By Gavin Finch and Kim-Mai Cutler
Sept. 17 (Bloomberg) -- The cost of borrowing in dollars for three months jumped the most since 1999 as banks hoarded cash amid concern more financial institutions will fail.
The London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association said today. The increase was the biggest since Sept. 29, 1999, during the run-up to the new millennium. The difference between what banks and the Treasury pay to borrow, the so-called TED spread, widened 70 basis points to 289 basis points. That's the biggest spread since Oct. 20, 1987, when stocks collapsed around the world on what became known as Black Monday.
``This is the second leg of the liquidity crisis,'' said Guillaume Baron, a fixed-income strategist who specializes in money markets for Societe Generale SA in Paris. ``We're having another round of problems plus higher bank risk. This is what happened in August 2007 when the crisis started.''
The freeze in credit markets deepened this week as Lehman Brothers Holdings Inc.'s bankruptcy and the U.S. government's bailout of American International Group Inc. spurred concern more financial companies may collapse.
The overnight dollar rate soared 3.33 percentage points yesterday, the largest increase in its history. It fell 1.41 percentage points to 5.03 percent today.
No Trust
HBOS Plc, the U.K.'s biggest mortgage lender, slid as much as 52 percent today on speculation it may not have access to funding. The shares pared declines after the company said it's in ``advanced'' takeover talks with Lloyds TSB Group Plc.
``Everybody is worrying about which bank is going to go bankrupt next,'' said Ronald Tharun, a money-market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany's biggest state-owned bank. ``There's almost nothing being traded in the money markets. Nobody trusts anyone else.''
The cost of borrowing in euros for three months rose more than half a basis point today, to 4.97 percent, the BBA said. That's the highest level since Dec. 5, 2000.
The surge in borrowing costs defied efforts by central banks from the U.S. to Japan to revive lending through emergency-cash offerings. Central banks refrained from pumping cash into money markets today after injecting more than $230 billion yesterday.
AIG averted the worst financial collapse in history yesterday by accepting an $85 billion federal rescue and ceding control to the government. The Federal Reserve saved AIG, while refusing aid to Lehman, which filed for bankruptcy two days ago, because financial markets were more prepared for a Lehman failure, a Fed staff official said.
`Break the Buck'
Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman. Losses on the securities firm's debt forced the fund to break the buck, meaning its net asset value fell below the $1 a share price paid by investors, New York-based Reserve Management Corp., its closely held owner, said yesterday in a statement.
Since the start of last year, the world's biggest financial institutions posted almost $516 billion in subprime-related losses and writedowns. Eleven U.S. banks collapsed since January. Corporate bond sales in the U.S. and Europe have slumped 42 percent from a year ago, according to data compiled by Bloomberg.
Bear Stearns
Banks began to hoard cash when rising defaults on subprime mortgages led two Bear Stearns Cos. hedge funds to seek bankruptcy protection on July 31, 2007. To avert further money- market dislocations the Fed in March backed JPMorgan Chase & Co.'s takeover of Bear Stearns, which was on the verge of collapse. On Sept. 7, the Treasury seized control of Fannie Mae and Freddie Mac, the two biggest U.S. mortgage-finance companies.
Libor, set by 16 banks including Citigroup Inc. and UBS AG in a daily survey by the BBA, is used to calculate rates on $360 trillion of financial products worldwide, ranging from home loans to credit derivatives.
The last time three-month dollar Libor climbed so much was nine years ago, when the rate surged 57 basis points as banks stockpiled cash before year-end on concern the switchover to the year 2000 would disrupt computer systems.
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 132 basis points today, the most 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.
The Fed added $70 billion in temporary reserves yesterday, while the European Central Bank offered 70 billion euros ($100 billion) in a one-day refinancing operation. The Bank of England injected 20 billion pounds ($36 billion), the Bank of Japan added 2.5 trillion yen ($24 billion) and the Reserve Bank of Australia injected A$1.85 billion ($1.5 billion).
To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net
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