Libor Jumps as Banks Seek Cash to Shore Up Finances

Money-market interest rates increased as banks sought to bolster balance sheets amid deepening concern a bailout of financial institutions won't happen quickly enough to ease short-term funding constraints.

The one-month London interbank offered rate, or Libor, for dollars jumped 22 basis points to 3.43 percent, the highest level since January, the British Bankers' Association said today. The corresponding rates in euros and pounds also rose, while yields on Treasury bills tumbled as investors fled all but the shortest- maturity government debt.

Efforts by the Federal Reserve, the European Central Bank and Bank of Japan to revive money markets with emergency cash auctions haven't worked. Banks are hoarding cash and balking at lending to each other on concern more institutions will fail following the collapse of Lehman Brothers Holdings Inc. and the U.S. government takeover of American International Group Inc. A $700 billion bank rescue plan from Treasury Secretary Henry Paulson has met resistance from Congressional Democrats and Republicans.

``There's no real term funding markets except for central banks,'' said Meyrick Chapman, a fixed-income strategist in London at UBS AG. ``The Libor is meaningless. It's for unsecured lending and there is no unsecured lending as far as I can see.''

Euro, Pound Libor

Banks typically hold onto cash to bolster their balance sheets before closing their books at quarter-end. One-month dollar Libor soared 40 basis points at the end of November as banks refused to lend funds for year-end.

The one-month Libor rate for euros rose 7 basis points today to 4.91 percent, and the pound rate also advanced 7 basis points, to 5.91 percent. The overnight rate for dollars doubled to 6.44 percent on Sept. 16 after the Lehman bankruptcy and AIG rescue.

The Treasury and Fed last week unveiled the proposal to move troubled assets from the balance sheets of U.S. financial companies and put them in a new institution. Congressional leaders are weighing new strategies, including the possibility of approving only a $150 billion initial installment for the government to purchase troubled assets from financial firms.

The difference between the Libor for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, widened 31 basis points to 166 basis points today, the highest level since at least December 2001. That compares with an average of 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.

Auction Demand

Demand for euros at today's European Central Bank auction of three-month loans was the strongest on record, while banks paid a record premium for dollar loans at yesterday's Fed sale.

The ECB allotted 50 billion euros ($73.3 billion) at a marginal rate of 4.98 percent. That's the highest since 2000. Banks bid for 155 billion euros. Banks paid 3.75 percent at yesterday's 28-day Fed term auction facility, or TAF. That's 57 basis points more than yesterday's one-month rate, the widest spread since the TAF program began in December.

Libor loans aren't secured and typically command rates above those of secured loans of similar maturities.

``We've seen quite a bit of upward pressure in the past couple of weeks and the fact that the TAF came in at over 50 basis points above yesterday's one-month Libor will no doubt add to that,'' said Barry Moran, a Dublin-based money-market trader at Bank of Ireland, the country's second-biggest bank.

Bonds Advance

Treasuries rose, led by three-month bills, on concern about the pace of the bailout. Rates on three-month Treasury bills plunged 31 basis points, or 0.31 percentage point, to 0.41 percent. Rates dropped to 0.02 percent on Sept. 17, the lowest since World War II. European and U.K government bonds climbed amid speculation the region is slipping into a recession.

To help ease the gridlock in dollar funding, the Fed arranged $30 billion in swap lines today with central banks in Norway, Sweden, Denmark and Australia.

The Fed, the ECB and the Bank of Japan joined with counterparts in Switzerland, the U.K. and Canada last week to pump hundreds of billions of dollars into the financial system.

The world's biggest financial companies posted $522 billion in subprime-related losses and writedowns since the start of last year. That's more than last year's gross domestic product of Ireland and Finland combined, according to data compiled by Bloomberg.