In the aftermath of the crisis, regulators initially planned to force asset managers like Vanguard and Pimco to contact at least five banks when seeking a price for a derivatives contract, a requirement intended to bolster competition among the banks.
It is also threatening to break up Britain's Lloyds Banking Group and force asset sales and limit dominant market positions at Royal Bank of Scotland and other European lenders who took help.
First, if growth did not recover and surprise on the upside (in which case high asset prices would be justified), eventually slow growth would dominate the levitational effects of liquidity and force asset prices lower, in line with weaker economic fundamentals.
"At the beginning, banks were willing to accept not to trigger margin calls because they feared forced assets sales," said Philip Gisdakis, a senior credit strategist at Unicredit in Munich, "but now that there is a serious deterioration in the valuation of collateral, they cannot do that any longer and need to protect their loans".
Debts go bad, weakening banks, forcing asset sales and driving prices down further.
Banks are pulling back from international markets where they have small operations, and European governments that bailed out local lenders are forcing asset sales to wind down bad investments.
But the changes are deeply unpopular in Greece, where street protests continued, and the Socialist government of Prime Minister George A. Papandreou will need to overcome widespread skepticism that it can carry out the budget cuts, layoffs, tax increases and forced asset sales, beginning with a vote Thursday on putting the measures in effect.
By reducing this risk, the Fed can lessen the chance that forced asset sales at big discounts will destabilize markets.
Short-term lenders became reluctant to finance the highly leveraged institutions, forcing asset sales at increasingly distressed prices and leading in many cases to a death spiral.
