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Libor

Chris Farrell Oct 3, 2008

Question: I hear that Libor’s rate have gone up a lot. Is this the same Libor rate that adjustable mortgages are pegged to? Dan, Baltimore MD

Answer: Yes, many U.S. adjustable rate mortgages are pegged to the Libor rate. Indeed, it’s estimated that about half of the ARMs written in recent years were linked to Libor.

Libor is short-hand for the “London interbank offered rate”. Libor is calculated for several currencies, including in dollars. The greenback rate is set everyday before noon by data collected from 16 banks by the British Bankers’ Association. You can learn more about Libor at the BBA’s website here.

The recent surge in Libor reflects the global credit crunch. The 3-month Libor rate was trading over 5% when the first bailout bill failed to pass but it has come down close to 4% with the second attempt succeeding. Still, banks are hoarding cash, unsure when they will need the money and increasingly fearful of lending it out.

The Libor rate is critical throughout the world. It influences everything from home loans to credit cards. According to Bloomberg, Libor determines prices for financial contracts valued at $393 trillion as of Dec. 31, 2007. Breaking it down, the story calculates that’s some $60,000 for every person on the planet.

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