OK, now here's the place where you may need to cover your eyes.
Satyajit Das, a credit derivatives expert based in Australia, told me in a phone interview Monday from Singapore that these events have "essentially destroyed the capacity of the banking system to provide funding to businesses." He added: "Investment banks have destroyed their capital by making foolish loans on a massive scale, and the chance that they will get new capital, as they did back in the spring, is low. If you are a sovereign wealth fund and give new money to Wall Street now, you look like a chump. They won't be sugar daddies anymore. It won't fly politically at home. It isn't going to happen."
So who's going to refill the capital well? You may have heard that money does not grow on trees, and neither can countries actually "print" money, since that actually involves the sale of new bonds at a time when the market is flooded with them.
Well, U.S. Treasury and Federal Reserve officials have urged American banks to pool together a $70 billion fund to bail out weaker members of their tribe. But Das scoffed at the effort as a nonstarter, considering they are all equally desperate to hold on to their capital: "It's like the deaf . . . volunteering to help the blind," he said.
So you can see why stock markets are suffering. The credit engine that has fueled the planet's economic growth is now kaput, as banks and governments have downshifted from risk-taking mode into survival mode. The only hope now is that the unraveling will not accelerate and become an uncontrolled spiral into the ground.
"The European Central Bank and U.S. Federal Reserve have held international financing together with chicken wire and hope, and only now are people seeing how fragile it has been for years," Das said. "As the contraction of credit feeds out into the real economy, business expansion will grind to a halt, unemployment will soar, and consumer spending will falter -- all of which leads, in turn, to lower production and more unemployment."
...Now he thinks the financial part of the game is in the fifth inning, as it has raced toward the inevitable conclusion of large-company bankruptcies faster than he expected. There are only so many major institutions that can go under, after all, and already two are dead, and two more are on the brink.
If American International Group can find the capital it needs, it will end the current panic. If it can't, look for more selling -- especially in Asia, says MSN Money's Jim Jubak.
Yet it turns out we're in a double-header, and the nightcap involving the crushing of the "real economy," which is where all of us live and work, is only in the first inning -- as companies are just starting to cut back jobs in a serious way to match diminished business and the loss of borrowing power. On Monday, Hewlett-Packard (HPQ, news, msgs) and Lehman Bros. announced plans to lay off 25,000 people each.
Now we just have to hope this game isn't called because of darkness.
