During yet another volatile week, the Dow (down 6.9% y-t-d) and the S&P500 (down 8.1%) each rose 1.4%. The Utilities gained 1.2% (down 7.2%), while the Transports dipped 0.2% (up 2.9%). The Morgan Stanley Cyclical index increased 1.2% (down 6.0%), and the Morgan Stanley Consumer index advanced 1.4% (down 6.3%). The small cap Russell 2000 added 0.4% (down 8.4%), and the S&P400 Mid-Caps increased 0.2% (down 7.3%). The NASDAQ100 gained 0.4% (down 14.6%), and the Morgan Stanley High Tech index rallied 1.5% (down 13.3%). The Street.com Internet Index gained 1.3% (down 10.2%), while the Semiconductors declined 0.6% (down 14.8%). The NASDAQ Telecommunications index gained 0.7% (down 11.5%). The Biotechs added 0.2% (down 7.5%). The Broker/Dealers declined 0.8% (down 6.9%) and the Banks dipped 0.6% (down 1.2%). With Bullion declining $20.0, the HUI Gold index dropped 1.9% (up 6.3%).

A steep yield curve became steeper yet. Three-month Treasury bill rates fell 5 bps this past week to 2.19%. Two-year government yields declined 2 bps to 1.91%. Meanwhile, five-year T-note yields rose 7 bps to 2.76%, and ten-year yields jumped 12.5 bps to 3.77%. Long-bond yields rose 15.5 bps to 4.58%. The 2yr/10yr spread ended the week at a notable 186 bps. The implied yield on 3-month December '08 Eurodollars rose 2.5 bps to 2.355%. Benchmark Fannie MBS yields surged 32 bps to 5.51%, this week dramatically under-performing Treasuries. Agency debt also performed poorly. The spread on Fannie's 5% 2017 note widened 11 to 71 bps and Freddie's 5% 2017 note widened 10 to 68 bps. The 10-year dollar swap spread increased 6.25 to 72.75, the widest since year-end. Corporate bond spreads were wider, with an index of junk bonds rising 24 bps.

Investment grade issuance included Credit Suisse $2.0bn, Procter & Gamble $1.5bn, Nabors Industries $575 million, PNC $375 million, and RPM International $250 million.

Junk issuance included Goodman Global $500 million.

Convert issuance included Vertex Pharmaceuticals $288 million, GMX Resources $105 million, and Glotek $100 million.

German 10-year bund yields jumped 9 bps to 3.95%, while the DAX equities index rallied 0.8% (down 15.5% y-t-d). Japanese "JGB" yields increased 3.5 bps to 1.45%. The Nikkei 225 recovered 3.1% (down 11% y-t-d and 23.9% y-o-y). Emerging debt and equities markets were mixed-to-higher - and volatile. Brazil's benchmark dollar bond yields declined 4 bps to 5.95%. Brazil's Bovespa equities index rallied 3.7% (down 4.1% y-t-d). The Mexican Bolsa gained 2.0% (down 2.7% y-t-d). Mexico's 10-year $ yields rose 5 bps to 5.28%. Russia's RTS equities index jumped 6.3% (down 13.2% y-t-d). India's Sensex equities index rose 3.7% (down 10.7% y-t-d). After the Lunar New Year break, China's Shanghai Exchange declined 2.2% this week (down 14.5% y-t-d).

Freddie Mac posted 30-year fixed mortgage rates rose 5 bps this week to 5.72% (down 58bps y-o-y). Fifteen-year fixed rates jumped 10 bps to 5.25% (down 78bps y-o-y). One-year adjustable rates dipped 3 bps to 5.00% (down 52bps y-o-y).

Bank Credit surged $51.4bn during the most recent data week (2/6) to a record $9.341 TN. Bank Credit has posted a 29-week surge of $697bn (14.5% annualized) and a 52-week rise of $986bn, or 11.8%. For the week, Securities Credit jumped $45bn. Loans & Leases increased $6.3bn to a record $6.884 TN (29-wk gain of $560bn). C&I loans fell $7.8bn, with one-year growth of 20.8%. Real Estate loans gained $10.2bn (up 7.6% y-o-y). Consumer loans added $2.6bn. Securities loans rose $3.6bn, while Other loans declined $2.3bn. Examining the liability side, "Borrowings from Other" jumped $40bn.

M2 (narrow) "money" supply jumped $33.8bn to a record $7.569TN (week of 2/4). Narrow "money" expanded $107bn over the past five weeks, with a y-o-y rise of $473bn, or 6.7%. For the week, Currency added $0.2bn and Demand & Checkable Deposits increased $19.9bn. Savings Deposits declined $11.8bn, while Small Denominated Deposits gained $2.5bn. Retail Money Fund assets surged $22.9bn.

Total Money Market Fund assets (from Invest. Co Inst) jumped $26bn last week (6-wk gain $275bn) to a record $3.388 TN. Money Fund assets have posted a 29-week rise of $804bn (56% annualized) and a one-year increase of $995bn (41.6%).

Asset-Backed Securities (ABS) issuance rose to a still slow $3.0bn. Year-to-date total US ABS issuance of $29bn (tallied by JPMorgan) is running about a third the level from comparable 2007. Still no Home Equity ABS deals have been sold thus far, compared to $45bn in comparable 2007. Year-to-date CDO issuance of $1.5bn compares to the year ago $39bn.

Total Commercial Paper dropped $13.3bn to $1.835 TN. CP has declined $389bn over the past 27 weeks. Asset-backed CP fell $6.2bn (27-wk drop of $399bn) to $796bn. Over the past year, total CP has contracted $198bn, or 9.7%, with ABCP down $266bn (25%).

Fed Foreign Holdings of Treasury, Agency Debt last week (ended 2/13) declined $4.7bn to $2.113 TN. "Custody holdings" were up $56.5bn y-t-d, or 20.4% annualized, and $302bn year-over-year (16.7%). Federal Reserve Credit fell $3.4bn last week to $858bn. Fed Credit has contracted $15.2bn y-t-d, or 12.9% annualized, while expanding $11.1bn y-o-y (1.3%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.350 TN y-o-y, or 27%, to a record $6.340 TN.

