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US household assets are $54,000bn. Liquid net worth (cash, mutual funds, bonds etc) is $27,500bn. Household debt is $13,000bn. In other words, the US household balance sheet is looking great: $54,000bn in assets ($27,500bn liquid) to cover $13,000bn in debt. Heck, we're under-leveraged as a country right now and should probably take on more debt. …But what about the subprime mess? Isn't that going to bring the net worth of the US to $0 or even negative? Right now the entire subprime market is about $800bn and let's give full credit to the traders and media and say 50 per cent of that is at risk. So $400bn. Will $400bn worth of homes go into foreclosure? Of course not. Defaults are good for nobody. Things will and are getting restructured.

Prime Time for SubprimeWho is doing the best reporting on this scary story?

It is now clear that the delusional hope that the severe credit and liquidity crunch that hit US and global financial markets would ease has been shattered by the events of the last few weeks. This credit crunch is getting much worse and its financial and real fallout will be severe. The amount of losses that financial institutions have already recognized - $20 billion – is just the very tip of the iceberg of much larger losses that will end up in the hundreds of billions of dollars. At stake – in subprime alone – is about a trillion of sub-prime related RMBS and hundreds of billions of mortgage related CDOs. But calling this crisis a sub-prime meltdown is ludicrous as by now the contagion has seriously spread to near prime and prime mortgages. And it is spreading to subprime and near prime credit cards and auto loans where deliquencies are rising and will sharply rise further in the year ahead. And it is spreading to every corner of the securitized financial system that is either frozen or on the way to freeze: CDOs issuance is near dead; the LBO market – and the related leveraged loans market – is piling deals that have been postponed, restructured or cancelled; the liquidity squeeze in the interbank market – especially at the one month to three months maturities - is continuing; the losses that banks and investment banks will experience in the next few quarters will erode their Tier 1 capital ratio; the ABCP and related SIV sectors are near dead and unraveling; and since the Super-conduit will flop the only options are those of bringing those SIV assets on balance sheet (with significant capital and liquidity effects) or sell them at a large loss; similar problems and crunches are emerging in the CLO, CMO and CMBS markets; junk bonds spreads are widening and corporate default rates will soon start to rise. Every corner of the securitization world is now under severe stress, including so called highly rated and “safe” (AAA and AA) securities.

This is indeed the message that comes from true market prices – that are not indirectly available via the ABX indices. Those prices tell you not only that the mezzanine and equity tranches of subprime CDOs are now worth close to zero; they also tell you that prices for the AAA and AA tranches – that until recently were hovering near par of 100 – are now down to 79 and 50 respectively. Hundreds of billions of subprime RMBS and senior tranches of CDOs are still being evaluated as if they are worth 100 cents on the dollar. What the ABX is telling you is that they are worth much less; thus the losses from subprime alone are an order of magnitude larger than recognized by most firms.  But most firms are not using such market prices – or their proxies – to value their illiquid assets.

it should be apparent to all of us that sometimes senior executives, including the chairman, do not fully understand the businesses in which the company is involved. The financial instruments now causing such turmoil were not properly priced for their inherent risk and managers were unaware of the integral problems with these instruments. Much of this was made possible by the advanced technology used to devise and distribute these instruments.

Goldman Sees Subprime Cutting $2 Trillion in Lending (Update5) By Kabir Chibber Nov. 16 (Bloomberg) -- The slump in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a ``substantial recession'' in the U.S., according to Goldman Sachs Group Inc.

The havoc on Wall Street following the collapse of the subprime-mortgage market boils down to a simple truth: for years, lots of very smart people took lots of very foolish risks, betting borrowed billions on dubious mortgage derivatives, and eventually the odds caught up with them. But behind that simple truth is a more surprising one: the financial whizzes made bad decisions in part because that’s what they were paid to do. Not literally, of course. The way that hedge-fund managers and investment-bank C.E.O.s get paid is supposed to make them perform better for the investors they serve. Hedge-fund managers, for instance, typically are paid “2 and 20”: they get two per cent of total assets as a management fee, and they keep twenty per cent of their investment gains (above some agreed-upon benchmark). Letting hedge-fund managers keep a chunk of their winnings gives them an incentive to do well for their clients: in theory, they get rich only if their clients do.

As the man who oversees about $20 billion of fixed-income investments at American Century Investments, we revisited with Keegan as part of today’s The Game column on the recurring foibles of Wall Street. Deal Journal: You were right back in April. You called it all. Why does Wall Street keep messing up? Jim Keegan: It’s too profitable to stop. It’s too profitable at the individual level, so the individuals interests are not necessarily aligned with the company’s interest. Pay me now and you pay for it later. There is no clawback. Employees can walk away with hundreds and tens of millions of dollars. And someone else will hire them to do it again.