If you have a Libor-based loan, or if you are trying to get one, don’t let the headlines concern you. Nothing has changed and there will be no impact on your loan.
So everyone understands what is going on: Libor is a rate that is calculated each business day at 11:00 a.m. in London by the British Bankers Association. They ask 16 of the major world banks to make an estimate of the cost at which that bank can borrow for itself for 30 days, 60 days, 90 days etc. in the interbank market. They then throw out the top four sets of quotes and the bottom four, and they take a simple average of the remaining eight. The BBA then publishes Libor for the day all around the world to everyone at once.
The entire world uses the same Libor rate each day, and everyone knows the rates at the same time each day. The one-month rates are quoted out to five decimal points, such as 0.24675. When you are quoted a Libor rate by your lender, generally it is quoted as a rounded number to two places.
The numbers banks give to the authorities making the calculation are estimates that are determined by traders at the banks. They are never based on real trades. The entire exercise was, and remains, a best guess based on a bunch of guesses that are averaged. There is no real Libor number that is based on a real trade.
The issue came in 2007 and 2008 when there was almost no way any bank could borrow money in the interbank market. Many banks were putting in overly low rates so that nobody would think the bank was unable to get loans for itself or that its credit was weak, and, therefore, they did not want to be seen as paying a higher rate than other banks. All 16 quotes are made public each day, so whatever a bank says is its cost of funds is public information. So banks were often putting in lower numbers than they possibly should have, but everyone knew it. All of the regulators seem to have known that the Libor quotes were not right at the time.
It is now clear even the Federal Reserve and the British banking authorities knew it and went along so as not to upset the chaotic, fragile markets. But some deceitful swaps and other derivatives traders took notice and gamed the system by misstating the five-decimal margin for pricing their swaps books. Because they managed a book of $80 billion to $100 billion of swaps and derivatives, they could make a few more dollars profit if the last decimal point or two of the five is off by a little.
To you as a borrower at $10 million or even $100 million who was quoted to a rounded two decimal points, it does not make any difference and nothing at all is going to change in regard to your loan. Anyone who says you need to be concerned simply does not understand the market or the issue. The offending traders will be dealt with, and it has absolutely nothing to do with you or your ability to borrow money. That is an underwriting issue, not anything to do with Libor setting. A lender will use current Libor or find another index if he wants to make you a loan.
In time, a new metric based on real trades might take its place—or not. Probably it will. A lot of academic work has been done on the topic, and everyone who matters already knows the issues. If there is a change, it will only affect the index for new loans, and then only after the change is made. Even then, they will not change the all-in cost, just the form of index. That could take months, or more likely a couple of years.
The only people who really care are senior bank managers who have to deal with this, lawyers who just found a new source of fee generation, politicians who want to beat up on banks and the media who have no understanding of the issue, but also love to attack bankers. The pity is the top managers of Barclays—which has landed itself at the center of the Libor rate-rigging scandal and has since seen the departure of many top executives—were excellent, and now that bank is weaker for their loss. It is vastly more damaging to the banking system worldwide to lose these guys than whatever tiny adjustment might have been made on some days to the margin on Libor indexes.
For you, go back to whatever it is you do and forget it. There will be lots of media and political noise and many more lawsuits and fines. Unfortunately, it is one more cost and distraction for bankers that just causes them, and ultimately you, more cost to pay the bank’s lawyers.
Nobody is going to cut lending over this. No lender did or did not make a loan because Libor was 25.46 but got quoted at 25.47. It is all nonsense. Nobody is making any change at all to your loan. The truth is that borrowers probably got a benefit because the bias was to quote low by banks so as not to look weak.
Joel Ross is principal of Citadel Realty Advisors, successor to Ross Properties, the investment banking and real-estate financing firm he launched in 1981. A pioneer in commercial mortgage-backed securities, Ross, along with Lexington Mortgage and in conjunction with Nomura, effectively reopened Wall Street to the hotel industry. A member of Urban Land Institute, Ross conceived and co-authored with PricewaterhouseCoopers The Hotel Mortgage Performance Report. Ross is also the author of Ross Rant, a commentary on the economy, financial markets and politics that is available through his website, www.citadelrealty.com.
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