Global Credit Market Dislocation Watch:

February 14 - Financial Times (Paul J Davies and Michael Mackenzie): "The world of synthetic collateralised debt obligations is suffering as the cost of protecting corporate debt against default via credit derivatives - from which these CDOs are created - continues to be pushed higher. But there is another problem building, and some fear it could lead to a repeat of the correlation crisis of 2005, which saw hedge funds and investment banks suffer hundreds of millions of dollars worth of losses. The problem then was that investment banks and hedge funds had built up large exposures to the riskiest equity tranches of synthetic CDOs, which pay the highest returns but bear the first losses from any defaults in an underlying pool of credit derivatives. When sentiment changed suddenly after the shock downgrades of US carmakers GM and Ford, these investors found that there was no market for the risk they held. Now a similar correlation pattern has emerged as hedge funds have loaded up on the same risk by selling protection on equity tranches. However, this time the patterns of pricing in the CDO market, or the movements in correlation, have also been fuelled by what is occurring at the other end of the risk spectrum. Here, large banks worried about systemic risk and the potential collapse of the monoline industry have been busily trying to buy as much protection as possible on the safest senior tranches.... 'Correlation now is even more unbalanced than it was in 2005,' says Alberto Gallo, credit derivatives strategist at Bear Stearns. 'Most of the money in the long correlation trade [for example selling protection on equity ranches is from hedge funds.'"

February 15 - The New York Times (Jenny Anderson and Vikas Bajaj): "Some well-heeled investors got a big jolt from Goldman Sachs this week: Goldman...refused to let them withdraw money from investments that they had considered as safe as cash. The investments at issue are so-called auction-rate securities, instruments at the center of the latest squeeze in the credit markets. Goldman, Lehman, Merrill Lynch and other banks have been telling investors the market for these securities is frozen -- and so is their cash. The banks typically pitch these securities to corporations and wealthy individuals as safe alternatives to cash... The bonds are, in fact, long-term securities. But the banks hold weekly or monthly auctions to set the interest rates and give holders the option of selling the securities. Only this week almost 1,000 of these auctions failed. The banks also refused to support the auctions, leaving many investors wondering when they will get their money back. 'Investors have lost confidence in the liquidity of these instruments,' said G. David MacEwen, the chief investment officer for fixed income at American Century Investments... 'These types of instruments depend on new investors showing up to own the securities.'"

February 14 - Financial Times: "The subprime virus has mutated. It has now infected the municipal market. The same issues that roiled the asset-backed commercial paper market in the autumn are cropping up again. Liquidity risk turns out to be a bigger problem than credit-focused investors had reckoned with. And liquidity risk can be fatal. Look at what happened to structured investment vehicles, a $300bn or so market that shrivelled away. Municipal issuers tap the capital markets in several ways and all of them now look under varying degrees of stress. The auction rate securities, a $330bn market according to JPMorgan Chase, have coupons that reset periodically at auctions. Now a few are failing, in part because of jitters around the insurers that support the credit ratings of municipal debt. There has to be a good chance that this type of funding vehicle, like SIVs, will lose its raison d'être."

February 11 - Financial Times (Aline van Duyn and Michael Mackenzie): "Another day, another loser in the global game of subprime hide and seek. As the Group of Seven finance leaders said over the weekend, there could be $400bn of losses in the financial system linked to US subprime mortgages. Yet only $120bn have been revealed so far. American International Group's confession on Monday reveals where some more of the losses were hiding. In December, the US insurer announced a $1.05bn to $1.15bn charge for October and November for credit default swap (CDS) insurance it wrote against collateralised debt obligations... Now, alongside PwC's conclusion that AIG had a 'material weakness' in its reporting, that charge has been increased to $4.9bn. That is largely the result of a change in methodology. Last time AIG did not mark its exposure to where the cash bonds were trading - instead it made an adjustment for where it believed the CDS should trade. Now, it has effectively acknowledged there is not good enough market data on the CDS, so it has reverted to pricing off the cash bonds... The trouble is, the AIG numbers are only marked as at November 30. Its $63bn of exposure to subprime CDOs is likely to have taken a further hit since then."

February 14 - Financial Times (Aline van Duyn and Michael Mackenzie): "A collapse in confidence in a $330bn corner of the debt market has left US municipalities and student loan providers facing spiralling interest rate costs. The implosion of the so-called auction-rate securities market - amid worries that bond insurers guaranteeing much of this debt could face rating downgrades - is the latest incarnation of the credit crisis. The market, heavily used by municipal borrowers and backed by triple-A rated guarantees from bond insurers such as Ambac and MBIA, was until now used as a safe harbour for investors. The interest rates on such bonds reset either weekly or monthly and a lack of interest from investors can trigger a sharp rise to compensate holders. The market's sudden slump has pushed interest rates as high as 20% for entities from the Port Authority of New York & New Jersey to a hospital. 'The auction securities market is falling apart,' said David Cooke, chief financial officer at Park Nicollet Heath Services in Minneapolis."

February 13 - The Wall Street Journal (Liz Rappaport and Randall Smith): "The credit crunch that has so far caused more than $100 billion of losses for big Wall Street investment firms now extends to students in Michigan, and it could soon hit many other borrowers, ranging from California museums to the prestigious Deerfield Academy prep school in Massachusetts. Yesterday, the Michigan Higher Education Student Loan Authority, a state agency, said...that 'due to the current and unprecedented capital-markets disruption' it will stop making loans under the state's Michigan Alternative Student Loan, or MI-Loan, program. More than 100 Michigan colleges and universities participate in the program. In the past few days, problems have mounted for many borrowers as an obscure -- but important -- corner of the credit market called auction-rate securities has gone into a deep freeze. Borrowers ranging from student-loan authorities to municipalities to big bond funds depend on this market to raise money for making loans and funding projects. They do so by selling securities whose interest rates are reset every week as they change hands in auctions arranged by Wall Street firms like Goldman Sachs Group Inc., Citigroup Inc. and J.P. Morgan Chase & Co. Moody's... estimates the size of this market at $325 billion to $360 billion. In recent days, the money managers and other investors who typically buy auction-rate securities have been balking, out of fear the credit turmoil is spreading."

