Tuesday, October 28, 2008

Learn You Some LIBOR

Great Donald MacKenzie piece in the LRB. Some excerpts..
"Libor anchors contracts amounting to some $300 trillion, the equivalent of $45,000 for every human being on the planet."

"As rates rose sharply in the 1980s, almost all the savings and loan associations in the US – the equivalent of the UK’s building societies – were caught out in this way. The resulting crisis, a precursor of today’s credit crunch, pushed more than 700 savings and loans into insolvency, and the rescue operation ended up costing US taxpayers around $130 billion."

"Given the criticism of Libor, why not abandon its conditional aspect (the submission of rates at which banks could borrow), and shift, as some critics have suggested, to an index based on actual transactions? At least two such indices already exist. Eonia (Euro Overnight Index Average), calculated by the European Central Bank, is a weighted average of the rates of overnight interbank loans denominated in euros. Sonia, its sterling equivalent, is a similar average of overnight loans transacted via London’s main money brokers."