Posts Tagged ‘international banks’

The LIBOR Problem

Tuesday, July 17th, 2012

People who don’t follow the capital markets on a continuing basis might be forgiven for thinking that LIBOR was the name of a fitness instructor from Norway. But no, it’s actually what a lot of people in the business world, including those of us in real estate, look to benchmark the interest rates that we pay for loans. LIBOR, or the London InterBank Offered Rate, is the rate that 18 international banks charge to lend each other money. It affects consumer debt, corporate debt and about $10 trillion in mortgage loans.  When you’re structuring a loan, for example, the originator may assign a rate of 2% over LIBOR. So, when the news broke that a group of banks was under investigation for rigging the rate, it sent shockwaves across both sides of the Atlantic and much of the financial world. On Monday, Chief Executive Officer Robert Diamond and Chief Operating Officer Jerry Del Missier, both of Barclays, Britain’s second-largest bank,  resigned over the scandal. Barclays agreed to pay a $450 million fine. In testimony to Parliament last week, Diamond apologized and said 14 Barclays traders were involved.

The scandal implies that thousands of loans may have been made on the basis of rates that we artificially inflated. One fear is that it may deepen the housing crisis. The rate-fixing scandal may have caused people to lose their homes to foreclosure, according to London’s Daily News. Moreover, many people have mortgages linked to LIBOR and fluctuations in its rate can affect the size of their monthly home loan repayments. The U.K. Serious Fraud Office joins the U.S. Department of Justice in criminally investigating how derivatives traders and rate submitters colluded to rig interbank offered rates. The U.K. Financial Services Authority is seeking civil penalties against banks.

The reaction stateside has been mixed: While condemning the malfeasance of some traders, Forbes says the scandal shouldn’t be quite the cause celebre it’s become.  “The allegation is that the traders within the bank would try and get those who reported rates to the BBA, and thus influenced Libor, to report false rates so that their trading books would benefit. This is clearly wrong, unethical, immoral and we’ll find out soon enough whether it is in fact criminal. What it isn’t though is a huge thing for the wider economy. Firstly, such manipulations would have been up or down depending upon where the specific book was on any one day: it did not lead to continual over or under statement of Libor. Secondly, the amounts by which it was moved, if it ever was, were pretty small, one of two basis points at most is the generally accepted number.”

Maybe the biggest question going forward is whether LIBOR will survive or whether a global benchmark built on manipulable opinions might be replaced by one based on actual reported trades.

Stay tuned.

Local Banks Facing Significant CRE Losses

Monday, June 15th, 2009

Toxic commercial real estate loans could create losses up to $100 billion for small and mid-size banks by the end of 2010 if the economy worsens.  According to a Wall Street Journal report – which applied the same criteria used by the federal government in its stress tests of 19 big banks — these institutions stand to lose up to $200 billion.  In that worst-case scenario, 600 small and mid-sized excedrin1banks could see their capital contract to levels that federal regulators consider troubling, possibly even surpassing revenues.  These losses would exceed home loan losses, which total approximately $49 billion.

The Journal, which based its analysis on data mined from banks’ filings with the Federal Reserve, are a grim reminder that the banking industry’s troubles are not confined to the 19 giants that have already completed the Treasury Department’s stress tests.  More than 8,000 lenders nationwide are feeling the dual impacts of the recession and commercial real estate slowdown.

The banks analyzed by the Journal include 940 bank-holding companies that filed financial statements with the Fed for the year ending December 31.  They range from large regional banks to mom-and-pop banks in small towns, as well as American-based subsidiaries of international banks.

Smaller banks are unlikely to appeal to bargain-hunting investors who are starting to recapitalize the industry’s giants.  As a result, these institutions must boost their capital by selling assets and making fewer loans – which could make the recession last even longer than anticipated.