My history with LIBOR

I never realized how many institutional deals tied to LIBOR were getting done until I joined this forum.

I'm not a fan of LIBOR as it pertains to true ARM products. Maybe it's because how I came to know it. Before the word subprime came to exist, there were residential mortgage banks that we all called B, C, D lenders...obviously for the kind of paper they underwrote and funded. 1 - 4 unit stuff. 500 to 600 credit scores. Some of these banks were Ford Motor Credit, yes, they lent on real estate in the 90's, Option One Mortgage and The Money Store (who later sold for $1Bil back in 98'). The Money Store had national television ads featuring retired Orioles pitcher Jim Palmer pitching their product.

All these lenders had this funny index that all their ARM - Subprime loans were tied to. It was LIBOR. LIBOR was seen as a dirty little index tied to another country across the pond. An index reserved for those who could do no better. LIBOR by many was considered a boom/bust index due to what we feel is extreme volatility.

For generations residential and commercial loans in the U.S. were tied to what was perceived as for more stable indices. COFI for example The Cost of Funds Index was recognized as possibly the most stable of all. Never hit the high of high's or the low of low's. The S&L's used this one all the time. Great Western Savings, Home Savings, World Savings Bank (who sold in 2007 to Wachovia, lol, ouch) all used to fund loans tied to this index.

Some say the demise of COFI came for two reasons. One was that S&L's basically became Wamu when some small insurance company from the Northwest basically bought the S&L industry up. Others say COFI died because it was too stable.

Is the 12-MAT or 1yr MTA...1yr CMT still around? This was a very popular index for a long time. It believe it's the rolling 12mo average of the 1yr treasury yield. Pretty stable.

Then of course the old dog, Prime. Still used by SBA and regional lenders for construction. Prime historically kind of follows the Fed. This time it stopped lowering when it hit 3% years ago. It did not follow Fed Funds all the down. Yet, interestingly enough it raised 25bps last year when the Fed did. I find that irritating.

While are bankers here in the US have some blood on their hands through the last financial crisis, at least it's on our soil. I'm still reading stories about the LIBOR scandal and really don't seem to be able to understand how it's to be prevented again. Just today Bloomberg issued another piece about how LIBOR is calculated. They feel their is too much room for manipulation still.

Now there are $350 Trillion dollars tied to one index. That's crazy. At least back in maybe 2000, my guess is that there was quite a bit more diversity in the world of ARM's and their index. If you look at the LIBOR scandal timeline, it was right when a ton of 2yr and 3yr fixed resi Arms were facing their first adjustment. Borrowers went from 4.5/5% I/O to a fully AM 27 or 28yr loan at 7.5 -8%. Boom, housing bust. Yet, not much later the index immediately came back in line.

I personally have a bad taste in my mouth about any LIBOR product. Maybe I need a graph comparing all these indices I mention to make me feel better about it. It really was once considered a junk index. I totally understand weighed averages. On a monthly cash flow basis, as a business owner, I would hate to have to ride out a 3yr period of 7% rates hoping to get back down to 3.2%, when I prob could have just borrowed a fixed rate at 4%.