US News and World Report

A good essay by Mort Zuckerman...

No one knows the true value of all that residential real estate at the base of the pyramid in which mortgages back up the collateral debt obligations that in turn back up the short-term loans that many banks and hedge funds have made to finance these CDOs. A recent review of would-be homeowners is hardly encouraging. Almost all exaggerated their incomes to win approval, and almost 60 percent inflated their incomes by more than 50 percent. Too many home loans did not require any down payment, principal repayment, or documentation...

With home prices falling rather than rising, refinancing is impossible for borrowers who fall behind. Defaults have accelerated. As one pioneer in the bundling of mortgages into marketable securities put it, "We're not really sure what the guy's income is, and...we're not sure what the house is worth."...

Many pension funds, insurance companies, hedge funds, and banks hold swaps and subprime derivatives but have not yet reported their losses, or at least not all of their losses, making it difficult to understand how big their exposure is. They are having difficulties determining the value of assets, making them impossible to sell, i.e., illiquid. The danger is that a liquidity crisis will drive financial institutions into insolvency, which could have a major impact on the economy.

The central banks have seen the threat. The European Central Bank has put up $212 billion "to assure orderly conditions in the euro money market." It's an amount so staggering that it perversely led the markets to fear that the ECB knows something that would indicate the situation is worse than it seems. The Federal Reserve similarly stated that it would provide "reserves as necessary." The concern is that the market has such anxiety about all debts, up and down the food chain, that no one will wish to buy them. Put it the other way: Fewer and fewer lenders are ready to lend. Many were going to sell high-yield bonds to finance their growth; they have had to withdraw them. In July, the issuance of these bonds dropped about 90 percent from June to a mere $2.4 billion. Even high-quality investment-grade bond offerings from companies with excellent credit fell from $109 billion in June to only $30 billion in July.