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View Diary: Libor --- OUTRAGE .... Please!!!! (210 comments)

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  •  But on a net basis that means (1+ / 0-)
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    Pescadero Bill

    they were not affected one way or another. It is incredibly common for borrowers (and not just small businesses) to be required to hedge fluctuating interest rates. So if I agree to pay the bank LIBOR + 4%, and that works out to 6% at the time the loan is entered into, the bank may require me to buy an interest rate swap that effectively fixes my rate at 6%. I make one dollar under my swap for every one dollar I lose because LIBOR went up, and I lose one dollar under my swap for every one dollar I make because LIBOR went down.

    So as a borrower, I'm completely indifferent (assuming a complete hedge as opposed to a partial one). Yes, I lost money under my swap when LIBOR went down, but my interest payments under the loan were also decreased because LIBOR went down. And if the hedge was incomplete (which is also common), then it helps me on a net basis when LIBOR is underreported.

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