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We've all scene the massive gyrations in the stock market over the past month, and everyone is asking whether it will get worse. When it gets difficult to assess the risk involved with a certain investment, most professionals sell first and ask questions later. Right now, the market does not know how to properly price the added risk in their mortgage-backed securities portfolios because of the fallout from the sub-prime mortgage sector. And an increase in uncertainty is reflected in an increase in volatility. Hence, you get these massive swings in the stock market - up 300 points one day, down 300 the next.

"This process is a very old and familiar process," says Jack Malvey, chief global fixed income strategist at Lehman Brothers. "These are regular currents in capital markets -- there's a break in the chain from the weakest link and there's a ripple effect."

In this case, the "weakest link" are subprime borrowers, those with checkered credit histories who were granted loans during the U.S. housing boom. They were the first group to miss home loan payments or default.

The risk is now widening to so-called Alt-A mortgages, a pool of alternative loans made to A-rated borrowers that could not meet typical prime borrowing terms.

So, where does this crisis rank among past financial shakeouts?

The turmoil sweeping the U.S. subprime mortgage market is starting to resemble some of the biggest financial crises of the past 100 years as its fallout infects credit conditions worldwide.

While most analysts say it's too soon to hit the panic button, parallels to past crises are starting to fall in place: a domestic credit crunch, contagion to international markets and more volatility, followed by bank intervention.

The Federal Reserve and European Central Bank pumped money into the banking system for a second day on Friday to ward off a global credit crisis and the Fed said it stood ready to do more if needed. Central banks worldwide have injected at least $323.3 billion in the past 48 hours.

$323 billion injected into the system 48 hours? That is a lot of money in such a short time frame, that's for sure. Something must be up, right?

Josh Rosner, a mortgage expert from Graham Fisher, a New York-based investment research firm, forecasts that losses from deteriorating U.S. subprime loans will surpass the S&L crisis in the 1980s. Rosner forecasts more than $200 billion in total losses to investors and homeowners, compared with about $125 billion in losses from the S&L debacle. "In terms of ultimate losses, it will be worse," Rosner said. "It's a bleeding into the system, a drag on the economy over the life of these mortgages."

The worst losses on mortgages originated in 2006 won't even start to have an impact on the market until the end of 2008, Rosner said.

"That's all the analysis you need to know things will get worse," he said.

Great. Now that's something to look forward to...

[Here's a detailed, comprehensive article that further describes what's going on.]

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