February 13 - Bloomberg (Martin Z. Braun): "A wave of bonds sold by U.S. municipal borrowers with rates set through periodic auctions failed to attract enough buyers in recent days as banks including Goldman Sachs Group Inc. and Citigroup Inc. that run the bidding wouldn't commit their own capital to the debt. Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey, with bidding run by Goldman, soared to 20% yesterday from 4.3% a week ago... Presbyterian Healthcare in Albuquerque and New York state's Metropolitan Transportation Authority also had failures, officials said. Investor demand for the securities has declined on waning confidence in the credit strength of insurers backing the debt, and on reluctance by dealers to submit bids and risk ending up with too many of the bonds... It's the beginning of the end for the auction-rate market,' said Matt Fabian... with... Municipal Market Advisors. 'Banks have stopped supporting the market.'"

February 13 - Dow Jones: "Failed auctions of mostly municipal debt totaled approximately $6 billion Tuesday, with Citigroup the lead underwriter on the bulk of the sales... Auction-rate securities, a type of bond that investors can re-sell at regularly scheduled auctions, have been knocked by the turmoil in credit markets... The failed auctions Tuesday follow at least six others, sparking concerns that this once safe corner of the credit markets is the next area to crumble. When an auction fails, the holders of the securities are paid a premium until the paper can be sold."

February 11 - Bloomberg (Thomas R. Keene and Mark Pittman): "Subprime fires have found 'new dry brush to burn,' according to UBS AG strategists, who compare turmoil in the auction-rate securities market with last year's crisis in structured investment vehicles. 'It's like SIV stress all over again in that a business that made the banks very little money comes back as a black hole of the balance sheet that could steal critical capital away from the engines of profits that the banks so sorely need at present,' writes William O'Donnell..."

February 15 - Financial Times (Henny Sender): "Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more private equity transactions will collapse. This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals... 'It is the tipping point argument,' said a senior partner at one of the biggest private equity firms, who asked not to be named. 'The banks have so many issues with their balance sheets that they are considering a new policy.' However, such a change could have a dramatic impact on the markets. 'If you want to come up with news that could make the Dow drop another 500 or 1,000 points, this would be it,' said one lawyer specialising in private equity for a New York law firm."

February 15 - The Wall Street Journal (Diya Gullapalli): "The freeze-up in the little-known but important 'auction rate' debt market is starting to create big problems for leveraged closed-end funds and their investors. Closed-end funds are a cousin of mutual funds that issue a fixed number of shares and essentially trade like stocks. To boost returns for common shareholders, many closed-end funds employ leverage, which essentially involves borrowing at short-term interest rates and investing the proceeds in higher-yielding assets. That approach, however, is now coming under extreme pressure, as the auction-rate securities market many of the funds tap for borrowing has seized up. In recent days, hundreds of such auctions have failed amid the broader credit crunch. Besides closed-end funds, the lack of trading is also hurting big borrowers like student-loan authorities and municipalities."

February 15 - Financial Times (Aline Van Duyn and Michael Mackenzie): "Eliot Spitzer, New York governor, yesterday gave bond insurers three to five business days to find fresh capital, or face a potential break-up by state regulators who want to safeguard the municipal bond markets."

February 14 - Dow Jones (Michael Wilson): "The cost of holding corporate debt, as measured by the spread over risk-free government bonds, has risen to levels not seen since the last global downturn, according to new research from Deutsche Bank. The Markit iBoxx corporate bond index, which tracks the price of corporate cash bonds and is considered the conventional measure of the price of corporate credit, now trades at around 165 bps over risk-free assets. These spreads are at the widest levels since the bear market peak of 2002, when the index traded at 175 bps... However, the iBoxx index has only existed for around a decade. To see further into the past, Deutsche Bank also used Moody's historical spread data, which span several decades, in place of iBoxx spreads. The bank found that the price of investment grade credit has now reached its highest level in the last 70 or 80 years."

February 11 - Bloomberg (Abigail Moses): "Banks are driving the cost of protecting corporate bonds from default to the highest on record as they seek to hedge against losses on collateralized debt obligations, according to traders of credit-default swaps. Contracts on the benchmark Markit iTraxx Crossover Index soared 17 bps to 547... according to JPMorgan Chase & Co... 'Banks have taken losses, spreads are going wider and they are just cutting positions,' said Andrea Cicione, a senior credit strategist at BNP Paribas... 'Lenders are probably reducing risk positions in a deteriorating credit environment by unwinding CDOs.'"

February 12 - Bloomberg (Patricia Kuo): "Citigroup Inc. and seven other top investment banks may need to write down at least $15.1 billion on unsold loans and bonds for leveraged buyouts in their first quarter earnings, according to Bank of America Corp. analysts. As prices of high-yield debt continue to fall this year, banks including Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Merrill Lynch & Co. may have more writedowns for $157 billion of loans and bonds than they did in the third-quarter, analysts led by...Jeffrey Rosenberg wrote..."

February 12 - Financial Times (David Oakley): "A growing number of leveraged loans backing private equity buy-outs are in danger of breaching covenants or defaulting, according to research by Standard & Poor's. These companies are carrying much more debt than they should, a sign of potential trouble, particularly in the event of a US recession or more turbulence in the markets, says the rating agency. Analysts say loans backing private equity buy-outs are the most likely casualties as the economic outlook darkens because any fall in earnings will raise debt-to-equity ratios, which could lead to the breaking of covenants and defaults."

February 14 - New York Times (David Jolly): "UBS offered no hope for a near-term turnaround in its business after it posted a huge fourth-quarter loss on Thursday and warned that 2008 would be a difficult year. UBS, the largest Swiss bank and the largest in Europe in terms of assets, reported a fourth-quarter net loss of $11.3 billion after it wrote off $13.7 billion in soured United States investments, mostly on subprime loans. It also said it had lost $2 billion on so-called Alt-A mortgages... One worrying sign that things could worsen is the disclosure that UBS has additional exposure of $26.6 billion in Alt-A mortgages."

February 14 - Financial Times (David Oakley and Gillian Tett): "European companies are increasingly being forced to turn to the dollar markets to raise funding as the credit crunch makes it almost impossible for them to launch deals in the euro-denominated market. A gap between the two markets has opened up with US investment grade issuance at a record high for a January, while Europe slumped to a record low, according to Dealogic. 'Thank God for the American market,' said one corporate treasurer of a leading European company. 'Without it, a lot of companies would have been severely restricted in what they could borrow. It is much harder to raise a large amount in euros or sterling because there aren't the buyers.' The trend is striking because it shows that the credit crunch is starting to affect the financing plans of companies, not just in the highly leveraged sector but in the investment grade arena as well. It also casts fresh doubt on the ability of the European corporate bond market to challenge the US."

