LIBOR Homeowner Lawsuit: Much Ado Over $1.22?
The methodology of how the LIBOR rate is collected makes it difficult for a single institution or even group of institutions to move the needle on the LIBOR value by much (if at all), either up or down. The final value of LIBOR used for ARMs is constructed by taking submissions from the contributor panel of banks, where the rates are ranked into four groups. The lowest and highest groups are discarded, and the remainder is averaged together to produce a value.
For example, if the contributor panel was 20 banks, the five lowest and five highest quotes would be excluded and the rest of the values would be averaged together.
As LIBOR pertains to the lawsuit, it's important to know that many of these kinds of ARM contracts generally specify the use of the LIBOR value available on the first business day of the month as published in The Wall Street Journal. As such, the value is presented on a one-day-delay basis; that is, a value created on the 31st of the month is released on the first of the month, and it is the first of the month value used as the basis of adjusting interest rates. If you pick up a today's copy of the Wall Street Journal and look, you will see the value from yesterday, and it is noted by date as such.
We launched our own review of the LIBOR dataWhile there have been allegations of LIBOR manipulation during the worst of the financial crisis (2007, 2008) banks were arguably quoting LIBOR on the low end, since being able to lend and borrow at low rates is an indicator of financial strength. At the time, and with major banks and financial institutions failing, there was great suspicion about the health of many market players, and if an individual firm was looking to borrow and being presented with high-rate offers, it might appear as if they were less than solvent. As such, the bias of such quotes, if they were manipulated, would have tended to be generally lower than reality would dictate.
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