The TRUTH Behind The Credit Market Lockup

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The truth behind the credit market lockup has nothing to do with liquidity or lack of capital in the system, it is literally about TRUTH itself.  Let me list a few examples that illustrate my point.

  1. In March, Bear Stearns' CEO goes on national TV and claims they are well capitalized and don't have a liquidity problem.  This statement is backed up from the SEC a regulatory agency in charge of monitoring Bear Stearns.  Only a week later Bear Stearns collapses and we later learn, they did not just have liquidity problems but were in fact insolvent (effectively bankrupt) by a wide margin.
  2. In July, Indymac issues a statement saying they are well capitalized to handle there problems.  The OTS/FDIC issue a similar statement saying they don't see any problems with Indymac's capitalization.  Only about a week later IndyMac fails, is seized by the FDIC, and we later learn as their assets begun to be liquidated, that they are in fact insolvent by over $8B.  This is against total assets of only $32B, so that is not even close to being solvent.
  3. Fannie Mae and Freddie Mac along with regulators repeatadly issue statements that they are in a solid financial position and well capitalized.  In September the government seizes and nationalizes these two GSE's and the truth comes out that the bailout is going to cost tens of billions if not hundreds of billions of dollars.  In fact they were no where near solvent or well capitalized as claimed.
  4. Lehman Brother's makes numerous statements on their capital adequacy throughout the summer and early fall.  When they finally blow up the CDS auctions show that bond holders are only expected to receive about 9 cents on the dollar once assets are liquidated.  They were insolvent by a huge margin.
  5. Washington Mutual and Wachovia, two of the largest banks in the US, effectively fail and received arranged shotgun marriages with the help of the FED and FDIC.  As part of these shotgun marriages they each write down tens of billions of dollars in bad loans they'd been holding on their books and claiming in financial statements were good.
  6. Wells Fargo's CEO gets on national TV and claims Wells Fargo has never done risky lending such as subprime, stated income, interest only, no ratio.  Cough, cough, bullshit, they're sitting on a metric ton of that stuff.

Starting to see a pattern here?  Not only are companies repeatedly cooking the books and lying to everybody involved about their true financial state, but the regulatory agencies are not calling them on it and in some cases helping to cover it up.  These regulatory agencies have literally had staff inside these corporations monitoring their financial state on a day to day basis so you are left with two choices.  Either the regulators are more incompetent the Michael Brown of Hurricane Katrina fame or they are flat out lying to the same public they are supposed to protect.

So here's my point.  Now that we've had a few major failures and people realize that not only are companies lying about their financials, but regulators are not making them come clean, everybody is assumed guilty by players in the financial system.  That is why the credit markets are locking tight, LIBOR skyrocketing and spreads blowing out..  It has nothing to do with companies not having capital to lend, in fact there maybe more liquidity in the system than ever.   It's the fact that lenders don't trust that they'll get the money back if they do lend it.  The government can throw as much liquidity into the tornado as they want but they can't force the institutions to lend. 

This is why despite the absolutely massive liquidity injections, backstopping and bailouts the credit market lockup continues to get worse.  More liquidity can not solve a trust problem.  The ONLY way you can unlock the markets is to force transparency in the system, expose those companies who are insolvent and deal with them.  If you don't you don't do this, all companies will be assumed to be lying and insolvent whether they are or not and nobody will lend.  This is why the government's expensive bailout plans are literally doomed to fail.


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  1. Jeanean and David Gendron 10/16/2008 10:16 AM
Mortgage / Finance
credit crisis
credit markets

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Michael A. Caruso
Surterre Properties - Laguna Niguel, CA

That is the scary truth here.  Trust erosion.

Please remember me if you learn of anyone moving to "The OC".

Best regards.