February 13 - Bloomberg (John Glover): "Half of the loans backing leveraged buyouts in Europe risk breaching investor safeguards or defaulting as company earnings and debt projections miss targets, Standard & Poor's said... 'There is a heightened potential for defaults,' S&P analysts led by Taron Wade... wrote. Fifty-three percent of the companies owned by buyout firms in S&P's study have more debt than forecast, making them vulnerable to default... In LBOs, firms borrow about two-thirds of the acquisition price, piling the debt onto the takeover target."

February 13 - Bloomberg (Stephanie Bodoni): "Luxembourg Finance Minister Jean-Claude Juncker is 'worried' European economies will endure for 'some more time' the consequences of the financial-market turmoil... 'The financial-market crisis hasn't come to an end yet... Banks and financial institutions have to write down a total of $400 billion. So far only $130 billion have been written down.'"

Currency Watch:

The dollar index declined 0.7% this week to 76.1. For the week on the upside, the Norwegian krone increased 2.4%, the Swedish krona 2.4%, the South African rand 1.3%, the Euro 1.1%, the Danish krone 1.1%, and the Swiss franc 0.9%. On the downside, the Japanese yen declined 0.8% and the Canadian dollar 0.5%.

Commodities Watch:

February 15 - Bloomberg (Jae Hur): "Soybean and soybean oil futures in Chicago soared to a record on speculation demand from China will climb after winter storms damaged the nation's rapeseed crop."

February 13 - Bloomberg (Shruti Date Singh): "Cocoa extended a rally to a 23-year high on speculation investors continue to increase their stakes in the commodity and as the U.K. pound's rise against the dollar boosts purchases of futures in New York."

February 13 - Bloomberg (Halia Pavliva and Catherine Yang): "Platinum rose to a record, breaching $2,000 an ounce, as South Africa's state-owned electric utility advised mines that power shortages will persist for four years. Palladium also gained."

February 14 - Bloomberg (Pratik Parija): "India, the world's second-biggest buyer of vegetable oil, imported 46% more edible oil in January because of concern output of winter-sown oilseeds will decline after cold weather reduced yields."

February 14 - Bloomberg (Feiwen Rong): "China's rapeseed crops, the world's biggest, have suffered widespread damage from the worst storms in 50 years that swept across parts of the country in late January, the China National Grain and Oils Information Center said. As much as 7.9 million acres of rapeseed crops, almost half the total area planted with autumn and winter rapeseed, has been affected by rain and snowstorms..."

Gold gave back 2.2% to $903, while Silver was unchanged at $17.11. May Copper added 0.2%. March Crude surged $3.88 to $95.65. March Gasoline rose 5.6%, and March Natural Gas increased 4.4%. March Wheat fell 6%. The CRB index rose 2.3% (up 7.1% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 2.9% (up 4.6% y-t-d and 46.2% y-o-y).

China Watch:

February 12 - Bloomberg (Nipa Piboontanasawat): "China's retail sales grew about 16% during the week-long Lunar New Year holiday, compared with the same festival a year earlier, according to the Ministry of Commerce."

February 14 - Bloomberg (Nipa Piboontanasawat): "China's money supply unexpectedly grew at the fastest pace in 20 months in January as the central bank pumped cash into the financial system ahead of the nation's biggest holiday festival. M2... rose 18.9%... from a year earlier..."

February 15 - Financial Times (Geoff Dyer and Tom Mitchell): "A real estate agency closing hundreds of branches while the owner of another absconds; property developers cancelling fundraisings and debt spreads widening dramatically; house prices slumping - these sound like recent tales from the US housing market. Yet these events have happened in the past three months in China, as some parts of the country's housing market have shown signs of real stress. Shares in many of China's largest listed property developers have fallen more than 50% from their highs of last year in the face of investor fears that some developers might be forced into bankruptcy."

Japan Watch:

February 13 - Bloomberg (Mayumi Otsuma): "Japan's wholesale prices rose at the fastest pace in 27 years, led by higher oil and wheat costs that are spurring inflation as the economy cools. Producer prices climbed 3% in January from a year earlier, after a 2.6% gain in December..."

Asian Bubble Watch:

February 15 - Bloomberg (Beth Thomas and Winnie Zhu): "Vietnam, China's largest coal supplier, plans to reduce exports by 32% this year and gradually eliminate the sales to meet rising domestic demand, a government official said."

India Watch:

February 12 - Bloomberg (Kartik Goyal): "India's Finance Minister Palaniappan Chidambaram asked state-run banks to boost loans for the purchase of homes and consumer goods, which he said were key to economic growth. 'There is a feeling that adequate credit is not being provided to the housing sector and the consumer durables sector,' Chidambaram said... 'Banks have been asked to pay attention to provide adequate credit to these two sectors as they are drivers of the economy.' ...Lending grew 22.6% in the 12 months through Jan. 25..."

Unbalanced Global Economy Watch:

February 13 - Bloomberg (Ben Sills and Paul Tobin): "Confidence in the global economy fell for a third month in February as the slowdown in the U.S. spread to Europe and Japan, a survey of Bloomberg users on five continents showed. The Bloomberg Professional Global Confidence Index fell to 14.3 from 21.0 in January. Users in Asia were the most pessimistic about the global economy, with the index falling to 12.6 from 15.0. A reading below 50 indicates negative sentiment."

February 13 - Bloomberg (Fergal O'Brien): "Irish mortgage lending declined 20% in the fourth quarter from a year earlier as increased borrowing costs and falling property prices deterred potential homebuyers."

February 11 - Bloomberg (Tasneem Brogger): "Denmark's inflation rate rose more than expected in January, reaching the highest in almost five years, as increased food and fuel costs pushed up consumer prices already under pressure from labor shortages. Inflation accelerated to 2.9% from 2.3% in December..."

February 14 - Bloomberg (Kati Pohjanpalo): "Finland's inflation rate rose more than expected in January, jumping to an eight-year high of 3.8% following an increase in food costs and taxes on fuel, electricity and alcohol. The rate rose from 2.6% in December..."

February 12 - Bloomberg (Jacob Greber): "Australian business confidence fell in January to the lowest since terrorist attacks on the U.S. in September 2001, as rising interest rates and turmoil on financial markets buffeted companies' outlook for 2008."

