Sea Change: America's Banking System

Most pundits agree that the financial distress on Wall Street will soon hit Main Street. But to figure out where the crisis is going to end it’s important to first understand where it began.

The crisis started with banks lending as much as possible to as many people as possible, throwing standards out the window. The money was mostly used to buy houses in a real estate market that was white hot. (Remember, people were rushing to buy, sometimes paying premiums, because prices were rising so rapidly.)

That held for a while, until homeowners in California and Florida and then the rest of the nation started to fall behind on their mortgage payments. By that time, those mortgages had been bundled and sold -- then sold again and again -– as very complex financial instruments that looked extremely profitable but were actually toxic.

When they went bad, those questionable mortgages were held by a wide range of firms, including some of the Wall Street’s storied investment banks. And now three of them -- Bear Stearns, Merrill Lynch, and Lehman Brothers -- have been obliterated.

The aftermath will be felt well beyond lower Manhattan. Their collapse signals a sea change for this country's financial system with every American vulnerable to its effects.

Banks will likely hesitate to loan money to anyone but the most upstanding borrowers. That translates into less money going into the system for homes, cars, TVs and even microwave ovens.

“We most likely are going to have a rather difficult recession,” says celebrated contrarian investor Bill Fleckenstein on Fast Money. We didn’t get into this situation overnight, but now the financial system is very broken. It’s going to take a while to fix all of this. I think investors need to think about protecting assets and not making money."

If you’re looking for trade, Fleckenstein thinks you should think about...

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If you’re looking for trade, Fleckenstein thinks you should think about cash. “I think people have to ask themselves if there’s a severe recession do I have too much money allocated to stocks. I think everyone would be better off holding cash. However, I think the US dollar is vulnerable. So I own metals to protect myself.”

Unfortunately, Fleckenstein doesn’t think the end is near. “I don’t think we’re close to the resolution. We may be fairly far into the discovery process into how bad the financial system is, but we’re not as to the effect on the economy. We’re in the early stages of figuring out just how much the risk is, in the economy.

The Bottom Line: The credit crisis began on Main Street and ultimately it will end there.

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Trader disclosure: On Sept 15, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (WMT), (TTWO), (MSFT); Adami Owns (AGU), (BTU), (C), (GS), (MSFT), (INTC),( NUE); Najarian Owns (AAPL) And (AAPL) Collar; Najarian Owns (AMGN) Call Spread; Najarian Owns (MS) And (MS) Collar; Najarian Owns Owns (NOK) And Is Short (NOK) Call; Najarian Owns (RIMM) Call Spread; Najarian Owns (TSO) Call Spread; Najarian Owns (WB) Puts; Najarian Owns (XLF) And (XLF) Collar; Terranova Owns (NOV), (X), (POT), (FCX), (EOG), (AAPL), (GS), (KOL), (VLO), (SA); Terranova Owns (AIG) Puts And Owns (AIG)

Terranova Is Chief Alternatives Strategist Of Phoenix Investment Partners, Ltd.: Phoenix Investment Partners Owns More Than 1% Of (ABD), (ARE), (BIG), (BRE), (CNTY), (CNW), (CLB), (OFC), (DLM), (DRH), (DLR), (EPR), (ESS), (EXR), (AGM), (FL), (GBL), (GNET), (IGE), (LNET), (MAC), (OIIM), (PSPT), (DBC), (DBV), (SLB), (GWX), (SSYS), (SKT), (UA), (BIV), (VV), (BLV); Phoenix Investment Partners Owns More Than 1% Of Goldman Sachs Financial Square Fund - Money Market Fund; Phoenix Investment Partners Owns More Than 1% Of Seagate Technology Tax Refund Rights

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