Aug 3, 2012
LIBORGATE
Changed by Wall Street, for Wall Street
We think, erroneoously, that LIBOR is a EU banking scandal, with no real implications on the U.S. economy and banks. Well, that is wrong. There are some $350 trillion in derivatives based on the LIBOR rate.
SO where does Wall Street come in? In the early to mid-1990s, as the home loan securitization machine got cranking, big brokerage firms looking to package and sell mortgage securities began pushing for a different index upon which A.R.M.’s could be based. The industry argued that it couldn’t hedge its mortgage holdings because there were no other securities based on the 11th District Cost-of-Funds Index. Libor, a more volatile index, appealed to traders as well.
“The volatile index was to respond to the needs of the secondary mortgage market, the guys who packaged the securities and the fellows who traded them,” Mr. Maher said.
By the late 1990s, the push for Libor became even more pronounced as brokerage firms sought overseas investors for their mortgage securities. Selling these instruments to foreign buyers would be far easier, the firms argued, if those instruments were tied to a well-known global benchmark.
“It was all about securitization, especially subprime loans,” said Guy D. Cecala, publisher of Inside Mortgage Finance, an industry authority. “You had Wall Street saying, ‘If we want to sell this overseas, we have to pick a more international-flavored index.’ Subprime lenders just started using it overnight, and then it started to spill out into any loan you wanted to securitize.”
To read more about this threat to homeowners with mortgages in the U.S., please click here
