If you thought that the subprime mess was the biggest threat, here is another one: the pay-option loans. Here below, you can read the CNBC article explainnig how the “game” works.

Countrywide Financial Corp. has seen mortgage defaults rise as the housing market went from boom to bust, but the nation’s largest home loan provider says it could have more trouble ahead with a particularly risky slate of loans _ pay-option adjustable rate mortgages…. Pay-option loans give borrowers the option to make a lower payment but can result in the unpaid portion being added to the principal balance. They also have the potential to provide high yields to investors who purchased the loans from lenders during the housing boom… As of the end of December, Countrywide had nearly $29 billion in pay-option loans, with about $26 billion of the total having grown beyond their original loan amount, the company said in a filing late Friday with the Securities and Exchange Commission… MORE: 03/04

Another headline in the New York Times caught our attention: States and Cities Start Rebelling on Bond Ratings:

A growing number of states and cities say yes. If they are right, billions of taxpayers’ dollars — money that could be used to build schools, pave roads and repair bridges — are being siphoned off in the financial markets, where the recent tumult has driven up borrowing costs for many communities…. A growing number of states and cities say Wall Street ratings firms assign municipal borrowers inappropriately low credit scores, costing taxpayers billions of dollars… States and cities rarely dishonor their debts. The bonds they sell to investors are generally tax-free and much safer than those issued by corporations. But some officials complain that ratings firms assign municipal borrowers low credit scores compared with corporations. Taxpayers ultimately pay the price, the officials say, in the form of higher fees and interest costs on public debt….

Um-um… who says that low credit scores are inappropriate? Considering the national debt, all we can say: it is about time to put an end to debt-multiplex. Maybe if the rating agencies had sounded the alarm a long while ago, we wouldn’t be there… we told you so a while back: ratings agencies are next to be investigated.
Meanwhile American consumers’ bankruptcy filings were up 15% in February. The February number was 37 percent higher than in the same month a year ago, according to the Bankruptcy Institute.

Wait, it is getting worse: a telegraph.uk columnist acknowledges that the Federal Reserve’s rescue has failed:

The verdict is in. The Fed’s emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed… The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe… UBS says the cost of the credit debacle will reach $600bn. “Leveraged risk is a cancer in this market.”

Try $1trillion, says New York professor Nouriel Roubin. Contagion is moving up the ladder to prime mortgages, commercial property, home equity loans, car loans, credit cards and student loans. We have not even begun Wave Two: the British, Club Med, East European, and Antipodean house busts… Half the eurozone is grinding to a halt. Italy is slipping into recession. Property prices are flat or falling in Ireland, Spain, France, southern Italy and now Germany. French consumer moral is the lowest in 20 years… The greater risk is slump, says Princetown Professor Paul Krugman. “The Fed is studying the Japanese experience with zero rates very closely. The problem is that if they want to cut rates as aggressively as they did in the early 1990s and 2001, they have to go below zero.”… (03/02)

Please bear in mind that Ben Bernanke warned that he expects bank failures. This article on marketwatch.com may soon reveal the cherry on the cake:

Gulf investors may not save Citigroup read… The Kuwait Investment Authority also said in January it would invest $3 billion in Citigroup. Al Ansari said “it would take a lot more money to rescue Citigroup.” A spokesperson for Citi was unable to comment immediately when called Tuesday… (03/04)