The Contagion Spreads

If you want to talk viral, let's talk about the disease of debt that's spreading. What started out as a portfolio of subprime mortgages going bad is rapidly spreading to any financial sector that touches any form of credit or debt.

Last week, First Marblehead (ticker: FMD), one of my company's partners, registered a half price haircut on its stock as their student loan portfolio was downgraded. Turns out that defaults may be higher than thought, and FMD might be forced to buy back bad loans.

What does this have to do with the mortgage crisis? Two things. First, securitization depends on available credit and liquidity, and the markets have neither in great supply right now. Second, on the consumer side, my gut instinct tells me a lot of people were paying their student loan bills with home equity. Now that the housing ATM is closed for business for the foreseeable near-term future, expect credit card and student loan defaults to rise precipitously. We're going to do our best to help people avoid default, but there's only so much you can do.

It's getting ugly out there, folks. Cash is king now and will reign supreme in 2008.

If you have debt, and you have the capacity to eliminate it, eliminate it as soon as you can.

Debt is your enemy in uncertain economic times.

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