The TRUTH Behind The Credit Market Lockup

By
Real Estate Services with Timu Corp - CEO, ActiveRain - Co-founder

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
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Topic:
Mortgage / Finance
Tags:
credit crisis
credit markets
indymac
bailout

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Rainmaker
179,860
Cathy Tishhouse
Royal Oak Real Estate
RE/MAX Showcase Homes

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.

October 16, 2008 10:56 AM
Rainer
14,487
Janie Diggs
ABR, ASR, GRI
Realty Executives Liberty

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.

October 16, 2008 10:59 AM
Rainer
12,231
Dave Hamill
Prescott, Arizona Real Estate
EXIT Realty Legacy

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?

October 16, 2008 07:27 PM
Ambassador
883,219
Lane Bailey
Realtor & Car Guy
Century 21 Results Realty

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...

October 16, 2008 08:00 PM
Rainmaker
288,877
June Stark
Las Vegas Condos & Luxury Homes Expert
Elite Realty-Luxury Homes & Condos On & Off the Strip

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

October 20, 2008 03:25 PM
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Rainer
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Matt Heaton

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Additional Information

My ramblings about growing ActiveRain, the real estate industry and something I follow very closely, credit markets.  Why "The ActiveRain Addiction"?

  • My latest startup project FossilEra
  • Starpires - A Strategy Game I Designed