What is the LIBOR Rate?

LIBOR as defined by Wikipedia:

"The London Interbank Offered Rate (or LIBOR, pronounced /'laibor/) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market). LIBOR will be slightly higher than the London Interbank Bid Rate (LIBID), the rate at which banks are prepared to accept deposits. It is roughly comparable to the U.S. Federal funds rate."

LIBOR in simpler terms:

"If, for example, you come into your branch of Wells Fargo (WFC) with a deposit of $1 million, it would be the intention of WFC to lend that money out to one of its customers. But suppose that it doesn't have a good prospect right now for that loan. At the same time, Citigroup (C) has a long-standing customer which wants to draw $1 million on its existing credit line, but is a bit short of deposits at that moment. Citi would then borrow the money it needed from WFC, which would normally be happy to do so, since it is better than having the cash sitting around idle in its vault. The rate it is done at is LIBOR." - (Zacks Investment Research)"

The current problem:

"Under normal circumstances, Wells Fargo making a loan to Citi or JP Morgan for three months would be one of the safest things it could do with its money. As a result, three-month LIBOR is normally priced just slightly over the yield on a 3-month T-bill, which is absolutely the safest thing a bank can do with its money (the government owns the printing press so it can always pay). The difference between these two rates is known as the TED (Treasury Euro Dollar) spread.

However, these are not normal times, and recently TED has become a minor celebrity. Right now, TED is spread wider than the Grand Canyon. The current spread is 4.24%; during times this year when the market thought the credit crisis was contained, it was down around 1.0%. During normal times, it is usually less than 0.50%.

The implication of this is that WFC is not sure if other major banks like JPM will be around in three months, and as such has to charge a much higher rate to compensate for that risk. However, right now the interbank market is just about dead -- not only are the rates abnormally high, but the volume of transactions is extremely low." - (Zacks Investment Research)

Why should we care (generically speaking)?

"More than half of U.S. adjustable rate home loans are tied to Libor, so a recent increase in this benchmark rate mean monthly mortgage payments will rise for affected homeowners if the rise is sustained. A typical adjustable rate home loan will adjust based on the six-month Libor, plus 2 to 3 percentage points. Plus, many home equity lines of credit, small business loans and student loans also use Libor as an index. Student loans, for example, can be set based on the three-month Libor rate plus, say, 4 percentage points or the one-month Libor rate, plus 9 percentage points." - (The Seattle Times)

What is LIBOR doing today?

"The London interbank offered rate, or Libor, for three-month dollar loans fell to 4.05875%, down sharply from 4.41875% on Friday." - (Market Watch)

Momentarily, LIBOR is heading in the right direction. Will this continue? Will the credit crisis, woes, and worries begin to subside? Is this a signal that credit markets are beginning to thaw or is this merely just a short-lived positive blip on the screen?