Escape Financial Armageddon

By Tobin Smith

There's one very important thing all investors must understand right now: We are not even close to the end of securities write-downs and rising loan losses.

There is even more pain ahead, and you should expect to see the stock market fall another 20% or so.

Don't believe me?

Well, Standard & Poor's Ratings Services released a report today titled "Global Financial Institutions Eye Another Wave of Write-Downs as U.S. Housing Woes Spread." It said that the world's financial institutions will face more securities write-downs combined with rising loan losses in the second half of 2008.

Here's an excerpt from the press release:

"'The overlap of these two phases may prove to be the most difficult test yet for the battered global financial sector,' said Standard & Poor's credit analyst Scott Bugie.

"We believe that turbulent capital market conditions and continuing negative news from the U.S. mortgage market will lead to another large wave of write-downs in the second half of 2008.

"The financial industry raised a huge amount of capital over the past year to compensate for securities losses. The present market conditions are less favorable, and financial institutions face this next wave of write-downs with reduced opportunities to raise additional capital.

"'The success in future capital raising, through issues or asset sales, to compensate for additional securities write-downs, will be the key factor driving the credit ratings on many global financial institutions in the second half of this year,' said Mr. Bugie."

Like I said, there's going to be a lot more pain ahead.

The Dumbest Money in the World

Top Wall Street management have already gone to the sovereign wealth funds -- aka dumb money in the Mideast and other foreign nations -- and convinced them that they could be the next Prince Ali, the sheik who bailed out Citigroup (C) in the early '90s after the bond and real estate crash in Latin America.

They bought it hook, line and sinker, and invested hundreds of billions of petrodollars. And it's all gone to money heaven, with the exception of the money raised by Bank of America (BAC) and JPMorgan Chase (JPM).

Now those same Wall Street execs are going back to the dumb money -- and are being told to "get lost."

So, who's left?

Well, my friends, the dumbest money in the world -- the U.S. government and taxpayers. But even the Federal Reserve and the Treasury Department have their limits.

What we're seeing now is the equivalent of the margin call of the century, and it is the inevitable consequence of numerous short-sighted decisions that banks and brokers have made during the past several years.

It took seven years for this toxic waste of bad investments to pile up, and it simply can't be fixed in a year.