Tuesday, September 16, 2008
Sept. 16 (Bloomberg) — The cost of borrowing in dollars overnight more than doubled to the highest since 2001 as the collapse of Lehman Brothers Holdings Inc. and credit downgrades of American International Group Inc. led banks to hoard cash.
The London interbank offered rate, or Libor, that financial institutions charge each other to borrow soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers’ Association. The rate was as low as 2.07 percent in June.
Banks are driving up short-term lending rates on concern that AIG, the biggest U.S. insurer, will follow Lehman into bankruptcy and leave financial institutions with losses on $441 billion of credit derivatives. Central banks around the world pumped more than $210 billion into the financial system as they sought to alleviate the credit-market seizure.
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“It’s fear,” said Imke Jersch, a senior money-market trader in Hanover at Norddeutsche Landesbank Girozentrale AG, Germany’s fourth-biggest state-owned bank. “You don’t know who has exposure and who might not be getting their money anymore. It’s a domino effect. You never know who might fall next.”
The credit freeze started in August 2007 when banks became wary of lending to institutions holding securities tied to U.S. subprime mortgages. Since the start of last year, the world’s biggest financial institutions have posted almost $515 billion in losses and writedowns. Eleven U.S. banks have collapsed since January.
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AIG tumbled as much as 74 percent today, taking its decline this year to more than 94 percent. Standard & Poor’s yesterday cut the insurer’s long-term counterparty rating three grades to A-, citing “reduced flexibility in meeting additional collateral needs and concerns over increasing residential mortgage-related losses.”