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| Courtesy of Bubbels @ SXC |
We've heard it all: free trade, free markets, market transparency, less regulations, self-policing, and choice for the customer. With an endless supply of the catchy slogans describing the most favorable environment for thriving business, recent hot guano scandal with London interbank offered rate, aka LIBOR, strips the financial institutions from their exclusive image of Yoda-like knowledge and informed decision making.
After reading several articles on this latest issue, I found the CNN Money article to be the most comprehensive, explaining how the LIBOR rate manipulation would affect the average folks.
What is LIBOR?
In short: it's an interbank rate at which banks lend each other money. It's published every day by Thompson Reuters news conglomerate after British Bankers' Association collects the rates from up to 18 major banks.
Should we care?
Yes. Because, according to the previously mentioned CNN Money article:
Libor is the world's most important benchmark for interest rates. Roughly $10 trillion in loans -- including some credit card rates, car loans, student loans and adjustable-rate mortgages -- as well as some $350 trillion in derivatives are tied to Libor.
How is LIBOR different from US Prime Rate?
The U.S. Prime Interest Rate is used by many banks to set rates on many consumer loan products, such as student loans, home equity lines of credit, car loans and credit cards. If you read or hear about a change to the U.S. Prime Rate, then any loan product that is tied to the Prime Rate will also change, like variable-rate credit cards or certain adjustable-rate mortgages.
U.S. Prime Rate = (The Fed
Funds Target Rate + 3)
The Current Wall Street Journal Prime Rate is:
3.25%
Any surprises for us?
Short answer: yes. If your credit card or a loan is tied to LIBOR instead of US Prime Rate, you could save some money. But if your hard earned cash is invested in derivatives or some other overcomplicated investment products, you most likely lost some money.
Now for the big guns.
If your municipality invested in one of those LIBOR-tied products, guess who lost money? Your state or local government pension and possibly real estate taxes would be impacted. Why the taxes? Someone has to make up for the losses.
If your municipality invested in one of those LIBOR-tied products, guess who lost money? Your state or local government pension and possibly real estate taxes would be impacted. Why the taxes? Someone has to make up for the losses.
Gordon Gekko once said: "Greed is good". Yes, but is the whole worldwide banking system rigged against the uninitiated? Is the unhealthy greed becoming new low of the financial sector? The newest dangers of global banks are floating to the surface. Hopefully, people can still swallow the taste of the bittersweet fruit of the hard LIBOR.
