After the crisis, as funding levels receded, we calculated that the Dodd-Frank post meltdown equilibrium for 3 month LIBOR was 40-50bp. This level was assuming roughly 12-14bp for Fed Funds in ZIRP. In other words, the new landscape would revolve around 25 over Funds as opposed to the prevailing insanity of 14 over always and everywhere.
As signs of recovery took hold and term structures expanded, the 3 month rate moved steadily to this level. The discussion of "exit strategy" and (false) hope of a limited time on the zirp floor caused FF expectations to rise also and the old spread constant to remain in market participant calculations. Ironically, the markets held up until LIBOR sets clustered in the 55bp area, then the trouble started. Global problems, natural and man made, turned up liquidity and sets fell back to the 24bp fantasy.
Fast forward to today and the slow motion train wreck before us. The Canadians, Chase and HSBC continue to submit low rates that reflect their, not a counterparty's, situation. UBS and Deutche submit on the high side or accurate for next. Few "johnny come latelys" to the process recognize that Soc Gen, BNP and Credit Ag are essentially out of the game. Unable to act for longer than 1 week funding, their submission is automatically in the 5 highest (with UBS and Deutche) and thus DROPPED. The Canadians, JP and Rabo drop from the low side.
The resulting peg is not a sign of crisis in our opinion. The set is closer to reality as we have perceived it for some time. Unsecuritized, uncollateralized borrowing in the 45-50 range - with Ff at 13 - should be reasonable given the present troubles. The question is can the system handle it? As Cypher requested in Matrix 1, sometimes it is "better" to eat a fake steak in a fake world than deal with the scary truth.