Sorry to keep bringing pessimism to the forum, but that’s just what stands out for me as I absorb news and such.? There’s a future post in what I perceive to be a large asymmetry in naive perspectives amongst the bullish lot.? Anyway, on to a quote from Paul Volker via Marc Fleury‘s blog:

Simply stated, the bright new financial system ? for all its talented participants, for all its rich rewards ? has failed the test of the market place.? Paul Volcker, April 8 2008

What’s the fallout?? Why is it not just about write downs and losses?? The current financial situation have not only caused losses, but they’ve also taken away the most profitable business for most banks and brokers.? From Nouriel Roubini (emphasis mine):

So how will mortgage brokers, banks, broker dealers, monoline insurers, rating agencies generate revenues and profits now that this slice & dice scheme has unraveled? The current market delusion that the worst is behind us for financial institutions is based on the view that most of the writedowns of the toxic assets have already been done. But this is not just a balance sheet problem. Now financial institutions have a more severe P&L problem, i.e. how to generate income and earnings from now on when they cannot originate junk any more. The entire income generating model of financial institutions ? make income out of securitization fees rather than by holding the credit risk – is broken now that the generalized credit bubble (not just subprime mortgages) has burst; thus, how will these financial institutions generate earnings over time? Capital losses are one-time problems; but destruction of the income generation process is a more severe and persistent problem that will require banks and other financial institutions to rethink their overall business model of credit risk transfer.

I know Quicksilver will respond with some comment about how Roubini is always bearish, but Nouriel also happens to have hit on an important point here.? Where will the income generation come from for banks?? If the Fed and Treasury really are trying to give the banks time to grow their way out of the current mess, where will that growth come from?