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|User Info||Bloomberg's Editorial On MBS Failures; entered at 2012-04-30 10:05:07|
If I can't pay cash (immediate liquidation price) then this is capped off immediately.
Banks were lending at 100% LTVs which they would NEVER do without the ability to print that credit out of nothing.
There's nothing wrong with liquifying assets and as long as you hold the party doing it to account in the event of value declines market discipline is more than sufficient to stop this from happening.
The problem comes in when you tell the market that there will be no penalty for getting it wrong. That started with Continental Illinois when bondholders were protected and is why we had this mess happen.