So, is the ongoing and apparently spreading debt problem a crisis of confidence or a crisis of substance? The question was originally posed in an interview with W. Kyle Gore in the August 21 issue of Net Lease forum. Gore, a member of NLf's Editorial Advisory Board, warns readers that he is neither a student of the Fed nor a research analyst. Point taken, but the Baltimore-based managing director of RBS Greenwich Capital does have clear-cut and well-put opinions of how the rumblings throughout the debt market impact daily practitioners. For the record, the respondents to last week's Feedback Poll came down decidedly (to the tune of 54%) on the side of subprime as a crisis of substance, with the remainder seeing it as a confidence issue. Herein, Commentator Gore provides the nuances:

"The crisis of substance started in one market--the subprime market--which lead to the crisis of confidence in a significant number of other credit markets. That's driven by two facts. Some of the players in the subprime markets also play in the other markets, specifically CDOs and hedge-fund players generally, who participate in all credit markets. They buy subordinate, unrated or below investment-grade tranches of securities offerings in all the markets and in turn issue their own securities.

"So if you're buying a security in a CDO whose exposure also includes subprime, you could tend to lose confidence in the ability of that CDO to perform well, and if you're a lender to that CDO you might lose confidence to the point that you call your loans or change your loan terms, which then forces the CDO or hedge-fund sponsor to sell assets. So the substantive problem in subprime leads to a confidence problem--which leads to a price problem--in all other asset classes.

"It's interesting to ask which is the more critical. In the long term, the crisis of substance is more critical because it means that instruments designed to perform in a certain way aren't gong to perform that way. Short term, the crisis of confidence is far worse. It paralyzes activity. It causes credit markets to cease up, as they have, which will lead to the ultimate ripple effect to other segments of the economy.

"But recently the Fed stepped in and cut the discount rate to shore up confidence, not substance. Cutting the rate is more of a symbolic thing; it's the Fed saying, 'We care and those few financial institutions that might have a substantive problem can feel free to come to the discount window and we're going to be more lax. We'll give you 30 days and it's going to cost you a little less than it would have.' I'm not the guy to comment in depth on what the Fed did. We have teams of people who do that for a living. But this sends a signal to the markets that the Fed is aware that there might be an issue and they are on the case.

"Every activity in life, particularly those that are capital markets-related, swing like a pendulum. But pendulums have a bad habit of not stopping in the middle. Now it's going in the other extreme of excessive constraint. How long will it take for the pendulum to settle back in the middle and some form of sanity? No one knows. In April, people would have said it will settle itself out by the summer, and subprime is an isolated problem. Here we are just before a seminal events--the return of the world after Labor Day. That's when you'll get a real assessment of how long this issue will last.

"Will we have boom times again? Of course. That's inherent in a capitalist society. People treat every event like a soap opera, and we go from great and giddy to the world coming to an end when in fact neither was true."