February 14 - Bloomberg (Jacob Greber): "Australia's unemployment rate fell to the lowest since 1974 as employers hired extra workers for a record 15th month, increasing pressure on the central bank to raise borrowing costs as soon as March...The jobless rate fell to 4.1% from 4.3%."

February 13 - Bloomberg (Tracy Withers): "New Zealand house sales slumped to a seven-year low in January, adding to signs record-high interest rates are slowing the property market and economic growth. House sales dropped 31%... from... a year earlier... 'The abnormally low sales figures tell us that the market's liquidity has reduced significantly and this will impact on prices,' Murray Cleland, national president of the Real Estate Institute, said..."

Latin America Watch:

February 14 - Bloomberg (Eliana Raszewski): "Unions for 70% of registered workers in Argentina are demanding wage increases of as much as 30% this year, saying they need higher salaries to match inflation that's three times the officially reported figure. 'We just want to recover the purchasing power we lost,' Juan Jose Zanola, head of the union representing 90,000 bank employees, said..."

Central Banker Watch:

February 13 - Bloomberg (Jonas Bergman): "Sweden's central bank unexpectedly raised its benchmark interest rate to 4.25% after inflation surged to a 14-year high on plunging unemployment... The inflation rate rose to 3.5% in December as surging energy and food costs pushed up prices and falling unemployment allowed unions to secure record wage gains."

Bursting Bubble Economy Watch:

The preliminary reading on University of Michigan Consumer Confidence sank to the lowest level since 1992. January Import Prices were up 13.7% from a year earlier, the largest increase since records were began in 1982 (according to Bloomberg).

February 14 - Financial Times (James Politi and Daniel Pimlott): "President George W. Bush signed into law yesterday a $170bn fiscal stimulus package designed to jolt the US economy back into health in the second half of this year. He said that US economic growth had 'clearly slowed', but added: 'The genius of our system is that it can absorb such shocks and emerge even stronger.'"

February 14 - Guardian (Andrew Clark): "American students borrowing money to go to college could be the next victims of the global credit crunch as investors back away from traditionally low-risk securities backed by student loans. A state lending agency has suspended loans under a programme serving students at some 100 colleges and universities. Experts fear that others could follow. The Michigan higher education student loans authority cited 'current and unprecedented capital markets disruption' for its decision to axe its alternative loans programme. Student loans are typically packaged into securities that have a floating interest rate determined through regular auctions - called the auction-rate securities market, worth an estimated $360bn. In recent weeks, many of these bonds have been left unsold."

February 12 - Boston Globe: "The Massachusetts Consumer Confidence Index plummeted 20 points since October, the largest one-quarter drop in seven years. The index is published quarterly by Mass Insight... Consumer confidence is at its lowest point since October 1992..."

GSE Watch:

February 15 - Bloomberg (Jody Shenn): "The larger home loans that Fannie Mae and Freddie Mac will temporarily be allowed to guarantee won't be accepted into the main market for mortgage bonds, the Securities Industry and Financial Markets Association said... The exclusion of the larger loans should reduce the size of drops in jumbo mortgage rates that will result from the new law..."

February 13 - Bloomberg (Laurence Viele Davidson): "Fannie Mae, the largest source of U.S. home-loan money, faces a proposed class-action lawsuit over as much as $7 billion it earned on property owners' escrow accounts starting in the 1970s. The company violated government policy and breached its duty to about 4,000 owners of government insured moderate- and low-income housing, lawyer Mark Lanier claims in federal court... Fannie Mae should return gains of $3 billion to $7 billion, said Lanier... Fannie Mae says it acted legally. U.S. District Judge David Folsom, 60, twice refused company requests to throw out the case."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

February 11 - Financial Times (Paul J Davies): "The market for complex debt securities has seen its worst start to the year in more than 10 years, with issuance of collateralised debt obligations grinding to a near halt worldwide. Just three CDOs worth a total of $1.3bn were sold in January - one in the US and two in Asia - compared with 37 deals worth $22bn in January 2007, according to analysts at Morgan Stanley. Investment banks that structure such deals, and those that buy them, are still reeling from the credit market turmoil that has led to huge losses on all kinds of structured debt securities. Many banks are still working out exactly how much they might have lost on such deals."

February 13 - Bloomberg (Jody Shenn): "Almost half of the U.S. homeowners who in the past two years took out subprime mortgages that now underlie securities would owe more than their property's value if home prices drop an additional 10%, according to UBS AG. About a third of borrowers with option adjustable-rate mortgages would owe more...analysts led by Laurie Goodman wrote..."

February 14 - Bloomberg (Jeremy R. Cooke and Adam L. Cataldo): "Unprecedented failures in the more than $300 billion U.S. auction-rate bond market are sending debt costs higher and squeezing closed-end funds run by Nuveen Investments Inc. and other firms that use money borrowed by issuing the securities to boost returns. As much as $20 billion of auctions failed to attract enough buyers yesterday... 'We are kind of in uncharted territory right now,' said Anne Kritzmire, a managing director at Chicago-based Nuveen, the largest U.S. manager of closed-end funds."

February 15 - Bloomberg (Alan Ohnsman): "Delinquency rates on U.S. auto loans in asset-backed securities rose in January to the highest levels in 10 years, Fitch Ratings said. Fitch's index for prime loans with payments overdue for at least 60 days was 0.77% last month, an increase of 44% from a year earlier. The rate for subprime loans reached 4.03 percent, a 43% increase from a year earlier..."

Mortgage Finance Bust Watch:

February 15 - Reuters: "Countrywide Financial Corp, the largest U.S. mortgage lender, said on Friday foreclosures and late payments rose in January to the highest on record... The foreclosure rate for the 9.02 million mortgages on which Countrywide collects and processes payments roughly doubled to 1.48% from 0.77% a year earlier, and rose from December's 1.44%. Delinquencies rose to 7.47% of unpaid balances from 4.32% a year earlier, and 7.20% in December. Countrywide services $1.48 trillion of home loans."

February 13 - Dow Jones: "The premise behind 'Project Lifeline,' the latest government-brokered housing bailout, seems to be that foreclosure is against the best interest of either the borrower or lender, James Hamilton writes at econbrowser. 'But foreclosures are burgeoning even when teaser rates remain in effect,' he writes. This is likely because, as a research paper from the Boston Fed points out, foreclosure is 'a rational response of the borrower when the value of the house falls below the value of the mortgage debt.'"

