The evidence comes in in pieces. One bit of bad news here and one there.

Today, the FT reported that US banks had tapped the Fed’s Term Auction Facility for over $50 billion in the last few weeks. As one analyst pointed out "The TAF … allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take … [this] suggests a perilous condition for America’s banking system.”

The news that Credit Suisse (NYSE: CS) had "found" $2.85 billion in write-downs for asset-backed paper was not terribly encouraging. It is certainly an indication that banks are still having substantial problems valuing assets which are based on a weakening housing market and do not trade because of a locked-up credit markets. The banks can guess at the value of what they hold,  but have no way to know for certain.

There is also an emerging body of analysis which says that large banks may have to write-down about $15 billion in LBO loans in the early part of this year. According to The Wall Street Journal "the extent of the damage is likely to emerge as banks file their annual reports next month and report first-quarter results in April."

None of these calculations take into account the falling value of paper backed by student loans, credit card debt, or loans for car purchases. They also leave out a potentially massive hit if bond-insurers like MBIA (MBI) or Ambac (ABK) face cuts in their credit ratings.

The total market in LBO debt now runs around $200 billion. The size of the mortgage-back and consumer-credit markets can only be guessed at. Write-downs for some of these securities have not begun in earnest.

The debacles at AIG (AIG) and Credit Suisse are surely a sign that financial companies and their auditors are having trouble putting a dollar amount on assets for which there is not market.

Every sign, and that is every sign, points to bank and brokerage write-downs in 2008 which will make 2007 seems like a picnic.

Douglas A. McIntyre

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