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"The Worst is Yet to Come..."

Written By Brian Hicks

Posted August 19, 2008

If I hear one more banking CEO reference baseball metaphors for how deep our financial crisis really is, I’ll scream.  Truth is – we’re no where near finished with the downturn.  Honest. 

Smart analysts like Meredith Whitney know this.  I know it.  And you know it.  It’s just the banking world and the naïve that actually believe we’re nearing a market bottom.

Richard Fuld, for example, once told us the worse of the crisis is "behind us." 

JP Morgan Chase’s Jamie Dimond believed the market debacle is "maybe 75 percent to 80 percent over."

Remember when the Merrill Lynch CEO said the subprime crisis was "reasonably well contained"?

Or when FDIC Chairman Sheila Barr said we’re in the 7th inning?

Or when Morgan Stanley said we’re in the 3rd inning?

Or even when Morgan Stanley CEO John Mack says the 8th inning… maybe even top of the 9th?

Truth is we’re lucky if we’re in the top of the 6th inning of a double-header. 

But truth be know, "The worst is yet to come in the U.S.," according to Kenneth Rogoff, former chief economist at the IMF.


"Credit market turmoil has driven the U.S. into a recession and may topple some of the nation’s biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund."

"The financial sector needs to shrink; I don’t think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.”

"The U.S. housing slump has triggered about $500 billion in credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest U.S. securities firm. Bonds of regional banks such as National City Corp. and Keycorp are under pressure on expectations of more fallout. Rogoff, 55, said the government should nationalize Fannie Mae and Freddie Mac, the nation’s biggest mortgage-finance firms."

"Freddie Mac and Fannie Mae “should have been closed down 10 years ago,” he said. “They need to be nationalized, the equity holders should lose all their money. Probably we need to guarantee the bonds, simply because the U.S. has led everyone into believing they would guarantee the bonds.”

"Banks repossessed almost three times as many U.S. homes in July as a year earlier and the number of properties at risk of foreclosure jumped 55 percent, according to RealtyTrac Inc., an Irvine, California-based seller of foreclosure data. U.S. builders broke ground on the fewest houses in 17 years last month, according to a Bloomberg News survey."

"Rogoff told a conference in Singapore today that the credit crisis is likely to worsen and a large bank may fail, Reuters reported earlier. He was the IMF’s chief economist from August 2001 to September 2003."

"Like any shrinking industries, we are going to see the exit of some major players,” Rogoff told Bloomberg, declining to name the banks he expects to fail. “We’re really going to see a consolidation even among the major investment banks.”

"The only way to put discipline into the system is to allow some companies to go bust,” Rogoff said. “You can’t just have an industry where they make giant profits or they get bailed out.”

Oh, and don’t forget that Option ARM resets, which will be worse than subprime, is right around the corner.

 "It shouldn’t come as a shock when mountainous Option ARM and Alt-A loans begin resetting and the second leg of the credit crisis begins.

Alt-A loans were given to borrowers with credit scores of between 620 and 700, and included the option of interest-only loans, option ARMs, and no documentation loans that required little if any documentation for loan approval. Ninety percent of those that got an Option ARM in 2006 provided little or no documentation.

Ninety percent!

And it’s estimated that only 60% of Option ARM borrowers make only minimum monthly payments. Others estimate that up to 80%.

Say a borrower makes minimum payments on a $600,000 loan. That loan could easily be a $750,000 loan within two years.

And we’re supposed to be shocked when this problem ends in the second credit crisis?"

I’d love to hear what you think.  You can leave a message below.