[MUSIC]
To measure the spread of anxiety from subprime into the overall
financial system, we need a different measure than the ABX.
The ABX, pictures of which we've seen in earlier lessons in this module,
tell us what's happening specifically in subprime.
But they don't allow us to see how worried our market participants about the banks
themselves that may or may not have some of this subprime on their balance sheets.
That may or
may not need to bring investment vehicles back onto their balance sheets.
To do that, we need a different measure and the measure that we will use in this
course Is something called the LIBOR-OIS and that is made up of two components.
It is the spread between two different things, the LIBOR, which is
the London Interbank Offered Rate, which is a measure of the interest rates that
banks charge each other for unsecured dollar funding over various time periods.
Like overnight or one month, or three months.
It's not an actual rate,
it's not something that is reported in transactions.
Rather, there is a survey that is done, or at this time, was done, of banks
saying what would it cost you to borrow in an unsecured way from other banks?
Now, you may have seen in the news that some of these
survey responses were manipulated during some of this time period.
That in fact, they're not completely reliable numbers, certainly,
not at the height of the crisis in 2008.
That fact, which is most certainly true, from all of the evidence that we've seen,
does not affect the conversation that we will have in this module and
the evidence that we've seen.
Those effects are relatively small, and they occur much later,
and they tend to be bank specific.
The overall benchmark rate,
while it might end up being slightly lower in its reporting than the reality was,
if anything, will understate the effects that we will discuss today.
So the first component is the LIBOR, which is an unsecured rate.
As in, Bank X gives money to Bank Y, and if Bank Y can't pay,
Bank X can just go after Bank Y through some kind of liquidation or
bankruptcy procedure but has no actual collateral behind it.
The OIS is going, in contrast,
to be something that is very close to being a secured borrowing rate.
OIS stands for Overnight Index Swap, and this is a relatively