"Libor, set every morning in London, is what banks pay to borrow money from each other. That in turn determines prices for financial contracts valued at $393 trillion as of Dec. 31, 2007, or $60,000 for every person in the world, and helps set consumer interest rates on everything from home loans to credit cards.
Corporate bank loans are often linked to three-month Libor rates. Libor also affects interest costs on credit cards, student loans and adjustable-rate mortgages. From 2004 to 2006, more than half of the U.S. subprime mortgages at the root of the financial crisis, or those issued to the least creditworthy borrowers, had adjustable rates linked to Libor, said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Maryland." Source: Bloomberg.com, 10/3/2008
This rate is very important because it measures liquidity risk between banks. Because of so many bank failures recently in the U.S and Europe, banks were unwilling to shell out 3 month loans to other banks because of solvency risk. As a result 1 month and 3 Month LIBOR rates spiked making it more expensive to borrow money. As stated in the description above, the 3 Month LIBOR rate is linked to corporate bank loans, as well as consumer loans including adjustable rate mortgages. Here's a recent chart of the 3 Month LIBOR rate and you can see it spiked recently due to the financial mess.