May 2008


LONDON — Under scrutiny about the accuracy of the benchmark London interbank offered rate, the group that oversees the rate system decided Friday to leave it largely unchanged.

After reviewing the Libor system, the British Bankers’ Association said it would leave intact the 16-bank panel that reports borrowing rates to calculate Libor in dollars. The BBA also said it would step up policing of the panel’s banks to make sure they contribute accurate rates. It gave no further information, saying details of the new policing system would be published “in due course.”

The BBA sped up the annual review after bankers expressed concern that rivals might be understating their true borrowing costs to avoid looking desperate for cash. The association said it would eject any bank that had deliberately misquoted borrowing costs.

The BBA’s decision not to take more radical action disappointed some market participants, who have noted various flaws in Libor, which forms the foundation for payments on trillions of dollars in mortgages, corporate debt and financial contracts world-wide.

“They’ve moved the deck chair an inch to the right on the Queen Elizabeth, when the question in the age of the aeroplane is whether they need ocean liners at all,” said William Porter, a credit strategist at Credit Suisse Group.

Via Wall Street Journal.

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May 13 (Bloomberg) — The benchmark interest rate for at least $347 trillion of derivatives and 6 million U.S. mortgages is set for its biggest shakeup in a decade on concern that banks misquoted their true borrowing costs.

“We have not run away or hidden from the need for reform or the need for review” of “serious issues” in the U.K. financial-services industry, British Bankers’ Association Chief Executive Officer Angela Knight said at a hearing of a parliamentary committee in London today. The BBA is set to announce the results of its most far-reaching review of the way it sets the London interbank offered rate in a decade on May 30.

The association, an unregulated London-based trade group, is under pressure to show that Libor is reliable following complaints by investors that financial institutions weren’t telling the truth about their funding costs after rising mortgage defaults contaminated credit markets and drove up borrowing costs.

While the association set the one-month dollar Libor rate at 2.72 percent on April 7, the Federal Reserve said banks paid 2.82 percent for secured loans later that day. Secured loans typically yield less than unsecured debt.

“The Libor numbers that banks reported to the BBA were a lie,” said Tim Bond, head of global asset allocation at Barclays Capital in London. “They had been all along. The BBA has been trying to investigate them and that’s why banks have started to report the right numbers.”

April Warning

Libor rates jumped after the association said April 16 that any member banks found to be misquoting rates will be banned. The cost of borrowing in dollars for three months rose 18 basis points to 2.91 percent in the following two days, the biggest increase since the start of the credit squeeze last August. The one-month rate climbed 14 basis points, the most since November.

The cost of borrowing in dollars for three months should be as much as 30 basis points, or 0.30 percentage point, higher than the current rate, Citigroup Inc. said in a report last month.

Banks are understating borrowing costs on concern they will be perceived as “weakened” by the credit turmoil that forced financial companies to record $323 billion of losses and credit- markets writedowns, said Peter Hahn, a fellow at the London- based Cass Business School.

“Since the credit crunch, it’s something that appears to have been manipulated,” said Hahn, a former managing director at Citigroup. “We are in an extraordinarily delicate confidence time where a small event can shatter things quite easily.”

Via Bloomberg.  The BBA’s report is scheduled for release today, and there could be ripples.

There are signs that the global demand for oil — one of the real drivers of this overheated oil market — may be showing signs of stabilizing:

OPEC cuts estimate of growth in world oil demand for 2008

High prices and slower economic growth in industrialized and Western countries led the Paris-based International Energy Agency to cut its estimates for demand, but the Organization of Petroleum Exporting Countries put its estimate even lower.

Global oil demand is now projected to grow by 1.35 percent in 2008, compared with the previous estimate of 1.4 percent, according to OPEC’s monthly report for May.

Because of its projected slowdown in demand, OPEC has repeatedly refused to increase production.

“World oil demand growth in 2008 is forecast at 1.2 million barrels per day to average 86.95 million barrels per day, representing a minor downward revision from last month,” the report said.

While demand in industrialized countries has dropped since the beginning of the year, demand in developing countries has continued to grow as their economies grow and they build supply reserves, though demand in China was interrupted this week because of the earthquake.

OPEC said that the warm winter was part of the reason for the slow demand early in the year and, with winter ending in the Northern Hemisphere, “Oil demand growth will follow a slow consumption cycle in the second quarter,” the group said.

Via UPI.  A more important dynamic is on the horizon, perhaps — that is, once the Olympics in Beijing are over, the Chinese economy may experience a bit of a cooling-off period.

All I’m saying is, people, if you are investing — think twice about jumping into oil now, just when everyone is making predictions about $300 oil.