Good information at this site about the current market. We continue to look for more liquidity in the system and for certainty to return to the market and have seen some signs of this recently.

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September 6, 2007
Libor Pops Up
September 6, 2007; Page A16
In the game of international credit-market Whac-a-Mole, the Libor rate just popped up, literally. Libor, short for London Interbank Offered Rate, climbed to 5.72% Wednesday, the 10th day in a row it has tracked higher. Libor is the rate at which banks lend to each other for the short term, and the rate pop represents greater apprehension among banks about whom they are lending to.

In normal market conditions, Libor tracks the Federal Funds rate pretty closely, and as recently as July the two were just 13 basis points, or hundredths of a percent, apart. As of Wednesday’s close, that gap had grown to nearly 50 basis points, or half a percent. With exposure to the U.S. mortgage market cropping up in seemingly unlikely places, such as banks around Europe, banks that lend at Libor are expressing concern, through the rising rates, that borrowers who appear safe may prove to have something ugly hiding on their balance sheets.

This suggests that the shakeout that started with a handful of hedge funds in the U.S. and has spread to the asset-backed commercial paper market is finding its way into the international banking system. Weeks after the credit-market turmoil began, no one is quite sure which hole the mole is going to pop out of next. The rising interbank lending rates are a proxy of sorts for the increased risk that some banks, somewhere, may go belly up.

The best thing regulators can do is make sure they’re on top of the banks they are supposed to be regulating, so we don’t get surprise bank failures that spook the markets and confirm the worst fears being whispered about. This is something for which Treasury Secretary Hank Paulson, late of Wall Street, ought to be eminently well-qualified.

Instead, what we have is regulators across the board leaning on banks to hand out forbearances, per Tuesday’s concerted regulatory push against the banks. There’s nothing wrong with forbearance in principle, and it’s often beneficial for borrower and lender alike. But the regulators stood aside while the loans that are in trouble now were being made. The FDIC, which joined the forbearance chorus this week, was notably late in promulgating stricter underwriting standards while the party lasted. Loan forbearance may have awkward consequences for banks most exposed to bad loans, and so it’s a decision that ought to be made without Washington breathing down the banks’ necks.

At some point, the markets will start to clear. Until then, regulators would do well to focus on preventing further financial accidents, fear of which is one factor that has now driven Libor out of sync with the Fed Funds rate.
 

This sounds right from my own experience listening to people’s financial strategies over the past few years.  More than a handful of people told me their strategy was to buy many investment properties in Nevada, central California and even Tennessee.  They had pretty graphs and intricate Excel spreadsheets showing how a 10% annual appreciation with increasing rents would make them rich.  When I asked them ‘what if’ questions, they told me I was just being a downer and that they were sure it would all work out given how housing prices had been rising so dramatically. 

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