In Ask the Expert: How the Securities Foreclosure Mess Happened, mortgages expert witness Maher E. Soliman writes:
With the recent collapse in lending and drain on market liquidity, property values also collapsed.The events hold a negative effect on bank’s assets and likewise the capital value of all member banks and FSB’s. This is the current condition that further reduces banking liquidity.
If you return to 1989 and the passage of FIERREA, you recall how the legislation made it unlawful for a bank to hold junk bonds as bank assets. It was a decision coupled with the government electing to close (versus to sell off) the largest market maker of junk bonds at the time.
Drexil Burnham and Lambert fell in a shake up that caused a direct collapse of the junk bond market in just over a 6-month period. Its was cause for a loss in asset value of over 70% after assets were sold by the FDIC, RTC, banks and S&Ls at a deep government induced discount.
The sector subsequently recovered their previous value as other market makers entered the junk bond arena seeking to provide liquidity to buyers and sellers.
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