An Identity Crisis in the LIBOR

Questioning the Accuracy and Relevance of a Key Interest Rate

CHICAGO, April 29 /PRNewswire/ -- "In recent weeks, one of the most
important benchmarks for interest rates, the LIBOR, has come under intense
scrutiny. Persisting stress on money markets has resulted in a misalignment of
rates, thus complicating the mission of the Federal Reserve to restore calm
and steer the economy away from a recession," says Adolfo Laurenti, senior
economist of Mesirow Financial, in his April issue of Themes on the Global
Markets available at
(www.mesirowfinancial.com/pdfs/newsletters/globalmkts/globalmkts_0408.pdf)
"At the same time, doubts have been raised whether the LIBOR correctly
reflects underlying fundamentals in the market for bank funds," notes
Laurenti.
In his April newsletter, Laurenti addresses questions and controversial
issues surrounding use of the LIBOR as a market indicator, including:
-- What is happening to the LIBOR? -- As the need for liquidity
heightens, banks begin to increase their bid for overnight funding,
thus driving a wedge between the LIBOR and the fed funds rate. This
was the case during the second half of 2007, when money and credit
markets seized up, and again in March and April, suggesting that the
liquidity position of major banks may be worsening.

-- What does an increase in the LIBOR mean for the economy? -- Central
banks pay attention to the LIBOR for two reasons. First, a spike in
the LIBOR immediately translates into higher-than-necessary rates on a
broad spectrum of existing loans. Second, a rate increase could
substantially mute the impact of monetary stimulus provided by the
Federal Reserve.

-- Should we trust the accuracy of the LIBOR? -- Until a few weeks ago,
there was little effort to pry open the "black box" of the LIBOR. Even
with evidence of widening spreads, the assumption was that the British
Bankers' Association (BBA) numbers provided an accurate picture of
market conditions. That confidence has now been shattered.

-- What threats does an inaccurate LIBOR pose? -- Some banks surveyed are
suspected to have altered their reporting to the BBA in an effort to
conceal the severity of their own liquidity problems. If, and this is
a big if, some "strategic" reporting did take place and the LIBOR was
misleading the market about the true cost of money, the implications
for the economy and for policymakers are very relevant.

"The LIBOR is a thinly traded and highly inaccurate measure of market
liquidity. In recent weeks, the United States has paid a particularly large
price for its shortfalls as a market indicator, when problems in Europe have
resulted in higher borrowing costs domestically," concludes Laurenti.
The April issue of Themes on the Global Markets as well as archived issues
can be found at http://www.mesirowfinancial.com.
Mesirow Financial is a diversified financial services firm headquartered
in Chicago. Founded in 1937, it is an independent, employee-owned firm with
$31.4 billion in assets under management and more than 1,100 employees in 30
locations across the country and in London. With expertise in Investment
Management, Investment Services, Insurance Services, Investment Banking,
Consulting and Real Estate, Mesirow Financial strives to meet the financial
needs of institutions, public sector entities, corporations and individuals
and was named one of Chicago's Best Places to Work by Crain's Chicago Business
in 2008. For more information about Mesirow Financial, visit its Web site at
http://www.mesirowfinancial.com.
SOURCE Mesirow Financial

Adolfo Laurenti of Mesirow Financial, +1-312-595-7129