Michael Caruso, Broker ABR ABRM CRB CRS GRI

2007 President, Orange County Association of Realtors

Oct 15, 2008 10:59 PM #1
Shane OnullGorman
Eau Claire Realty, Inc. - Eau Claire, WI
Eau Claire Wisconsin, Real Estate Agent & Realtor- Buy or Sell

I agree. This has nothing to do with people not being able to afford houses. Its about capitalism running amuck with greed and corruption with the government there to lend a helping hand. I guess that is what they are paid to do.

Oct 15, 2008 11:25 PM #2
Fran Gatti
RE/MAX Coastal Redwoods - Crescent City, CA
Realtor, CDPE, RDCPro - Crescent City CA Real Esta


Trust is a funny thing.  Once you lose it, it's pretty darn hard to earn back and those in power aren't even trying.

Oct 16, 2008 12:21 AM #3
Alan 'AJ' Nisen California Contra Costa Mortgage Officer
A Large Bank in America - Lafayette, CA

Matt, great examples.  If you have ever worked for large companies, there are a lot of small examples that support the concept that management lies or bends rules for their own end.  I have alway realized that most politicians typically server their own best interest. AJ

Oct 16, 2008 12:50 AM #4
Brian Block
RE/MAX Allegiance, Managing Broker/Branch Vice President - McLean, VA
Northern Virginia & D.C. Real Estate

Matt, how about hooling up all bank executives and bank regulators, Henry Paulson, and Ben Bernanke to lie detectors every time they go on television or make a statement?

Oct 16, 2008 06:11 AM #5
Richard Shuman
The Only B.S. I Have is from the University of Massachusetts - Longwood, FL
Realtor, Broker - Preferred Realty of Florida - ww

After we fix the problems - they need to fire a ton of people that had their hands in this mess.

Oct 16, 2008 06:15 AM #6
Renée Burrows
Savvy Home Strategies Realty, LLC-REALTOR®-Estate-Probate - Las Vegas, NV
Las Vegas Real Estate Broker -

Thank you for another awesome post Matt!!  I like Brian's idea for lie detectors, for all politicians, right now!

Oct 16, 2008 07:54 AM #7
Cathy Tishhouse
RE/MAX Showcase Homes - Royal Oak, MI
Royal Oak Real Estate

WOW - this makes me feel like my head has been in the sand.  It definitely seems to be the case of capitolism gone mad.  In this perspective, it seems like it will be a very long time to recover.

Oct 16, 2008 10:56 AM #8
Janie Diggs
Realty Executives Liberty - Hinesville, GA

An amazing and candid Blog as usual...  I have to agree with your thoughts entirely. The whole situation reminds me of how bankruptcy works. It is put in place to help people or businesses who have gone over their head. Our governent helps them wipe the slate clean. Some of those people really have authentic reasons for the financial problems they face and try to make sure that they dont fall into that hole again; however, there are those that take advantage of the system and have claimed bankruptcy 3 and 4 times over.  Somehow I tend to think of these Bank who are asking for Bailouts as those who take advantage rather then those who earnestly will fix the problems so it wont arise again.

Oct 16, 2008 10:59 AM #9
Dave Hamill
EXIT Realty Legacy - Prescott, AZ
Prescott, Arizona Real Estate

Matt, the need for transparency is, uh . . . transparent.  The question is, how do we force the powers that be to force transparency?  They've obviously forced the passage of this bail-out in direct contravention of the expressed will of the American people.  If the influence these people/entities had with congress is greater than the influence of the electorate, wherewith shall we or anyone else, force transparency?

Oct 16, 2008 07:27 PM #10
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

It certainly is a crisis in confidence.  I think that in order to get a handle on this, CEOs and Congress critters need to be doing perp walks.  Guys that cooked the books to get scores of millions of dollars in bonuses, and the legislators that protected tham all need to go to jail. 

And it needs to happen soon...

Oct 16, 2008 08:00 PM #11
June Stark
Elite Realty-Luxury Homes & Condos On & Off the Strip - Las Vegas, NV
Las Vegas Condos & Luxury Homes Expert

Well said Matt - and Lane- I couldn't agree more!

Oct 20, 2008 03:25 PM #12
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