Actually Ilargi did this one.

We are headed into a recession for sure. Which then creates positive feedback mechanisms, and potentially a new round of unwinds. Thats when we'll see how much leverage and resilience is in the financial system.

A spiral of positive feedback, with successive rounds of unwinding, is exactly the problem we're facing IMO. The peeling away of each successive layer destabilizes the one beneath it, hence the subprime crisis is already moving on to Alt-A and beginning to encompass prime lending as well. With most of the residential real estate defaults still ahead of us, and a commercial real estate debacle to add to the mix in the not too distant future, we will indeed see how resilient the financial system really is.

Nate,

I'm not sure what you're trying to say here. Yes, Goldman has presented profits, but they're the only one, and there's lots of questions about those gains. Lunch with Bernanke and the PPT? I don't know which firms would have written down losses to zero, but they're not the Wall Street ones, other than what we have reported here.

HSBC is the only one that put $45 billion in SIV waste on the balance sheet, de facto writing down everything to zero. For all others it's obvious they're trying to hide most for now.

Which may not be that crazy: If Citi would write down its $83 billion SIVs in one fell swoop, the market could panic. (There's also the fact that Citi can't afford to put it where the light shines). Still, writing it down in steps doesn't make it a healthy company. SIVs are but a small part of Citi's trouble.

What you mean by "the finance part of this is nearing an end", once more I don't know; far as I can see it's all finance, and at the very least hundreds of billions of losses remain to be swallowed.

As for the notion that there's not much leverage involved in "these securities", maybe I don't understand what you mean. The whole game is about leverage, every mortgage, and every other available asset, has been used to borrow money against. That's why we have derivatives and securities: offload the loan from your books, so you can use it as collateral for the next.

The Norwegians, as we said here last week, are a prime example. They had $80 million, and invested 8 times that, all leverage, and all lost. And I don't think for a second that they're an exception; if anything, they're more prudent than most others. They were simply the last-to-come Ponzi suckers. I predict these people will be held up as an example soon of the honorable way to deal with the fallout.

As I said in the intro, bond insurer Ambac carries $620 billion in structured paper, with $9 billion in cash. That's leverage. Citi supposedly has $2.2 trillion in assets, with, as Mike Shedlock said, $127 billion in equity (much of which is doubtful). It's not all 100-1, but do you really believe that in this increasingly fractional theater, LTCM was some kind of weird abberation?

The very fact that the BIS confirms $516 trillion in derivatives outstanding, growing at a rate of 24% per year, tells me differently. If just 20% of that is found to be less than AAA perfect, Wall Street and Threadneedle are endangered species.

This is not just another downtrend, or some sort of cyclical move. This could become Weimar, where cigarettes were currency, because money had no value anymore. Only, this time it won't be through inflation. In that respect, Shedlock agrees with Stoneleigh and me.