noticed now that I bought enough puts that will make me rich when the market crashes and enough calls that will make me rich when the rebound comes.
The worst for me that could actually happen is a sideways market for the next 6 months.
And that's likely what we'll get. I've backed away from my inflationist stance and started to consider deflation, but still undecided. At this point I just want to get it over with already instead of this annoying halfway-rally-slump nonsense.
But another 6 (12? 18?) months of kinda-sorta-credit-deflation coupled with creeping-not-quite-dangerous-commodity-inflation is probably what we're in for before something triggers the reckoning.
Malaise...
That would be approving the Buy and hold strategy Ragnar. That didn't really turned out well these last 2 years. I don't think so. But then if I did, I wouldn't have bought them now would I :)
Nil velocity of money => inflation not so fast (like not earlier than 2012 imho, and that's an election year).
And the longer term allows for all kinds of readjustments, workouts, innovations. So my vote is for slow. Question is: does Ben B's slow eventuation kill us in the longer-er term?
Commodity inflation .ne. USD inflation, but we watch carefully.
- Ned
Dear Theta Virgin - Get out while you can. The "secret" of being long options is that the leverage that allows you to "control" (psst: there is no control) such large nominal positions amounts to a loan taken out on the whole notional amount. Chances are that time decay will ultimately melt both positions like ice cream in the noonday sun. And if you bought recently, you will have paid out through the nose for vega, which will tend to revert to its historical mean, gutting the value of your get rich quick scheme. Of course you could be one of the few for which the dream of unearned wealth comes true. And if so, then I salute you. Somebody's got to be that guy. Speaking from bitter experience, I say Good Luck with that, you'll need it. The best advice, if this position is risking more than 2% of your capital, would be to scale down or get out. Now.
Yes but .... Goldman Sachs will just cancel whichever is the winning trade and stick you a margin call on the other ;-p
Is something looking bullish ?
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
The world truly becomes more complicated with each passing second.
I'm trying to budget for retirement. Can anyone tell me what the Poor Schmuck Taxpayer Bank Bailout Rate (PSTBB) is?
Don't bother budgeting for retirement unless you are retiring within the next 5 years.
Beyond that, it is highly unlikely that any of us will see the type of retirement years that require budgeting.
All you need to know is that debt begets debt. The more created, the more needs to be created.
Better to spend your time researching and developing a solid investment strategy that both protects wealth and multiplies it.
The days of golf resort retirement in gated Florida communities are limited.
However, if you really want a well planned budget the spend-nothing-make-as-much-as-possible budget works very well.
LIeBOR.
The fact that the LBMA reported gold lease rate (which is derived by subtracting GOFO from LIBOR) started showing up as negative from March 2009 is further proof something is wrong with LIBOR - http://www.lbma.org.uk/?area=stats&page=gofo/2009gofo I can guarantee you bullion banks aren't paying anyone to borrow gold.
In hindsight, one early indicator that something was seriously wrong with the credit markets was when 1-month libor stopped moving in Sep 06. Day after day for months it never moved more than a fraction of a bp. Banks were reporting a rate, but there was no real activity associated with it. It started moving again as soon as the SHTF in July 07.