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We’re getting to the crux of this crisis. Liquidity isn’t the problem. Insolvency is the problem. CFC, IndyMac and so many other banks are offering sky high CD rates b/c they can’t get capital anywhere. So they have to bid up for deposits. They’ve underwritten so many bad loans with depositors’ money that they’re at risk of failure.

That’s how these lenders are failing; they run out of capital to fund mortgage lending. The most vulnerable banks, like American Home Mortgage, relied on other banks for its capital. Banks are more capricious than depositors and when they saw AHM get into trouble, they quickly cut off the company’s credit facilities. If a bank has no money to lend, well then folks, that’s all she wrote.

CFC underwriting was probably worse than AHM; reports about the latter said they avoided subprime almost entirely, yet still had enough bad loans to scare off lenders. But CFC has deposits, and depositors aren’t quite as fickle. They respond to CFC’s sky-high CD rates, providing emergency capital to keep funding the business.

It’s only a matter of time for CFC. They’re running out of capital. Remember when so many other lenders were going under and CFC doubled down? Instead of recognizing how dangerous the mortgage lending market had become, they scooped up hundreds (thousands?) of fired AHM lenders and made a grab for additional market share. IndyMAC did that too.

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