The stone, hard, cold reality is this economy is about go into a tailspin, unlike anything you have witnessed. The recessions of 1980-82, 1990-91 and 2001 were minor in comparison with the imminent decline of this economy. This one will be characterized by massive job lost. The good news is the downward spiral we are in will not be as catastrophic as the Great Depression (1929-1941).

Let us start near the top. The bond insurers are on the ropes. There are primarily three types of bonds (Federal, Municipal-state, local and quasi-governmental agencies - and corporate). Essentially a bond is a loan made to one of the three above. Bond insurers, American Capital Access (ACA), Municipal Bond Insurer Association (MBIA), Financial Guaranty Insurance Corporation (FGIC), American Municipal Bond Assurance Corp. (Ambac), etc. provide insurance policies called credit default swaps in complex transactions. So if Citigroup, Bear Stearns, Florida State University, Port Authority of NY/NJ, Baltimore or Anytown, USA were selling bonds to finance improvements such as bridge repair, building a new stadium with public funds, adding a wing to a hospital or a new dormitory, the bonds would be sold to investors backed by the rating of the bond insurer.

The corporate bonds (structured finance) include instruments collateralized with subprime loans. Well, over the next two years, bond insurers will be required to payout an estimate of $200 billion, due to subprime defaults. This is only the beginning of the deterioration. Because of the losses accumulated to date from the subprime crisis, rating agencies (Standard & Poors, Moody's and Fitch) are threatening to lower the AAA rating on their bonds. FGIC, the third largest bond insurer, has been downgraded by Moody's, Ambac was lowered to AA by Fitch, Security Capital Assurance has been lowered to A by Fitch. But all 7 of the bond insurers are under review by the rating agencies. When one of them is lowered below AAA by all three agencies, you will see a huge swing in the stock-market because pension funds cannot invest in securities or bonds with a rating less than AAA. The issue is multi-layered.

The NY Insurance Commissioner and Governor are proposing a split within the bond insurers. Remember, bonds are public and private. NY wants the bond insurers to split their alleged profitable municipal bond portfolio (Warren Buffet offered $800 billion) from the structured finance side, which is bleeding money from the subprime crises. FGIC is pursuing this course while MBIA and Ambac are opposed. All of the bond insurers are undercapitalized but FGIC has greater exposure to the subprime debacle. FGIC has 54% of its collateralized debt obligation tied to the subprime industry as opposed to less than one-third by the others. Legal analysts are saying litigation is in the offing. The problems do not stop here. The groundwork is being laid for a bailout of the bond insurers and/or the Port Authority of NY/NJ is behind the idea of a split. Bershire Hathaway would not have offered to purchase the Municipal Bond side if they (Warren Buffet) did not think there was some leverage in the deal for them.

In my next installment I will talk about auction-rate securities and from there we can discuss how the downward spiral of this economy is impacting you as a Black consumer and homeowner.

BlackCommentator.com Guest Commentator, Lloyd Wynn was a consultant in the secondary market. Lloyd is the author of Residential Real Estate Finance:  From Application Through Settlement. Click here to contact Lloyd Wynn.