On the use of the term “Liquidity Crisis”

[barnaby33]

Wouldn’t a sh*tty asset crisis by definition imply liquidity problems. Inability and unwillingness to loan result in the same exact consequence; that of less loans. Hence credit contraction is what the FED is fighting. Liquidity crisis is really just a proxy for insolvency crisis, which leads to loss of confidence as you mentioned. This then rolls up into credit contraction with is deflationary, which is where the real crisis comes full circle. If deflation takes hold, all those sh*tty assets levered to the hilt will REALLY become toxic, or completely worthless, choose your phase to suit.

Josh

[davelj]

Josh,

No, bad assets do not necessarily imply widespread liquidity problems; just liquidity problems related to those bad assets. Let me compare two separate financial events to make a distinction between a Liquidity Crisis and a Bad Asset Crisis.

When Long Term Capital Management imploded back in the Fall of 1998 we saw a true Liquidity Crisis. LTCM had a bunch of illiquid assets that were being marked down as hedge funds ganged up on the positions they were trying to unwind. When the Fed lowered rates and put together a plan with the major investment banks to organize an “orderly liquidation” of LTCM’s assets the Liquidity Crisis slowly disippated. LTCM’s investors lost a bunch of money but the markets returned to normal functioning in a relatively short period of time. That’s because LTCM’s assets were being undervalued in large measure BECAUSE OF the lack of liquidity as opposed to a problem with their underlying fundamental values. LTCM’s trading strategies were seriously flawed but the underlying values of the assets weren’t imperiled. Even companies with good credit were having problems rolling over their credit lines during the Fall of ’98. That’s not the case right now.

Flash forward to today. Most of these mortgage-related assets whether they are MBS’s, CDOs, CDO-squareds, etc. etc. have VALUES that are materially impaired because people aren’t paying their mortgages as originally expected. Furthermore, prices are deteriorating because the underlying assets were overvalued to begin with. So, even if you improve “liquidity” it isn’t going to improve the intrinsic value of the underlying assets that are causing the problem right now, as much as some would like to believe the contrary.

A Liquidity Crisis is a “pricing” issue. A Bad Asset Crisis is a “value” issue. Now, yes, you could argue that we have liquidity issues right now. But that’s not the root of the issue. The root of the problem is plain and simple bad assets. The two problems are related, but there’s a distinction between them.

[davelj]

Josh,

No, bad assets do not necessarily imply widespread liquidity problems; just liquidity problems related to those bad assets. Let me compare two separate financial events to make a distinction between a Liquidity Crisis and a Bad Asset Crisis.

When Long Term Capital Management imploded back in the Fall of 1998 we saw a true Liquidity Crisis. LTCM had a bunch of illiquid assets that were being marked down as hedge funds ganged up on the positions they were trying to unwind. When the Fed lowered rates and put together a plan with the major investment banks to organize an “orderly liquidation” of LTCM’s assets the Liquidity Crisis slowly disippated. LTCM’s investors lost a bunch of money but the markets returned to normal functioning in a relatively short period of time. That’s because LTCM’s assets were being undervalued in large measure BECAUSE OF the lack of liquidity as opposed to a problem with their underlying fundamental values. LTCM’s trading strategies were seriously flawed but the underlying values of the assets weren’t imperiled. Even companies with good credit were having problems rolling over their credit lines during the Fall of ’98. That’s not the case right now.

Flash forward to today. Most of these mortgage-related assets whether they are MBS’s, CDOs, CDO-squareds, etc. etc. have VALUES that are materially impaired because people aren’t paying their mortgages as originally expected. Furthermore, prices are deteriorating because the underlying assets were overvalued to begin with. So, even if you improve “liquidity” it isn’t going to improve the intrinsic value of the underlying assets that are causing the problem right now, as much as some would like to believe the contrary.

A Liquidity Crisis is a “pricing” issue. A Bad Asset Crisis is a “value” issue. Now, yes, you could argue that we have liquidity issues right now. But that’s not the root of the issue. The root of the problem is plain and simple bad assets. The two problems are related, but there’s a distinction between them.

[davelj]

Josh,

No, bad assets do not necessarily imply widespread liquidity problems; just liquidity problems related to those bad assets. Let me compare two separate financial events to make a distinction between a Liquidity Crisis and a Bad Asset Crisis.

When Long Term Capital Management imploded back in the Fall of 1998 we saw a true Liquidity Crisis. LTCM had a bunch of illiquid assets that were being marked down as hedge funds ganged up on the positions they were trying to unwind. When the Fed lowered rates and put together a plan with the major investment banks to organize an “orderly liquidation” of LTCM’s assets the Liquidity Crisis slowly disippated. LTCM’s investors lost a bunch of money but the markets returned to normal functioning in a relatively short period of time. That’s because LTCM’s assets were being undervalued in large measure BECAUSE OF the lack of liquidity as opposed to a problem with their underlying fundamental values. LTCM’s trading strategies were seriously flawed but the underlying values of the assets weren’t imperiled. Even companies with good credit were having problems rolling over their credit lines during the Fall of ’98. That’s not the case right now.