February 13 - Bloomberg (Dan Levy): "Cities in California, Ohio, Florida and Michigan accounted for three-quarters of the 20 U.S. metropolitan areas with the most foreclosures in 2007 as borrowers fell behind on adjustable-rate mortgages, RealtyTrac Inc. said. Foreclosure filings rose in 86 of the 100 largest metro areas from 2006... California had six cities in the top 20, Ohio had four, Florida had three and Michigan had two."

February 13 - Dow Jones: "As the subprime-mortgage mess grew last year, the highest foreclosure rates among the nation's 100 biggest metro areas belonged to Detroit, Stockton, Calif., and Las Vegas, a foreclosure-listing service said... In the Detroit area, 4.92% of households were in some stage of foreclosure during the year as credit trouble and falling home values fell on homeowners... The Stockton metro area's foreclosure rate was 4.87%, while Las Vegas had a 4.23% rate. Trailing them were the metro areas of Riverside-San Bernardino, Calif.; Sacramento, Calif.; Cleveland; Bakersfield, Calif.; Miami; Denver; and Fort Lauderdale, Fla."

February 13 - Bloomberg (Kathleen M. Howley): "When Mary Kamanu paid $409,000 for a house in Folsom, California, she never imagined that three years later it would be worth about 20% less and she would have to pay the bank more than $80,000 just to sell the place. 'I'm completely upside-down on my mortgage, like a lot of people,' said Kamanu... By the end of this year as many as 15 million U.S. households may owe more on their mortgages than their homes are worth, according to an estimate from Jan Hatzius, chief U.S. economist of...Goldman Sachs... That may fuel an increase in foreclosures, erode prices, and increase mortgage bond losses... 'If borrowers who are underwater go into foreclosure, the properties are likely to be sold at discount prices and will further depress the price of housing,' said Robert Engle, a Nobel laureate in economics...at New York University's Stern School of Business... 'It becomes a spiral.' Thirty-nine percent of people who purchased a home two years ago already owe more than they can sell it for, according...Zillow.com..."

Real Estate Bubbles Watch:

February 14 - Bloomberg (Bob Ivry): "Home prices fell in a record number of U.S. metropolitan areas in the fourth quarter, according to a report released today by the National Association of Realtors in Chicago. The median sale price of a U.S. home dropped 5.8% to $206,200 in the last three months of 2007 from $219,000 in the same period of 2006, the realtors group said today. Prices fell in 77 of 150 metropolitan areas, the most since the group began tracking values in 1979. The decline was 10% or more in 16 metro areas, the association said."

February 13 - Bloomberg (Daniel Taub): "Office rents rose an average of 14% worldwide in 2007 as demand grew from banks and brokerages in the U.S., U.K. and Asia. In the 10 most expensive office markets rents increased 40% last year, Cushman & Wakefield Inc... said... Financial services firms are driving rent increases in cities including London, New York and Hong Kong, where the companies take as much as 60% of office space."

Muni Watch:

February 14 - Financial Times (Michael Mackenzie and Aline Van Duyn): "The Port Authority of New York and New Jersey, which manages New York's JFK airport, has had an unpleasant shock - it will have to find an additional $300,000 for its weekly payments to cover an unexpected jump in interest costs. Municipalities across the US are experiencing similar problems, as a corner of the debt markets becomes the latest casualty of the credit squeeze and the collapse in confidence in the ability of bond insurers to maintain their triple-A credit ratings. The Port Authority is one of the users of the $330bn short-term debt market known as auction-rate securities, which is suffering from the investor buying strike amid a reluctance of banks to provide liquidity. This follows the sharp contraction in the asset-backed commercial paper market and structured investment vehicles. This time, it is not just banks that are feeling the pinch. Taxpayers, who fund municipalities, are potentially on the hook for huge spikes in interest payments. The market, backed by triple-A rated guarantees from bond insurers including Ambac and MBIA, was used as a safe place for investors to park cash and earn slightly higher returns. Its slump this week has pushed interest rates as high as 20%."

February 11 - Bloomberg (Martin Z. Braun): "Bond insurance sold by MBIA Inc., Ambac Financial Group Inc. and Security Capital Assurance Ltd. is backfiring on counties, universities and hospitals across the U.S., more than doubling some borrowing costs. Park Nicollet Health Services in Minneapolis may pay an extra $5 million to $6 million this year, about a quarter of its operating profit, because interest on $375 million in floating- rate debt doubled in the last six weeks, said Chief Financial Officer David Cooke. The rate on $98 million insured by Ambac climbed to 6% on Jan. 30 from 3.06% on Jan. 2. 'We'll have to reduce our capital expenditure program, which means less equipment, less modernization of facilities,' Cooke said... The hospital paid Ambac to 'count on that AAA insurance for 30 years. Now it's going away on us.'"

February 13 - Bloomberg (Michael B. Marois): "U.S. states' credit ratings may be lowered this year as slumping housing and the weakened economy constrain tax revenue, Moody's... said. The rating company changed its credit outlook on states to negative from stable as sales, corporate and income taxes fall below forecasts. States will likely borrow more to fund programs... Half of U.S. states, including New York, New Jersey and California, are projecting budget deficits next fiscal year... States that had robust residential real estate markets, such as Florida, Arizona and Nevada, have been particularly hard hit..."

February 11 - Bloomberg (Michael Quint): "New York Governor Eliot Spitzer called for scaling back a planned increase in state spending after budget officials reduced their estimate for next year's tax collections by $384 million. Officials cited a weakening economy and reduced profits at banks and securities firms. 'The continued worsening outlook for the economy demands additional tough choices,' said Spitzer... Next year's budget gap is now estimated at $4.8 billion, up from $4.4 billion in January."

February 12 - Bloomberg (Carol Massar and Mina Kawai): "New Jersey Governor Jon Corzine said he plans to propose more spending cuts this month to help put the state's finances on a 'healthy' pathway. 'We are going to freeze or cut spending in the 2009 budget that I'm going to lay down two weeks from today,' Corzine said... New Jersey faces a $3 billion budget shortfall, the third-biggest after California and New York, according to the Center on Budget and Policy Priorities."

