As noted in my post on the invariable failure of the Treasury's PPIP initiative, it is impossible to coax liquidity from the sidelines if asset owners are unwilling to trade at a price approximating market value. In this case, banks perceive themselves to own a valuation call option, one where they hope time will boost asset values such that underwater (at least on a mark-to-market basis) securities have time to recover. While this is a negative approach supported by weak and ineffectual accounting rules, banks are not violating the rule of law.

Consider, however, the looming time bomb that is the Commercial Mortgage-Backed Securities (CMBS) market. With the hundreds of billions of 5 year paper originated between 2005-07, there is a huge refinancing requirement just over the the horizon. Many, if not most, of these projects are not readily financiable in today's market environment. Further, the complexity of their capital structures has given rise to an array of misaligned motives that will invariably find their way into court. Think about the unrated, junior most layer of the capital structure. These investors, with expected IRRs at inception of 20%+, are looking at a zero payout at this point  However, many also hold the servicing rights to the structures, and are charged with the responsibility of acting in the best interests of all debt holders. With the scepter of refinancing just 1-3 years out, all is not looking good. But with the hammer of their contractual rights and historically low interest rates, they are currently able to service the debt without the pressure of necessarily selling out, which is exactly what the AAA senior tranche would like them to do. So you have the AAAs who felt very secure in a liquidation scenario not controlling the timing or manner of liquidation, while the unrated z-bond holders are bust on a mark-to-market basis but holding most of the cards. At the end of the day the magic of securitization didn't disseminate risk, it spread responsibility. And in the absence of a need to mark-to-market, the vehicles can continue to exist as members of the walking dead. Now that the day of reckoning is rapidly approaching, their legal construct will necessarily be tested. The General Growth Properties bankruptcy will be our first mega-scale test of whether these Special Purpose Entity (SPE) structures hold up. This is a clear indictment of the way these vehicles were established, and the blame lies squarely at the feet of the structurers (convoluted and conflicted, no?), the rating agencies (AAA-rated super senior? Really?) and the investors (were these documents ever read?).