Flash forward to today. Most of these mortgage-related assets whether they are MBS’s, CDOs, CDO-squareds, etc. etc. have VALUES that are materially impaired because people aren’t paying their mortgages as originally expected. Furthermore, prices are deteriorating because the underlying assets were overvalued to begin with. So, even if you improve “liquidity” it isn’t going to improve the intrinsic value of the underlying assets that are causing the problem right now, as much as some would like to believe the contrary.

A Liquidity Crisis is a “pricing” issue. A Bad Asset Crisis is a “value” issue. Now, yes, you could argue that we have liquidity issues right now. But that’s not the root of the issue. The root of the problem is plain and simple bad assets. The two problems are related, but there’s a distinction between them.

[davelj]

Josh,

No, bad assets do not necessarily imply widespread liquidity problems; just liquidity problems related to those bad assets. Let me compare two separate financial events to make a distinction between a Liquidity Crisis and a Bad Asset Crisis.

When Long Term Capital Management imploded back in the Fall of 1998 we saw a true Liquidity Crisis. LTCM had a bunch of illiquid assets that were being marked down as hedge funds ganged up on the positions they were trying to unwind. When the Fed lowered rates and put together a plan with the major investment banks to organize an “orderly liquidation” of LTCM’s assets the Liquidity Crisis slowly disippated. LTCM’s investors lost a bunch of money but the markets returned to normal functioning in a relatively short period of time. That’s because LTCM’s assets were being undervalued in large measure BECAUSE OF the lack of liquidity as opposed to a problem with their underlying fundamental values. LTCM’s trading strategies were seriously flawed but the underlying values of the assets weren’t imperiled. Even companies with good credit were having problems rolling over their credit lines during the Fall of ’98. That’s not the case right now.

Flash forward to today. Most of these mortgage-related assets whether they are MBS’s, CDOs, CDO-squareds, etc. etc. have VALUES that are materially impaired because people aren’t paying their mortgages as originally expected. Furthermore, prices are deteriorating because the underlying assets were overvalued to begin with. So, even if you improve “liquidity” it isn’t going to improve the intrinsic value of the underlying assets that are causing the problem right now, as much as some would like to believe the contrary.

A Liquidity Crisis is a “pricing” issue. A Bad Asset Crisis is a “value” issue. Now, yes, you could argue that we have liquidity issues right now. But that’s not the root of the issue. The root of the problem is plain and simple bad assets. The two problems are related, but there’s a distinction between them.

[davelj]

Josh,

No, bad assets do not necessarily imply widespread liquidity problems; just liquidity problems related to those bad assets. Let me compare two separate financial events to make a distinction between a Liquidity Crisis and a Bad Asset Crisis.

When Long Term Capital Management imploded back in the Fall of 1998 we saw a true Liquidity Crisis. LTCM had a bunch of illiquid assets that were being marked down as hedge funds ganged up on the positions they were trying to unwind. When the Fed lowered rates and put together a plan with the major investment banks to organize an “orderly liquidation” of LTCM’s assets the Liquidity Crisis slowly disippated. LTCM’s investors lost a bunch of money but the markets returned to normal functioning in a relatively short period of time. That’s because LTCM’s assets were being undervalued in large measure BECAUSE OF the lack of liquidity as opposed to a problem with their underlying fundamental values. LTCM’s trading strategies were seriously flawed but the underlying values of the assets weren’t imperiled. Even companies with good credit were having problems rolling over their credit lines during the Fall of ’98. That’s not the case right now.

Flash forward to today. Most of these mortgage-related assets whether they are MBS’s, CDOs, CDO-squareds, etc. etc. have VALUES that are materially impaired because people aren’t paying their mortgages as originally expected. Furthermore, prices are deteriorating because the underlying assets were overvalued to begin with. So, even if you improve “liquidity” it isn’t going to improve the intrinsic value of the underlying assets that are causing the problem right now, as much as some would like to believe the contrary.

A Liquidity Crisis is a “pricing” issue. A Bad Asset Crisis is a “value” issue. Now, yes, you could argue that we have liquidity issues right now. But that’s not the root of the issue. The root of the problem is plain and simple bad assets. The two problems are related, but there’s a distinction between them.

[stansd]

Excellent Post, Dave…I agree in large part.

Question to you or others, and I hope I can characterize this sensically: I get the sense that the financial markets still don’t fully believe how bad the housing market is going to get-that’s why they think there is a liquidity crisis.

That said, there is enough fear out there of the unknown that asset prices are pretty well reflecting future reality even though this reality is worse than the current financial forecasts.

