There is the principal of unintended consequences. You do something to improve the situation but other changes also happen that you were not fully expecting.
http://en.wikipedia.org/wiki/Unintended_consequence

Below is one example.


The US Fed decided to increase liquidity in the banking system. It injected capital to the tune of about $200 billion. They also broaden the number of assets they would accept in exchange for capital from the Fed.

Note - The Fed facility very similar to asset based lending or hard money where the borrower provides assets to raise cash and the deal is based on the assets value).

Carlyle Capital Corporation (CCC) was actually hurt by the Fed's action even though the fund held mostly Fannie Mae and Freddie Mac AAA rated securities (mortgage backed loans which the two semi-government organizations packaged into bonds and sold on). Take a look at the following three paragraphs from an article in the Financial Times where they do a good job of explaining what happened.

In response to the credit woes ripping through the financial system, the Fed this week unveiled a new $200bn securities lending facility that will allow dealers to swap hard-to-finance mortgage securities, such as the $21.7bn held by CCC, for Treasuries.

The Fed intervention was designed to help, but in the case of CCC it had the reverse effect, said Mr Rubenstein in an interview with the Financial Times only hours after walking away from frantic, last-minute talks with banks this week.

He said that the banks realised that because of the Fed’s intervention, the underlying assets of CCC were worth more, which only made them more determined to seize its assets quickly and crystallise that value by selling some.

http://www.ft.com/cms/s/0/c531f716-f216-11dc-9b45-0000779fd2ac.html
[Anyone know how to turn the above line into a hot link so you can just click on it?]

Why is the above important? Two reasons.

1. Fannie and Freddie are the folks who buy conforming loans and set the standards for what conforming means. They are the two elephants in the market. If their securities are not liquid they will not be buying many conforming mortgages. There will be even less money available for home loans.

2. When the S&L banking crisis happened in the US a couple of decades ago many successful RE investors were hurt. Banks pulled their credit lines and otherwise shut them off. Business models that depended on capital being available ground to a halt. Overheads killed the businesses when they could no longer keep doing deals. Many times there was nothing wrong with the borrower or the business model. The banks just ran out of money.


Care to discuss further?


John Corey

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