tfj - lie-bor: the rate you thought you knew

WEEK ENDED JULY 6 2012

Thoughts

from Joe

Steppin’ Out

LIE-BOR: The Rate You Thought You Knew

If you have a floating rate loan, you probably think that your interest accrual will rise “when rates go up”

and fall “when rates go down.”

This would be true if all rates moved together, but the ongoing “LIBOR scandal” as it’s being called

demonstrates otherwise.

Specifically, LIBOR is calculated by survey where bankers submit rates every morning that supposedly

indicate the bank’s funding costs. But they don’t have to prove they actually borrowed at that rate – it’s

simply a guesstimate.

So to be clear, if you have a LIBOR-based loan your interest accrual will only rise when the survey of

banker’s cost of funding rises. During the funding crisis in 2008, these bankers were more concerned

about their reputation than their profits so they may have under-estimated funding costs for the

purposes of calculating LIBOR. (and maybe at the urging of government officials!)

If your rate reset during this period, you may have received a windfall while the banks in question held

onto their reputation of being able to fund at lower rates, even if this wasn’t the case.

Was this a bad thing?

Lying is never good, however I wonder if we’d all be happier had true funding costs been reported that

led to a system-wide bank run?

Ok, probably not.

Top Eight

1. UK lawmakers set up inquiry on LIBOR issue. Early next week, a showdown between a Bank

of England and a Barclays official will ensue. The question on hand is: Did the Bank of England

encourage Barclays to submit artificially low rates in the LIBOR rate-setting process? Recall

during the height of the crisis how worried everyone was about the banking industry? This

does not seem so implausible.

2. The “Facebook effect” halts IPOs in the second quarter. Just 11 venture-backed IPOs came in

the second quarter with only two coming out after Facebook’s May 17 offering. The IPO

market is also being affected by the JOBS act which was signed into law just before Facebook.

To learn more, see SVB’s recent webinar.

3. Actions by three central banks fail to instill confidence. China and Europe lowered rates,

while Britain extended their QE actions, but stock markets barely reacted and Spanish yields

ended the week higher. It’s not about rates, it’s about confidence.

4. Unemployment in the eurozone hit a new high of 11.1 percent in May. There remain

tremendous disparities across the zone with the rate ranging from 5.6 percent in Germany to

24.6 percent in Spain. In the U.S., when the disparity is this large, people move. Detroit’s

population is down 25 percent in the last ten years!

5. The U.S. job market disappoints in June. The economy added just 80,000 jobs and the

unemployment rate remained steady at 8.2 percent during the month. Due to population

adjustments, we need to add between 120,000 and 150,000 jobs each month just to keep

even. In addition, hours and wages are rising which indicates companies are still squeezing

efficiencies out of existing workforces. Companies are not yet ready to make the long-term

commitment of hiring new workers.

6. Are you worried about deflation? Gas prices drop for 13th

week in a row. Gas prices are 20

cents below one year ago and 23.4 percent from the record high set July 14, 2008. We are

starting summer and there is no upward pressure here. The consumer is very sick.

7. California cities may attempt to take mortgages from investors. They may use eminent

domain to force mortgage-owners to sell to cities at “market value” in order to allow for

restructuring of the loans. There are many problems with this plan including: The owners may

not reside in the city, state, or even the country where the homes stand, and investors will

carve out these districts when purchasing future mortgages making credit less available. A

better tactic would be to work with the lenders who will surely only want to maximize the

value of their failed investment.

8. Airbus to build first U.S.-based assembly plant in Alabama. The company plans to spend

$600 million and employ 1,000 people by 2017. Who says manufacturing is dead in the

U.S.? As developing markets develop, U.S. competitiveness increases.

Key Indices

Return

7/6/2012 1 week YTD Treasury 7/6/2012 6/29/2012 Change

Dow

12,772 1.4% 4.5% 30yr 2.67% 2.75% -0.08%

S&P 500

1,355 1.9% 7.7% 10yr 1.55% 1.65% -0.10%

Nasdaq

2,937 3.1% 12.8% 5yr 0.65% 0.72% -0.07%

Euro Stoxx

2,236 -1.3% -3.5% 2yr 0.27% 0.30% -0.03%

Nikkei

9,021 0.2% 6.7% 1yr 0.19% 0.21% -0.02%

Hang Seng

19,801 4.1% 7.4% 3mo 0.07% 0.08% -0.01%

Source: Bloomberg

Looking Ahead

• Wednesday brings the minutes to June

extended.

• Economic data will be light next week, headlined by trade balance, consumer confidence and

producer price inflation releases.

• Earnings season kicks off Monday. We

o Tuesday: The Shaw Group, OCZ Technology Group

o Friday: JP Morgan (It will be interesting to see the effects of recent trading losses)

• There are no IPOs scheduled

JOE MORGAN, CFA Chief Investment Officer SVB Asset Management 555 Mission St., Suite 900 San Francisco, California 94105 PHONE 415.764.3149 [email protected] svb.com Profile

Find SVB on LinkedIn, Facebook

©2012 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve

System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. SVB Asset

Management, a registered investment advisor, is a non

Financial Group. Products offered by SVB Asset

obligations of Silicon Valley Bank, and may lose value. This material, including without limitation to the statistical

information herein, is provided for informational purposes only. The material

third-party sources that we believe to be reliable, but which have not been independently verified by us and for

this reason we do not represent that the information is accurate or complete. The information should not

viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision.

You should obtain relevant and specific professional advice before making any investment decision. Nothing

relating to the material should be construed as

investment or to engage in any other transaction.reliable, but we cannot guarantee their accura

Wednesday brings the minutes to June’s FOMC meeting where ‘Operation Twist

Economic data will be light next week, headlined by trade balance, consumer confidence and

producer price inflation releases.

ngs season kicks off Monday. We’ll be watching:

Tuesday: The Shaw Group, OCZ Technology Group

Friday: JP Morgan (It will be interesting to see the effects of recent trading losses)

e no IPOs scheduled for next week.

and Twitter

SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve

, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. SVB Asset

Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB

Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other


information herein, is provided for informational purposes only. The material is based in part on information from

party sources that we believe to be reliable, but which have not been independently verified by us and for

this reason we do not represent that the information is accurate or complete. The information should not



uld be construed as a solicitation, offer or recommendation to acquire or dispose of any

investment or to engage in any other transaction. The rates and yields have been obtained from sources we believe to be

reliable, but we cannot guarantee their accuracy or completeness.

Operation Twist’ was

Economic data will be light next week, headlined by trade balance, consumer confidence and

Friday: JP Morgan (It will be interesting to see the effects of recent trading losses)

SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve

, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. SVB Asset

bank affiliate of Silicon Valley Bank and member of SVB

Management are not FDIC insured, are not deposits or other


is based in part on information from

party sources that we believe to be reliable, but which have not been independently verified by us and for

this reason we do not represent that the information is accurate or complete. The information should not be



a solicitation, offer or recommendation to acquire or dispose of any

The rates and yields have been obtained from sources we believe to be

tfj - lie-bor: the rate you thought you knew

Economy & Finance