That’s my stab at an explanation of why everyone is perceiving a liquidity crisis, when the reality is as you say: we have a shitty asset crisis (we just haven’t come to grips yet with how shitty the assets really are).

Stan

[stansd]

Excellent Post, Dave…I agree in large part.

Question to you or others, and I hope I can characterize this sensically: I get the sense that the financial markets still don’t fully believe how bad the housing market is going to get-that’s why they think there is a liquidity crisis.

That said, there is enough fear out there of the unknown that asset prices are pretty well reflecting future reality even though this reality is worse than the current financial forecasts.

That’s my stab at an explanation of why everyone is perceiving a liquidity crisis, when the reality is as you say: we have a shitty asset crisis (we just haven’t come to grips yet with how shitty the assets really are).

Stan

[stansd]

Excellent Post, Dave…I agree in large part.

Question to you or others, and I hope I can characterize this sensically: I get the sense that the financial markets still don’t fully believe how bad the housing market is going to get-that’s why they think there is a liquidity crisis.

That said, there is enough fear out there of the unknown that asset prices are pretty well reflecting future reality even though this reality is worse than the current financial forecasts.

That’s my stab at an explanation of why everyone is perceiving a liquidity crisis, when the reality is as you say: we have a shitty asset crisis (we just haven’t come to grips yet with how shitty the assets really are).

Stan

[stansd]

Excellent Post, Dave…I agree in large part.

Question to you or others, and I hope I can characterize this sensically: I get the sense that the financial markets still don’t fully believe how bad the housing market is going to get-that’s why they think there is a liquidity crisis.

That said, there is enough fear out there of the unknown that asset prices are pretty well reflecting future reality even though this reality is worse than the current financial forecasts.

That’s my stab at an explanation of why everyone is perceiving a liquidity crisis, when the reality is as you say: we have a shitty asset crisis (we just haven’t come to grips yet with how shitty the assets really are).

Stan

[stansd]

Excellent Post, Dave…I agree in large part.

Question to you or others, and I hope I can characterize this sensically: I get the sense that the financial markets still don’t fully believe how bad the housing market is going to get-that’s why they think there is a liquidity crisis.

That said, there is enough fear out there of the unknown that asset prices are pretty well reflecting future reality even though this reality is worse than the current financial forecasts.

That’s my stab at an explanation of why everyone is perceiving a liquidity crisis, when the reality is as you say: we have a shitty asset crisis (we just haven’t come to grips yet with how shitty the assets really are).

Stan

[4plexowner]

“the Fed will lend directly to banks and the banks don’t have to tell anybody”

Fed’s Auction Scam
http://globaleconomicanalysis.blogspot.com/2007/12/feds-auction-scam.html

~

Dave – thanks for posting – great to get insight from the banking industry – it appears that you are associated with some banks that are healthy (at least at this point) – what is your take on the bailouts being offered to banks that aren’t healthy? unfair to prudent bankers? bailout likely to drive prudent bankers out of business because they can’t compete with recipients of ‘free’ money from the Fed and other sources like FHLB and this new auction BS?

[4plexowner]

“the Fed will lend directly to banks and the banks don’t have to tell anybody”

Fed’s Auction Scam
http://globaleconomicanalysis.blogspot.com/2007/12/feds-auction-scam.html

~

Dave – thanks for posting – great to get insight from the banking industry – it appears that you are associated with some banks that are healthy (at least at this point) – what is your take on the bailouts being offered to banks that aren’t healthy? unfair to prudent bankers? bailout likely to drive prudent bankers out of business because they can’t compete with recipients of ‘free’ money from the Fed and other sources like FHLB and this new auction BS?

[4plexowner]

“the Fed will lend directly to banks and the banks don’t have to tell anybody”

Fed’s Auction Scam
http://globaleconomicanalysis.blogspot.com/2007/12/feds-auction-scam.html

~

Dave – thanks for posting – great to get insight from the banking industry – it appears that you are associated with some banks that are healthy (at least at this point) – what is your take on the bailouts being offered to banks that aren’t healthy? unfair to prudent bankers? bailout likely to drive prudent bankers out of business because they can’t compete with recipients of ‘free’ money from the Fed and other sources like FHLB and this new auction BS?

[4plexowner]

“the Fed will lend directly to banks and the banks don’t have to tell anybody”

Fed’s Auction Scam
http://globaleconomicanalysis.blogspot.com/2007/12/feds-auction-scam.html

~

Dave – thanks for posting – great to get insight from the banking industry – it appears that you are associated with some banks that are healthy (at least at this point) – what is your take on the bailouts being offered to banks that aren’t healthy? unfair to prudent bankers? bailout likely to drive prudent bankers out of business because they can’t compete with recipients of ‘free’ money from the Fed and other sources like FHLB and this new auction BS?

[Author]

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