Mortgage lending scandals, defaults and financial services sector meltdown has started the bear market in stocks
Marla Guthrie
Feb. 10, 2007

The Bank of America slap in the wrist is the tip of the iceberg. The HSBC mortgage-lending problem is the start of a bear market in financial services sector. The Merger and Acquisition mania along with bubble in investment banking from super liquidity created by Fed is now almost over. The reason why we say almost over is because after the first leg of the bear market, the Fed will pump in another dose in liquidity. That will cause a sharp rise in the stock and real estate market. It will follow by the next leg down.

Banks have just picked in their profitability and based on the forty-year and the twenty-year cycles are ready to go belly up again. It will be similar to the Savings and Loan scandal (S&L) of late eighties but 10,000 times larger in proportion. In late 1920s, believe it or not, there was norm to give mortgage on interest only basis. The same has happened this time. The sub par mortgage loan sector is already in trouble. The other mortgage loan sectors will soon be in trouble. Every twenty years a cycle repeats when the valuation of properties (appraisal) fall sharply below the mortgage amount. Last time it happened in 1987-91 time frames. We have reached that time. That is time when banks go out of business and s Government for bail out. This time Government may not be able to provide the welfare finds banks will need.

The effect on Dow and other financial instruments can be severe. Initially the Government bond market will rally and corporate bonds will collapse with the stock market. Later, the Asian central banks and international investors will lose confidence in Governments ability to halt the financial meltdown. That is when bond market yield will sky rocket. That will be further reason for stocks to collapse below levels one cannot imagine today.

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