Libor's demise was on the anvil after they raised interest rates in 2008. Here's my case.
Let's begin with Libor.
How Is Libor Calculated?
Each day, 18 international banks submit their ideas of the rates they think they would pay if they had to borrow money from another bank on the interbank lending market in London.
To help guard against extreme highs or lows that might skew LIBOR, the Intercontinental Exchange (ICE) Benchmark Administration strips out the four highest submissions and the four lowest submissions before calculating an average.
Integrating world economy Libor is calculated in five currencies: UK Pound Sterling, the Swiss Franc, the Euro, Japanese Yen and the U.S. Dollar.
In other words, these 18 banks took into account the strength of the 5 currencies on day-to-day basis.
Libor exacerbated the 2008 Financial Crisis
Here's how - according to Forbes
American International Group (AIG) - bankruptcy was the biggest player in the CDS disaster. (CDS - Credit Default Swap). The firm issued vast quantities of CDS on subprime mortgages and countless other financial products, like mortgaged-backed securities.
The crash of the real estate market in 2007, followed by the even larger market meltdown in 2008, forced AIG into bankruptcy, resulting in one of the largest government bailouts in history.
Now don't let terms like CDS fool us. AIG is / was an insurance company and they insured all of those low value / high risk 'subprime mortgages' - in other words new US Home Loans - that made overseas funding possible. Almost, if not all of the 18 International Banks bought heavily into Sub-Prime
because, hey, it was insured!
Two banks (as I recall) invested heavily in Wall St. - 2008 subprime packs - Bank of London and Deutsche Bank were teetering to collapse but for their respective government's bailout.
As the structural cracks on the insured CDS packs became visible to Europeans, AIG focused overseas and with extreme aggression started selling their other personal insurance packs in India! (Know this first hand).
Forbes continues:
Once AIG started falling apart, it became clear that failing subprime mortgages and the securities built on top of them weren’t properly insured, many banks became reluctant to lend to each other.
Libor transmitted the crisis far and wide since every day Libor rate-setting banks estimated higher and higher interest rates. Libor rose, making loans more expensive, even as global central banks rushed to slash interest rates.
Great respect for Forbes but this time their patriotism is showing and not the truth. Taking shots on LIBOR is unkind since while US government bailed out a few major institutions including AIG; it was Europe and others who pumped in money into Wall St. - on the scale of US Govt. bail out packages.
That Barclay's and Bank of Scotland manipulated LIBOR rates in 2012 for personal profits is / was insufficient reason to pull down the shutters - in my opinion.
Clearly, with LIBOR gone,
US Treasury can print trillions of dollars with lesser fear of inflation.
Edited by
jaish
on Tue 12/14/21 02:15 PM
