1) It had always seemed to me that the big differential between the rate of interest on the high yield debt, leverage buyout loans and mortgages and the treasury bond rate was a silver lining to make all the assets owned by the banks quite profitable even in a recession. Say they were earning 10% nominal on those assets with a 10% default rate of 10%. That was still 9% , and much more than the 3% available on treasuries or the fed funds rate they needed to borrow at. But now, the treasury rate is creeping up to 5% , and the differential doesn't look that attractive.

I always look at simple things like that.

My favorite mantra for fixed income has been that when the Fed makes tightening noises, this is very bullish because it keeps the long term inflation rate down.

I believe that's worked for 30 years or so, but now the interaction with the staggering amounts of leverage on the banks balance sheets adds an additional layer of complexity.

still with stocks reeling again, no way can the Fed raise interest rates as this would precipitate more problems in the differential that would truly create a lack of profitability on the income side as well as a weak balance sheet.

One realizes this is simplistic reasoning and would appreciate feedback on how predictions and tests and profits might be considered.

2) When in the merger bus in the 70's , we ran into buyers saying all the time " Why should I pay more than book for a company like this as it cant earn a return on its assets any better than average, and its activities could be duplicated. Much now seems to be clear about the brokerages and related financial institutions . Its clear that the relatively high rates of return on equity that they made, were because of high leverage and there was a corresponding low return on assets. Now that the assets have to be reduced, one is left with a ratchet brining both the bas assets and the return figure down. The Wall Street Journal in an article on Lehman says. " until Leh can prove that it has a future and find a way to regain lost investor trust, there is no reason to see why the shares should tradve above ( adjusted discounted book). Or why a potential buyer if the firm decides it can't survive on its own should pay much more ".

That's exactly what the potential buyers of companies in industries that were selling below book in the 70's used to tell me. The situation exacerbated by higher interest rates, so interest rates must go down considerably so that the problem is solved.

One realizes that the stable door is being locked late here, and that's why I concentrate on the interest rate prediction. The stock market vigilantes must show the world that interest rates must come down soon.