TFJ is

1. WEEK ENDED JULY 6 2012
Thoughts
from Joe
Steppin’ Out
LIE-BOR: The Rate You Thought You Knew
If you have a floating rate loan, you probably think that your interest accrual will rise “when rates go up”
and fall “when rates go down.”
This would be true if all rates moved together, but the ongoing “LIBOR scandal” as it’s being called
demonstrates otherwise.
Specifically, LIBOR is calculated by survey where bankers submit rates every morning that supposedly
indicate the bank’s funding costs. But they don’t have to prove they actually borrowed at that rate – it’s
simply a guesstimate.
So to be clear, if you have a LIBOR-based loan your interest accrual will only rise when the survey of
banker’s cost of funding rises. During the funding crisis in 2008, these bankers were more concerned
about their reputation than their profits so they may have under-estimated funding costs for the
purposes of calculating LIBOR. (and maybe at the urging of government officials!)
If your rate reset during this period, you may have received a windfall while the banks in question held
onto their reputation of being able to fund at lower rates, even if this wasn’t the case.
Was this a bad thing?
Lying is never good, however I wonder if we’d all be happier had true funding costs been reported that
led to a system-wide bank run?
Ok, probably not.
Top Eight
1. UK lawmakers set up inquiry on LIBOR issue. Early next week, a showdown between a Bank
of England and a Barclays official will ensue. The question on hand is: Did the Bank of England
encourage Barclays to submit artificially low rates in the LIBOR rate-setting process? Recall
during the height of the crisis how worried everyone was about the banking industry? This
does not seem so implausible.
2. The “Facebook effect” halts IPOs in the second quarter. Just 11 venture-backed IPOs came in
the second quarter with only two coming out after Facebook’s May 17 offering. The IPO
market is also being affected by the JOBS act which was signed into law just before Facebook.
To learn more, see SVB’s recent webinar.

2. 3. Actions by three central banks fail to instill confidence. China and Europe lowered rates,
while Britain extended their QE actions, but stock markets barely reacted and Spanish yields
ended the week higher. It’s not about rates, it’s about confidence.
4. Unemployment in the eurozone hit a new high of 11.1 percent in May. There remain
tremendous disparities across the zone with the rate ranging from 5.6 percent in Germany to
24.6 percent in Spain. In the U.S., when the disparity is this large, people move. Detroit’s
population is down 25 percent in the last ten years!
5. The U.S. job market disappoints in June. The economy added just 80,000 jobs and the
unemployment rate remained steady at 8.2 percent during the month. Due to population
adjustments, we need to add between 120,000 and 150,000 jobs each month just to keep
even. In addition, hours and wages are rising which indicates companies are still squeezing
efficiencies out of existing workforces. Companies are not yet ready to make the long-term
commitment of hiring new workers.
6. Are you worried about deflation? Gas prices drop for 13th week in a row. Gas prices are 20
cents below one year ago and 23.4 percent from the record high set July 14, 2008. We are
starting summer and there is no upward pressure here. The consumer is very sick.
7. California cities may attempt to take mortgages from investors. They may use eminent
domain to force mortgage-owners to sell to cities at “market value” in order to allow for
restructuring of the loans. There are many problems with this plan including: The owners may
not reside in the city, state, or even the country where the homes stand, and investors will
carve out these districts when purchasing future mortgages making credit less available. A
better tactic would be to work with the lenders who will surely only want to maximize the
value of their failed investment.
8. Airbus to build first U.S.-based assembly plant in Alabama. The company plans to spend
$600 million and employ 1,000 people by 2017. Who says manufacturing is dead in the
U.S.? As developing markets develop, U.S. competitiveness increases.
Key Indices
Return
7/6/2012 1 week YTD Treasury 7/6/2012 6/29/2012 Change
Dow 12,772 1.4% 4.5% 30yr 2.67% 2.75% -0.08%
S&P 500 1,355 1.9% 7.7% 10yr 1.55% 1.65% -0.10%
Nasdaq 2,937 3.1% 12.8% 5yr 0.65% 0.72% -0.07%
Euro Stoxx 2,236 -1.3% -3.5% 2yr 0.27% 0.30% -0.03%
Nikkei 9,021 0.2% 6.7% 1yr 0.19% 0.21% -0.02%
Hang Seng 19,801 4.1% 7.4% 3mo 0.07% 0.08% -0.01%

3. Source: Bloomberg
Looking Ahead
• Wednesday brings the minutes to June FOMC meeting where ‘Operation Twist’ was
June’s Operation Twist
extended.
• Economic data will be light next week, headlined by trade balance, consumer confidence and
producer price inflation releases.
• Earnings season kicks off Monday. We be watching:
ngs We’ll
o Tuesday: The Shaw Group, OCZ Technology Group
o Friday: JP Morgan (It will be interesting to see the effects of recent trading losses)
• There are no IPOs scheduled for next week.
e
JOE MORGAN, CFA
Chief Investment Officer
SVB Asset Management
555 Mission St., Suite 900
San Francisco, California 94105
PHONE 415.764.3149
jmorgan@svb.com
svb.com
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