Nouriel Roubini, the NYU economist, has predicted the US is moving into its worst downturn since the Great Depression. He forecasts that hundreds of banks will fail. But, he is an "independent" on the outside looking in at the crisis in the banking and mortgage industries.

Someone a little closer to the action is predicting one of the large US banks will fail sometime before the end of the year.

Former IMF chief economist Kenneth Rogoff sees the financial crisis getting much worse. According to Reuters, he said "We’re not just going to see mid-sized banks go under in the next few months, we’re going to see a whopper, we’re going to see a big one, one of the big investment banks or big banks."

There may be some wisdom to his observation. The mortgage-related paper crisis appears to be getting much worse as housing default rates rise. Banks hold securities which are derivatives of credit card, home equity, and auto loan debt. The value of those is likely to fall. The failure rate of corporate "junk" debt will also rise as the economy gets worse and credit tightens. That will pull down the value of LBO paper.

Based on stock price figures, the most likely candidates for disaster are Lehman (LEH), Wachovia (WB), and Washington Mutual (WM). If one of these does collapse no one knows what the Fed or Treasury will do. They may simply stand by and allow the stock prices of other banks and brokerages fall as fear about the viability of the entire system spreads. That may purge the sector of its most deeply troubled companies, but it will only leave a few strong institutions to pick up the mess.

There may not be enough aid to go around.

Douglas A. McIntyre

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