Interest Rate Roundup

Thursday, August 30, 2007

Some early morning headlines and thoughts

There are lots of juicy news items to cover this morning, so let's get right to 'em...

* Bloomberg has a story headlined "Bernanke May Hear Call for Fed Activism on Assets, Regulation." The gist of it? That the Fed's laissez-faire attitude toward regulation ... and its stark refusal to target inflating asset bubbles by raising interest rates ... is flawed and needs correcting. I couldn't agree more. The Fed has a ridiculous double standard -- it says it can't detect inflating asset bubbles and should therefore not target them with interest rates ... but it claims it can decide when a bubble has burst, and should respond by lowering rates to "clean up the mess."

* Another hedge fund has been hammered by the subprime mortgage rout. Basis Capital Fund Management of Australia said its second-largest hedge fund filed for bankruptcy. Called "Basis Yield Alpha Fund," it may have lost more than 80%, according to Bloomberg. Oops.

* H&R Block just reported that Q1 losses more than doubled due to costs related to its subprime mortgage unit, Option One Mortgage. It has been trying to unload the division to Cerberus Capital Management, and is now renegotiating the terms of that proposed sale. The company's CEO had some choice words for conditions in the mortgage market. According to some Bloomberg headlines, things are the "worst since 1930." He added that loan originations at Option One have plunged from about $1 billion a month to just $200 million.

* Meanwhile, in the money markets, LIBOR rates are climbing again amid a general game of "Who's holding the bag?" on subprime losses. Another contributing factor: The Bank of England reported that it loaned out $3.2 billion at its 6.75% penalty interest rate. We don't know who borrowed the money from the BOE's lending unit, which is somewhat similar to our Fed "discount window" here in the U.S. But that was the largest loan made since July 2.

Above is a chart of U.S. dollar-based 1-month LIBOR. You can see that we're setting a new high for this up cycle today. By the way, if you want to learn more about LIBOR, what it is, and how the British Bankers' Association calculates it, check out this link.


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