The Sudden Libor Jump Gave Out Warnings of Foreclosure Crisis
December 23rd, 2008
The writing was on the wall – but few took heed of the warnings of the impending foreclosure crisis. During the early months of 2007 junk bonds from emerging markets were only a little above the yields from Treasury bonds. It meant there was no cause to panic about the risk factor. But suddenly in August there was a sea change. The Libor or London Inter banking Offer Rate suddenly gave a five-fold jump. Usually it hovers around 0.5% but it went up to 2.5%. This sudden Libor jump gave out warnings of the impending foreclosure crisis. Libor refers to the rate at which banks lend to one another. This is what set off the alarm bells. The bells pealed out that the banks are in trouble and they no longer trust each other. This led to a freeze in cash flow. Immediately the feds stepped in to keep the river flowing.
On 13th May 2008 at a federal conference held in Atlanta, Ben Bernanke of Federal Reserve referred to the findings of some prominent professors of Wharton, Allen and Gale, and said that their works “confirm that … ‘fire sales’ forced by sharp increases in investor’ (demand for cash) can drive asset prices below their fundamental value, at significant cost to the financial system and the economy.” Bernanke went on to explain that here the central bank has a vital role to play in counteracting this process “by making cash loans secured by borrowers’ illiquid but sound assets.” In other words he meant that the Fed could grant loans keeping mortgaged backed securities and similar assets as collateral which other lenders were not accepting. He said, “Thus, borrowers can avoid selling securities into an illiquid market, and the potential for economic damage … arising, for example, from the unavailability of credit for productive purposes or from the inefficient liquidation of long-term investments … is substantially reduced.”
The first measure taken by the Feds was to make the discount window more wide in August 2007. From January 2003 by this facility it was possible for proper eligible institutions to take loans practically overnight. These institutions were by and large the commercial banks that deal with the savings of ordinary citizens and grant loans to them. The discount window makes up the deficit when there is a short-term shortage in cash.
- Civil Courts are Clogged by Staggering Number of Foreclosures
- Scam Companies Are Proliferating, Thanks to Foreclosure Crisis
- The Obama Government Aggressively Responding to the Foreclosure Crisis
- Foreclosure Measures Being Discussed by Congress and HUD Secretary
- Ben Bernanke Facing Brickbats As Well As Kudos for His Foreclosure Mitigation Plans
- House Builders and Mortgage Associations Wake Up To the Benefits of Empowering Judges to Modify Loans to Avoid Foreclosures
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January 12th, 2009 at 8:45 am
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