Just do long as the 10-year doesn't decouple from USD deonominate mortgage rates and credit is reasonably ok to get (if a bit tighter) until I sell my damn house...

Mais c'est un scandâââle!!

As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.

Lending standards are about new lending, not existing lending.

We have met the enemy, and he is us — Pogo

Credit Suisse, Switzerland's second largest bank, said Tuesday that fourth quarter profit swooned 72 percent amid roughly $1.2 billion in write-downs spanning leveraged loans and mortgage debt. Fourth quarter earnings fell to $1.10/share (1.21 Swiss francs), compared to earnings of $2.08/share (2.29 francs) in the year-ago period.

The results, however, looked pretty positive in comparison to the losses posted late last month by Switzerland's largest bank, UBS AG, which took write-offs amounting to $14 billion for the same quarter.

Leveraged loans

The markets have been so transfixed by the horror show unfolding through subprime and collateralised debt obligations, they have not been focused on the banks' other crisis: leveraged loans. Optimists thought that once the loan pipeline slipped below $150bn, debt investors would be cheered by hopes of a logjam clearing and would pile in again. Wrong.

It has been a terrible period for leveraged loan prices - worse than for high-yield bonds despite the unsecured nature of the latter. Some of the reasons may be "technical", but somehow, that tag no longer has the comforting ring of a short-term blip.

(...)

S&P LCD estimate that default rates would have to rise to roughly 10 per cent to wipe out the excess risk premium priced into current US loans. That is a lot given the 2000 high of 8.2 per cent. But with corporate profits looking toppier than then, and gearing higher, loans may not recover soon. Banks hoping for a respite from their nightmare could face more writedowns yet.

Given how mild the 2000/1 recession was, and how much debt has been piled on since then, it would not be surprising that default rates go higher...

In the long run, we're all dead. John Maynard Keynes

Scrap heap for financial models

From what appeared to be a modest glitch in the mortgage market, the damage to the world of financial modeling is ever-extending, and has now come to be surprisingly widespread, involving huge swathes of modern financial theory:

Subprime mortgages turned out to be correlated with each other, so that securities apparently rated AAA were in reality dangerously concentrated in a particular sector of the market that could and did collapse.
That also blew out the theory surrounding monoline insurance, that a well capitalized insurance vehicle could insure debt representing a large multiple of its capital base, without its bond rating or profitability coming into question.
Then there was asset backed commercial paper, under which commercial paper of short term maturity was issued by a shell company against the backing of financial assets of a long term maturity, and through this means removed from a bank's balance sheet - it turned out that in a financial crisis the funding for these vehicles dried up.
Finally, credit default swaps are showing signs of strain, and may have turned out to have concentrated risk in unsuitable hands rather than spreading it as had been promised for them. In particular the counterparty problem in the CDS market becomes acute when defaults rise to a substantial level and declared debt ratings turn out to be unreliable.
As well as the instruments themselves, their risk management turns out to have been flawed. Value at Risk, the paradigm of risk management systems, recognized by the Basel II system of bank regulation and incorporated into it, has proved to be almost entirely useless - like rain-proofing that works well in a light shower, but falls apart completely in a heavy storm.

(...)

Looked at in this way, the subprime mortgage is simply a scam, and the market a giant Ponzi scheme that could survive only as long as more people entered into subprime mortgage contracts, keeping house prices high and mortgage brokers active. Once interest rates began to rise, the demise of the market became inevitable, and it also became clear that the market was not simply entering a downturn but would disappear altogether. In 10 years' time, only Fannie Mae and Freddie Mac will be making subprime mortgages, and they will exist only because they have been bailed out by the taxpayer through the generosity of their friends in Congress, possibly several times.

(...)

Needless to say, the opportunities for chicanery and malfeasance in such a business are legion, and made more manifold by bonus systems which reward bank officers and brokers for the business done in a particular year, without regard to the losses that business may produce in later years. Risk assessment in this business is a joke; the VAR models that fail in assessing the risk of a broad based portfolio fail even more spectacularly in assessing a narrow based portfolio of credit risks, in which correlations between different assets are not properly explored and for which the experience is at most a few years. In spite of their convenience to loan originating banks, it is thus likely that the market for credit default swaps will in future be very limited indeed.

When all these products are taken into account, it becomes obvious that the financial system of the future will look very different from that of the recent past. Shareholders will pay much more attention to the conflicts of interest between traders', brokers' and bank officers' bonus schemes and their own returns. Opportunities to make large amounts of money by pure salesmanship, without regard as to the quality of the underlying assets, will disappear. Risk management will become much more conservative, and will treat exotic and little-understood assets with the utmost suspicion; that in itself will greatly limit the market for profitable "financial engineering" creativity.

The percentage of finance's value added in the US and world economy will shrink once again, close to the levels of the 1970s and 1980s, around half those of today, and remuneration for bankers, traders and salesmen will be correspondingly more restricted. Since new career opportunities on "Wall Street" will be few and far between, there will be an aging in place of existing staff, which will itself increase those institutions' conservatism, probably replacing it with gerontocracy.