Uh-oh! They're starting to use the "R" word. Yes, the dirtiest word in finance is rearing its ugly little head as the entire world embraces the full ramifications of the "innovative financial instruments" that have proliferated through this debt-driven bull market. As this ugliness unfolds, economists, analysts, and money managers all scratch their heads wondering how this all happened as they continue to insist that macroeconomic factors "don't matter". They point to corporate earnings and individual company fundamentals as the only things that matter. Guess what? When corporate profits are driven by record consumer debt and then credit markets unravel, macro factors matter.
Ex-Treasury Secretary Summers warns of risks 'greater than any since aftermath of 9/11', reports Ambrose Evans-Pritchard
Former US Treasury SeFcretary Larry Summers warned that the United States may be heading into recession as the biggest victim to date of the sub-prime mortgage debacle was humiliatingly sold for a token sum in Germany.
Traders are braced for another week of turmoil after the near breakdown of America's $2,200bn (£1,100bn) market for commercial paper.
"It would be far too premature to judge this crisis over," Mr Summers said. "I would say the risks of recession are now greater than they've been any time since the period in the aftermath of 9/11."
In Germany, it emerged that the state-bank SachsenLB may have accumulated $80bn of exposure to risky assets through a set of Irish funds kept off balance sheet.
Stock markets rallied strongly late last week on the belief that the Federal Reserve would start to cut its key lending rate in September, and that the European Central Bank would refrain from further tightening. Goldman Sachs said any hint the banks may prove more hawkish could quickly dampen investor spirits again, warning it was too early to give "all clear" on equities.
Federal Reserve data shows that the outstanding stock of US commercial paper has fallen by $255bn over the last three weeks, a sign that borrowers have been unable to roll over huge amounts of debt. The fall is comparable to the sudden shrinkage that occurred at the onset of the dotcom bust, and may have the effect of draining liquidity.
The New York Fed issued a statement on Friday stressing that asset-backed commercial paper (ABCP) would be accepted as collateral for loans to banks from the discount window. The move has helped trim the average yield slightly to 6.04pc, helping to calm a key part of the money market that lubricates the financial system.
Even so, the cost of this credit is still up roughly 80 basis points since late July - for those borrowers who can obtain it at all. Bill Gross, head of the US bond-giant PIMCO, said parts of the commercial paper industry were now so discredited that it may be impossible to revive them.
A string of Germany banks have run into trouble after taking leveraged bets on CDOs and the even more deadly 'synthetic' or derivative CDOs - bond-like securities that often contain slices of US mortgage debt.
The scale of carnage in Europe explains the series of emergency actions by ECB, which injected a further $85bn in liquidity through various mechanisms last week. IKB was the first German bank to crumble earlier this month, requiring an €8.1bn state-rescue just days after it denied any significant exposure to sub-prime debt.
