Securitisation, a key source of funding for the global economy, is crippled and no one knows when it will recover or what it will look like when it does.
Sometimes called the "shadow banking system," because it rivals banks in importance as a source of credit, the business of bundling together debt and other assets for sale as complex securities and vehicles was cut off at the knees during 2007's credit crisis.
And because banks need to buttress their own fragile balance sheets, the health of the securitisation market will be important not just because it will govern companies' and consumers' ability to borrow, but as a driver of economic growth and the price of assets from stocks to real estate.
Securitisation has been hit by a terrible combination. Investors no longer trust the value of ratings from third parties such as Moody's and Standard & Poor's, while at the same time losses first emanating from the U.S. subprime market have more or less destroyed one of the main buyers, off-balance sheet vehicles such as SIVs.
Structured investment vehicles, which borrow short term to buy higher yielding longer term debt, were typically set up by banks as vehicles to buy securitised assets.
"The problem with the shadow system doesn't get fixed quickly at all," said Emanuele Ravano, head of portfolio management in bond giant Pimco's London office.
"We will live with a year where lending standards will be much tighter. The banks are not going to be able to do much of the lending."
And indeed the hobbling of the securitisation market leaves a gaping hole.
Whereas nearly $1.2 trillion (608 billion pounds) of asset backed securities were issued in 2006 in the U.S. and Europe, according to Thomson Financial data, just over $90 billion was done in the fourth quarter of 2007, a stunning slowdown.
Barclays Capital is forecasting a 43 percent drop in European securitisation and a 39 percent fall in U.S. issuance this year.
Pimco's Ravano points out that in Europe, the three major buyers of securitised debt were SIVs, which he calls "now prehistoric"; banks, which have balance sheet woes; and mutual funds, which have seen a huge increase in redemptions and are unlikely to have much firepower any time soon.
STOCKS, HOUSING AND ECONOMIC GROWTH TO BE HIT
So what does this mean for financial markets and economic growth?
In short, it is going to make an already bad situation worse. Securitisation was not just a source of borrowing, it arguably allowed prices across a range of assets to inflate as borrowers and investors took advantage of low rates and easy terms to increase the size, and risk, of their bets.