California Watch:

February 13 - Bloomberg (Daniel Taub): "The number of houses and condominiums sold in Southern California fell 45% in January, dropping below 10,000 sales a month for the first time in at least two decades, DataQuick...said... The last time Southern California sales were lower was, 'in looking at the other data sources, maybe sometime in the early '80s,' DataQuick analyst John Karevoll said... 'It could actually be back to the '70s, when we had mortgages that went up to 15, 18%, but we just don't know that.' ...The median price for all houses and condominium units sold in Southern California last month was $415,000, down 2.4% from December and 14% from a year earlier..."

February 14 - Bloomberg (Daniel Taub): "San Francisco Bay Area home sales last month plunged 42%, the most in two decades, as buyers struggled to get mortgages and prices fell. The number of houses and condominiums sold in San Francisco, Santa Clara, Alameda and six other Northern California counties fell to 3,586, DataQuick...said... It was the lowest sales count for any month since at least 1988, when DataQuick statistics began, and the biggest monthly drop in the company's records... The median price paid for a home in region was $550,000 last month, down 6.4% from December and 8.5% from a year earlier. Last month's median was 17% below the Bay Area's $665,000 peak, reached last June... A 'hefty chunk' of last month's sales in the Bay Area were of homes with financing problems..., LePage said. 'If you look at the whole Bay Area, just under 19% of the homes that resold in January had been foreclosed upon at some point in '07.'"

Fiscal Watch:

February 14 - The Wall Street Journal (Damian Paletta): "The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government. One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers. Credit Suisse officials have met with senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policy makers to discuss the proposal. The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss."

Speculator Watch:

February 12 - Bloomberg (Bei Hu): "Hedge funds worldwide reported the sharpest drop in five-and-a-half years in January, taking a beating from declines in global equities markets, said Greenwich Alternative Investments. The Greenwich Global Hedge Fund Index declined 2.4% during the month..."

February 11 - Financial Times (Henny Sender and Aline van Duyn): "Hedge funds are beginning to close their doors or lay off teams of traders in response to the unprecedented gridlock in the debt markets that has led to losses and significantly reduced the amount of money banks are willing to lend. In January, the overall performance for all hedge funds was a negative 1.8%, according to Hedge Fund Research, while the merger arbitrage index was down 0.34%. This does not capture the wide range of results, according to managers of funds of funds, who say many firms lost as much as 8%. 'Unlike last year, there is no cushion on which to fall back,' said Marc Freed, a managing director at Lyster Watson Investment Management, a hedge fund of funds firm. 'There will be cutbacks. It will be surprising if we don't see a lot of hedge funds close down at some point this year.'"

February 15 - Financial Times (James Mackintosh): "Call it the final indignity for banks - their hedge fund customers, usually regarded as the most hazardous financial operators, are questioning the creditworthiness of their prime brokers. Some of the world's biggest hedge funds have reviewed agreements with their bankers, assessing whether assets and cash left with the prime brokers are safe. Hedge funds, bankers and advisers say this has caused a shift in assets away from those banks regarded as riskiest after multi-billion dollar write-offs... 'It is quite paradoxical,' said Angelos Metaxa, a director of CM Advisor, a $3bn...fund of hedge funds. 'In August, everyone was worried about a hedge fund blowing up but now they are worried about a bank blowing up and taking a few hedge funds with it.'"

Crude Liquidity Watch:

February 11 - Bloomberg (Matthew Brown): "Saudi Arabian M3 money supply growth, an indicator of future inflation, slowed to 20% in December from 22% in November."

February 14 - Bloomberg (Matthew Brown): "Bahrain's M3 money supply growth, an indicator of future inflation, slowed to 35% in December from 38% in November."

February 14 - Bloomberg (Matthew Brown): "Kuwaiti inflation accelerated to a record 7.3% in October from 6.2% in September."

February 11 - Bloomberg (Matthew Brown): "Omani inflation accelerated to a record 8.3% in December, up from 7.6% in November, as the cost of food and rent increased. Food costs surged an annual 14.4%...while rents jumped 11.7%... Inflation has accelerated to records across the Persian Gulf as the weak dollar made European imports more expensive and higher public and consumer spending exacerbated real estate shortages."

The Breakdown of Wall Street Alchemy:

This week provided further confirmation of ongoing momentous Credit market developments. From today's article by the Financial Times' Michael Mackenzie:

"The auction-rate securities market, a $330bn slice of the municipal bond sector, could disappear if the credit squeeze remains entrenched, analysts warn. 'The auction-rate securities market is unwinding and most of the market will enter a failed state,' said Alex Roever, fixed-income strategist at JPMorgan. 'The lack of confidence is the contributing factor and there is a risk this type of structure will go away.' Like the asset-backed commercial paper market that was popular with structured investment vehicles until last summer, auction-rate securities, a form of rolling short-term funding for long-term municipal commitments, have become fashionable in recent years."

"Auction-rate securities" has joined the beleaguered ranks of "subprime," "asset-backed commercial paper," "SIVs," and the "monolines" - financial structures that flourished during the prolonged Credit Bubble but no longer pass market muster in today's Post-Bubble Risk Revulsion Backdrop. This week's "unwinding" of the "auction-rate" market and the blowing out of Credit spreads should be seen as an escalation of the ongoing unwinding of "Contemporary finance" and its many avenues of Risk Intermediation.

On numerous fronts, the markets and economy confront a Highly Problematic Breakdown in "Wall Street Alchemy" - the disintegration of key processes that had for some time transformed ever-increasing quantities of risky loans into perceived safe and liquid debt instruments that enjoyed insatiable demand in the marketplace. In the case of the "auction rate securities," it was a clever restyling of long-term and generally illiquid municipal debt (as well as student loans and other borrowings) into perceived liquid securities that could be easily sold at regularly recurring auctions (every one to a few weeks). With scores of flush corporate treasury departments and wealthy clients (managing huge Credit Bubble-induced cash-flows) keen to earn extra (after-tax) yield on "cash equivalents," the Wall Street firms had been diligent in ensuring (making markets for clients, when necessary) a highly liquid and enticing marketplace. Now, with the onset of Risk Revulsion and Acute Financial Sector Balance Sheet Pressures, investors are running for cover and Wall Street firms are shunning the use of their own capital to support this and other markets. Market liquidity has evaporated, confidence has been shattered, and we are witnessing yet another "run" on a previously popular risk market/asset class. The music has stopped for another game of musical chairs.

