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Screwed by your credit card masters or mortgage rate? Thank LIBOR.

With congressional scrutiny now aimed at the scandal surrounding LIBOR, you may ask yourself, "Well, how did we get here?" One reason might be that, according to documents from the Federal Reserve Bank of New York, our own current Treasury Secretary Timothy Geithner knew in 2008 (when he was President of the Federal Reserve Bank of New York) that banksters were tampering with LIBOR. In response, Geithner simply wrote a memo to the head of the Bank of London suggesting that maybe, just maybe, the big banks should stop playing with their favorite toy, LIBOR. (Source: Pam Martens, "How Wall Street Gutted Our Schools and Cities")

And here's another reason.

Any of us that have taken any type of loan in the last decade and a half are probably more tied to LIBOR than we would care to be (See our previous entry for more on that), but this has not always been the case.

Although, as Gretchen Morgenson points out in her article "Changed by Wall Street, for Wall Street," over 12 million adjustable-rate home mortgages, worth $3.5 trillion, have been indexed to LIBOR, this has not always been the case. Prior to the 2000s, it was common practice to use the 11th District Cost-of-Funds Index to establish mortgage rates. Morgenson explains that this rate, "represented the average rate paid to depositors by savings and loans in the Western region of the United States. The Federal Home Loan Bank of San Francisco, known as the 11th District and home to some of the largest mortgage lenders, compiled the rate every month."

What this means is that while LIBOR is based largely upon speculation and estimation (and, as we are finding out, downright deception), the 11th District Cost-of-Funds Index was based on actual numbers. As Morgenson puts it, the 11th District Cost-of-Funds Index, "has the merit of being a rate based on reality."

But apparently reality moved too slowly for the banksters. In the 90s, Wall Street began switching mortgage rates over to LIBOR. They griped that they could not make enough off of mortgages based on the 11th District Cost-of-Funds Index because no other securities were based on it. Thus began the LIBOR-based ARM, which soon resembled a Mafia loan, due to the volatility of LIBOR, as it is totally controlled by private banks.

As Wall Street began to seek international investors for the ARM mortgages, LIBOR became even more appealing to Banksters. Morgenson states, "Selling these instruments to foreign buyers would be far easier, the firms argued, if those instruments were tied to a well-known global benchmark."

The amount of 11th District Cost-of-Funds Index-based ARMs decreased rapidly, while the number of LIBOR-based ARMs increased just as rapidly. Morgenson points out that, "In 1991, according to the Federal Home Loan Bank of San Francisco, the cost-of-funds index was based on costs incurred by 153 institutions. By 2001, only 49 institutions contributed to the index. As of last January, that number had dwindled to 17."

So, while the largest banks in the world were rolling the dice with LIBOR, they were also rolling the dice with our mortgages, student loans, and credit cards. And when the snake eyes came up, we all lost.

But for those old enough to remember, prior to ARMs, the only mortgages out there were fixed rate mortgages. Which meant what you saw is what you got. If the interest rate was 7% at the the time you signed the paperwork, then it remained that way for 15 or 30 years, depending on the term of the loan.

Folks, we've been had every which way by Wall St. and its political lackeys. It's time to bring back Glass-Steagall and put other regulations in place to keep the Banksters under close scrutiny. Better still, why not just have FNMA and Freddie Mac issue all mortgages, now that they have been re-nationalized, instead of having them back up private banks?

But for now, are we going to keep letting Wall Street roll the LIBOR dice with our money, with our homes, with our education, with our future? Why not put our money into local community credit unions and let those banksters play with their own damn money?

UPDATE: On July 27th, we posted"Libor, Sandy Weill, and Endless Corruption." For more about LIBOR, please check it out here.
NOTE: This diary entry was co-written by donnyg1941 and JeffreeB.
JeffreeB will be available for comment immediately following the publication of this entry.

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