No institutions want to purchase any securitized loans (called CDOs - collateralized debt obligations ) that are tainted with the subprime loans now experiencing high rates of defaults.

Last Thursday and Friday, France's BNP Paribas and Countrywide, the US's leading mortgage lender, sent up red flags that were unexpected - just one week ago both institutions posted press releases reassuring financial stability. So many warning signals have implicated financial institutions with potentially risky holdings (and that includes many of them) as categorically suspect.... globally.

Wall Street investors "shoot first and ask questions later". Since money managers have no idea which institutions are exposed to the subprime risk, they simply stop buying any CDOs. Interbank lending came to a standstill.

Hedge funds are non-public investment funds that now manage $1.7 trillion in assets and are generally rewarded for high yield performance. Many hedge funds were attracted to the high yields offered by subprime collateralized CDOs.  Institutional investors like banks, pension and insurance companies invest in hedge funds, and are thus exposed to subprime risk. Hedge funds are also collapsing along with mortgage companies and no one knows how exposed institutions are to subprime risk because the hedge funds don't disclose their portfolios.

The Central Banks globally are providing liquidity to the credit markets by pumping funds into short term repo markets over the past two trading days. A repo is a short term (normally 1-3 days) capital market instrument where securities are traded for (made liquid) cash so that institutions can move money around and avoid the domino effect that happens when one failed cash payment causes a chain reaction of more failed payments. The Central Banks will likely continue this infusion this week, probably as long as it takes to calm the market.

The unity shown by the Central Banks was last seen after September 11, 2001 and it works because it says the world's financial systems are united in trying to slay a dragon... the hope is the markets will have time to figure out which institutions are risky and return to some form of status quo.

Many money managers see this liquidity crisis as an over reaction to the black box (Pandora's box?) of limited data about where all these subprime loans are. Some are slightly positive or making buying recommendations.

Bit of News provides succinct background on a 1998 hedge fund credit crunch caused by the failure of Long Term Capital Management, how it established the precedent that the Fed will bail out companies that will potentially cause massive fallout. It goes on to say that the subprime crisis has such huge fallout implications (it's not just one hedge fund now...), a bailout will essentially force the Fed to "print money" with potential hyperinflationary consequences.

Subprime contagion is spreading - Rising foreclosures affect Main Street...

Marc Faber of Boom Gloom Doom and David Chapman of Union Securities predict start of bear market with 20-30% drops in stock prices.

Liquid lenders return to the market with realistically priced loan products that aren't corrupted by the disproportionate mortgage rate jumps happening last week.

Now, buyers are spooked, particularly those contemplating purchases of properties that fit the subprime default profile - lower income neighborhoods, significant investor activity. If the Fed does lower interest rates to stem the credit crisis, it won't fix the underlying problems of subprime defaults now and in the future, nor would it make more borrowers eligible. On the other hand, A-clients will benefit from a new window of opportunity of lower interest rates and their associated mortgage rates... and that will help lubricate a residential market where there are both sellers and buyers.