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Libor Rises Unexpectedly: More Pain for Borrowers (and Lenders)

April 19, 2008

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Between April 14th and April 18th, the Libor rate jumped sharply to 2.9%, up from 2.7%. This increase, which was unexpected, will “add billions of dollars to the interest bills of home-owners, companies and other borrowers around the world, ” according to the Wall Street Journal.

What does this mean? Well, it means that any debt pegged to the Libor – about $9 trillion worldwide – would see an increase in interest payments. This comes at a very precarious time when homeowners are struggling to pay their mortgages, and many ARMs are resetting using Libor as a floor. Not only will this increase hurt residential real estate, it will also hurt – and quite severely – commercial real estate. Commercial real estate is typically highly leveraged using floating-rate Libor debt.

It is my belief that we will see dramatic losses, like the ones we’ve been seeing with residential real estate, in commercial real estate. When that happens, banks that are already reeling to cope with the residential mess will be in for another wave of losses and write-downs.

Here at Freund Investing, we have recommended buying shares of SKF, the UltraShort Financials ETF, which goes up 2% for every 1% the Dow Jones US Financials index goes down using swaps. It is currently priced relatively low, thanks to the rallies seen in the past week. SKF contains short positions in the most vulnerable banks and investment banks. The top 10 holdings of SKF, as of 4/18/08 are:

• Bank of America Corp.
• JPMorgan Chase & Co.
• Citigroup Inc.
• American International Group Inc.
• Wells Fargo & Co.
• Goldman Sachs Group Inc.
• U.S. Bancorp
• Wachovia Corp.
• Bank of New York Mellon Corp.
• Morgan Stanley

In the interest of full disclosure, the author of this article does not maintain any positions in any of the companies mentioned in this article.


Written by Ryan Freund · Filed Under Earnings, Economy, Financial, Housing, REIT, Recession 

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One Response to “Libor Rises Unexpectedly: More Pain for Borrowers (and Lenders)”

  1. JPMorgan CEO: Deep Recession Likely | FreundInvesting.com: Stock Market Investing Advice on May 12th, 2008 3:45 pm

    […] Libor Rises Unexpectedly: More Pain for Borrowers (and Lenders) […]

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Freund Investing, based in Worcester, Massachusetts and Boston, Massachusetts provides stock market investment and investing advice for the intelligent investor. To do so, Freund Investing publishes stock market investment and investing advice through both articles and the Investment Advisor Newsletter. Freund Investing also provides stock market investment and investing advice to investors in a concise, accurate, and objective manner. Freund Investing, based in Worcester, Massachusetts and Boston, Massachusetts, is not paid by any third parties for the stock market investment and investing advice provided and discloses any relationship we have to any stock investments discussed. Freund Investing is not a registered Investment Adviser, nor is Ryan E. Freund a registered Investment Adviser Representative. In the near future, Freund Investing will be registered as an Investment Adviser with Ryan E. Freund being a registered Investment Adviser Representative of the registered Investment Adviser firm. Freund Investing intends on providing wealth management, investment adviser services, and financial planning to clients once registration as an Investment Adviser is complete, as well as registration of Ryan E. Freund as an Investment Adviser Representative is complete in the State of Massachusetts. Objective stock market investment and investing advice is invaluable to investors, and we sincerely hope you enjoy your stay here at Freund Investing.