The catch-phrase “subprime mess” is giving way to a new financial buzzword: “counterparty risk.”  Although we’ve yet to hear Katie, Brian or Bob use the term on the evening news, it’s been surfacing with increasing frequency in print, and it got a real workout yesterday when it was needed to explain why two financial giants that had not even been rumored as troubled suddenly turned up on gurneys in the emergency ward.  Both had failed to meet large margin calls, but the real worry is that if the two companies – Carlyle Capital and Thornburg Mortgage -- are forced to liquidate assets, the selling could trigger a price spiral that would put pressure on other lenders’ portfolios. That’s what “counterparty risk” implies above all – that when a firm gets in trouble, it can set off a chain reaction.  These days, so many financial firms operate with such enormous leverage that neither the extent nor even the specific nature of counterparty risk across the banking system is knowable. As such, it seems highly plausible that even a relatively small company that gets on the ropes could take some much larger firms down with it.

The distressing saga of yet two more firms gone dangerously far out on a limb is not exactly the kind of news to which Fed chairman Ben Bernanke needed to awaken. He’d spent the earlier part of the week encouraging bankers to write down their mortgage portfolios, effectively letting shareholders take the hit rather than delinquent homeowners. The pundits saw this as a radical departure for Helicopter Ben -- the sort of stealth populism you might expect from Hillary or Obama, but not from the man whose main job is safeguarding the banking system and its precious capital.

Augean Stables

We must confess that we are growing increasingly sympathetic toward Mr. Bernanke ourselves, since he inherited from Alan Greenspan a corrupt, terminally delusional, stinking mess-of-an-economy that makes the Augean stables look like a pristine pasture in comparison. We’ve even learned to live Mr. Bernanke's shameless lies, such as that the economy will somehow squeak through 2008 without a recession.  After all, what is the guy supposed to say -- that we are all effed?  We give him credit for at least trying to prepare the bankers for the worst. (Or do they perhaps have some other plan for dealing with the tens of millions of homes that could conceivably wind up in foreclosure?)

We sense that the Fed chairman understands what the endgame will look like and that he is doing his utmost to prepare the banking system for it -- but without saying or doing anything that might touch off a stampede. Isn’t that now his job?