Portuguese banks have been frozen out of the capital markets because of a downgrading of the country's sovereign risk, making them dependent on funding from the European Central Bank.
However, that may not be the case if 200 or 2, 000 banks fail because most held mortgage-backed-securities they thought were safe because of their AAA ratings and because the strict application of mark to market accounting for those securities in a frozen market wiped out their capital on a massive scale.
Bodden and Milter allegedly told foreign investors that their funds would be invested in U.S. financial markets by Lempert Brothers through Lempert Capital and that all such invested funds would be frozen and the balance returned if the value of the investments dropped over 20%.
The frozen market for mortgage-backed securities was triggering massive write-downs, i.e. destroying capital, even while the underlying mortgages were still performing.