This week saw heightened systemic stress stampede toward the epicenter of the U.S. Credit system. It certainly didn't help that insurance behemoth AIG Group reported an almost $5bn writedown of its Credit default swap portfolio or that international securities dealer behemoth UBS reported massive loses on its U.S. Credit positions. Confidence was further shaken by huge losses reported by mortgage insurers, as well the twists and turns of the "monoline" bust turned apparent bailout. In the markets, various indices of investment grade Credits widened sharply to record levels. The key "dollar swap" (interest-rate derivative hedging) market saw spreads widen sharply. Agency spreads also widened significantly. Benchmark Fannie Mae MBS spreads widened a remarkable 20 bps against 10-year Treasuries, while agency debt spreads widened a noteworthy 12.5 basis points to 69.5 bps (high since November). The Breakdown of Wall Street Alchemy is now pushing the Credit Market Dislocation uncomfortably close to the core of our monetary system.

I'll return to financial aspects of this crisis, but I definitely feel the economic ramifications of the unfolding Credit Crisis are receiving short shrift in the media. This week saw the municipal debt market grind to a virtual halt and the corporate debt market take another significant blow. Investment grade debt issuance has now slowed markedly after beginning the year at near record pace. At this point, the junk, CDO, ABS, "private-label" MBS, muni, and even investment grade debt markets are all somewhere between impaired, dislocated and completely dysfunctional. There is no mystery behind the recent string of abysmal economic reports.

The preliminary reading on February University of Michigan Consumer Confidence dropped 8.8 points to the lowest level since the 1992 recession. The Economic Conditions index sank and the Economic Outlook index plunged, while one-year Inflation Expectations rose from 3.4% to 3.7%. The Economic Outlook has sunk a remarkable 22 points since July. Falling national home prices are clearly wearing on confidence. This week, Dataquick reported that home sales throughout much of California have collapsed to more than 20 year lows, while home price declines accelerate. This is a huge unfolding issue/debacle for the MBS, agency, mortgage insurance, CDO, and Credit derivatives markets, not to mention the U.S. banking system and real economy. Countrywide Financial reported delinquencies on its $1.5 TN mortgage servicing portfolio had jumped to 7.47%, up from the year ago 4.32%. The New York "Empire" Manufacturing index sank to the lowest levels since April 2003.

The economy is now faltering badly and there is every reason to expect the downturn to gather pace - negative real interest rates compliments of the Fed and stimulus package compliments of the federal government notwithstanding. While fourth quarter data is not yet available, one can look to the first three quarters of 2007 to gain important perspective. Despite the dislocation in the subprime mortgage market, Non-Financial Debt Growth accelerated from Q2's 7.2% to Q3's 8.9% (from the Fed's Z.1 report). And while Household Debt Growth had slowed to a 6.9% pace, Business Borrowings accelerated to a blistering 11.9% annualized rate in the third quarter. This was the strongest corporate debt growth since the tech/telecom boom in the late nineties. Importantly, total (financial and non-financial) Corporate Debt expanded at an 11.1% rate during the first three quarters of 2007, followed by 9.3% growth in State & Local government borrowings. And while residential mortgage debt was slowing meaningfully, Commercial Mortgage Debt was expanding at an almost 13% rate.

Total (financial and non-financial) Credit expanded a seasonally-adjusted and annualized record $5.0 TN during the third quarter - as nominal GDP expanded at a 6% pace. While many trumpeted the "resiliency" of the U.S. economy in the face of mortgage and housing woes - more adept analysis would have focused on the massive Credit creation that had come to be required to sustain the Bubble Economy. Importantly, the faltering subprime market initially instigated only greater excesses throughout commercial real estate, municipal finance, M&A finance, and corporate lending more generally. The Credit Bubble was sustained at the great cost of heightened instability and weakened structures - especially throughout leveraged lending, state & local finance, and investment-grade corporate borrowings. Keep in mind that through the third quarter CDO issuance was actually running ahead of 2006's record pace. Until the fourth quarter, record Credit growth continued to fuel the finance-driven economy. This is all now coming home to roost.

Today, with bursting bubbles in corporate and municipal finance joining the mortgage bust, the U.S. Bubble economy has quickly fallen desperately short of sufficient Credit and liquidity. And the greater the Credit market dislocation and broad-based tightness of Credit, the bleaker become economic prospects and the more intense the Revulsion to Wall Street's Credit instruments. The days of free-flowing cheap finance for home buyers, state and local governments, LBO firms, commercial real estate speculators, college students, risky auto buyers, and high-risk Credit card holders are over and they will not return for quite some time.

When I have previously underestimated the "resiliency" of the U.S. Credit Bubble and economy, it was in each instance a failure to appreciate the capability of Wall Street finance to expand to ever greater degrees of Bubble excess. Today, with "contemporary finance" mired in a historic collapse, I am confident that the Credit system is today only in a position to surprise on the downside. It is this framework that shapes my view of a rapidly escalating Credit crisis feeding an arduous economic adjustment period.

And while it could undoubtedly prod a highly speculative stock market, there is no resolution to the "monoline" dilemma that would meaningfully influence the trajectory of the unfolding Credit and economic bust. As we've been saying for awhile now, confidence in Wall Street finance has been irreparably shattered. Trust has been broken in "AAA" ratings, "mark-to-model," CDO structures, myriad risk models, Credit insurance, counter-party risk, and various instruments and vehicles for intermediating risk in the markets. Moreover, old fashioned lending will not come close to sufficing the demands of a highly imbalanced Bubble economy, especially with bankers nervous and retrenching. Again, we're witnessing nothing less than the Breakdown of Wall Street Alchemy - one that took a turn for the worst this week.

In a disconcerting development, recent market developments seem to confirm that the leveraged speculating community and the GSEs are poised as the next shoes to drop - the next Dominoes in an Escalating Contagion. Along with the "monolines" and mortgage insurers, the "Credit default swap market" and GSE mortgage Risk Intermediation were at the epicenter of the greatest Systemic Risk Distortions and Accumulations. They are now quickly moving to the forefront of Current Acute Fragilities. Simplifying highly complex circumstances, the various risk models that empowered the greatest leveraging of risk in the history of finance no longer function as expected - or as required to maintain highly leveraged exposures to a multitude of escalating risks. And it was all just only a matter of time. The overriding flaw was to ignore that a runaway Bubble in market-based finance ensured that various market and Credit risks all coalesced into One Massive, Unmanageable, Highly Correlated, Unhedgable, Undiversifiable Association of Interrelated Systemic Risks.