The swap spreads on Lehman Brothers rocketed to 465 yesterday, mirroring the moves in Bear Stearns debt days before. Fannie Mae and Freddie Mac - the venerable agencies created by Roosevelt that underpin 60pc of the $11 trillion mortgage market - had a heart attack on Monday. Their bonds were in free-fall, threatening to set off another cascade of bank writedowns.
These are not sub-prime outfits. They sit at the apex of the US mortgage credit industry. Hence the dramatic move by the Fed this week to offer a $200bn lifeline, agreeing to accept Fannie Mae and Freddie Mac issues as collateral.
Had the Fed delayed, many traders believe Wall Street would have plunged through resistance levels risking a full-fledged crash.
The 'monoline' bond insurers - MBIA, Ambac, and others - that guarantee most of the $2,600bn market for US municipal bonds have seen their shares collapse by 90pc since the Autumn.
They are still battling to raise enough to capital to save their 'AAA' ratings. Should they fail, the insured bonds will be downgraded in lockstep. Pension funds would be forced to liquidate huge holdings. As New York Governor Eliot Spitzer said before his own liquidation, such an outcome is too dreadful to contemplate.
If a company is down graded from AAA, most funds have to sell their holdings, which plunges the price. This is very scary time. I am glad I moved all my investments to the stable income funds. Cash is the place to be. Preserving capital is my goal. A 20% loss takes a 25% gain to break even. A 50% loss takes 100% to break even.