Subprime Debacle May Spark 2-Year Credit Crisis

A "credit recession" sparked by the U.S. housing market downturn and excesses in structured finance may last more than two years, and the financial sector will undergo "massive consolidation," two leading Wall Street strategists said Wednesday.

Credit Crunch
Credit Crunch

The fallout from deteriorating subprime mortgages and the broader housing and credit crisis will eventually lead to a healthier market—but not until after a prolonged purging process, Jack Malvey, Lehman Brothers Holdings'schief global fixed-income strategist, said in New York.

"We're going through a tough spell with regard to credit," Malvey said at a Securities Industry and Financial Markets Association conference.

The "subprime debacle" due to years of excess and easy credit will be followed by years of tight credit, Malvey said.

Malvey spoke a day after his company's stock plunged to close at nearly a five-year low on concern that Wall Street's smallest surviving major brokerage may need to raise more capital. On Wednesday, the Wall Street Journal reported that Lehman is seeking capital overseas.

The company's earnings have suffered due to exposure to structured finance—securities based on assets such as subprime mortgages.

Malvey said global diversification will be a "good remedy" for investors seeking to offset losses from the downturn. "This is the biggest blowup that we've had," the strategist said.

Richard Bernstein, chief investment strategist at Merrill Lynch, said that in the last market cycle downturn, about 25 percent of financial firms—including brokers, banks and asset managers—"went away," he said, referring to bankruptcies or mergers and acquisitions.

Only 7 percent of financial firms have failed or been acquired so far in this crisis, Bernstein said.

Like Lehman, Merrill's earnings have suffered due to structured finance.