When financing commercial real estate deals, interest rates are key points of negotiation. Veteran brokers know that few basis points in one direction or the other on a sale negotiation over an office building or shopping center can make the difference between iced champagne buckets and cold feet.
Where do these rates come from? Interest rates are the price of money. So who determines how much money costs? To some degree, the holder of that money does. But in a wider sense, the job falls to a global market set up by the planet’s top exchangers of money. Of course, these entities are called banks.
Determining the price of money in a free market for money is the least banks can do for our commercial real estate industry. It’s literally the least they can do, because the historic purpose of banks — providing financing for our CRE deals – should be, by most research, much easier than it has been lately.
But are we getting even that much from our pinstriped friends? Unfortunately, like so many “free markets” we hear about but never quite get to participate in, the market for interest rates is effectively a private, nontransparent arrangement between banks. As such, sometimes even the small favor of honest price determination proves too much for the largest banks to grant our industry.
This is the core of a criminal case filed three days ago by US and EU governments against the giant Deutsche Bank. The claim is that Deutsche Bank violated commodities trading and SEC laws to fix a very widely-used interest rate named LIBOR – short for London Interbank Offered Rate.
(Reuters) – Deutsche Bank (DBKGn.DE) said it received subpoenas and requests for information from U.S. and European Union agencies as part of a global probe into interbank offered rates and that it was also being sued over alleged dollar interbank rate manipulation.
The requests came from entities including the U.S. Department of Justice, the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, and the European Commission, Deutsche Bank said on Tuesday.
The inquiries relate to periods between 2005 and 2011, the bank said, adding it was cooperating with the investigations.
What could this mean for you as a broker, an investor, a manager? If this probe, (as well as similar probes against Citi, HSBC, UBS and others) find that banks have been colluding to fix the LIBOR rate, it means, in short, that they have been ripping you off. How much of the $360 Trillion worth of financial contracts tied to LIBOR contain your deals? Your REIT plays? Your lease calculations?
More than that, what deals might you have ultimately lost because of a fixed LIBOR?
- Wall Street Confidence Trick: The Interest Rate Swaps that Are Bankrupting Local Governments (webofdebt.wordpress.com)
- Traders suspended in growing scandal of ‘manipulation of rates’ which determine how much we pay for loans and mortgages (dailymail.co.uk)
- Manipulation And Abuse Confirmed In $350 Trillion Market (zerohedge.com)