US: Subprime crisis not over yet

As markets around the world rallied yesterday in response the the good news from the Fed on Friday (after most markets had closed, so giving the US markets a run all on their own), workers at Countrywide, one of the largest sub prime victims got ready to go home. And stay there. It was no boost to them that even bank shares were climbing.

Last Friday, just before the Fed's grand gesture, workers in the "self certified loan" division of Countrywide were told that most of them would not be needed. The Full Spectrum division does not know how bad business might get. Unlike sub-prime, where there are clear rules (at least in theory), the self certified loan division relies on borrowers declaring their income and doing it honestly.

In a world of rapidly rising house price, otherwise low inflation, low interest rates and high employment history shows that people are often willing to overstate their income, believing that they can always get a better paid job, that if it all goes wrong that they can easily sell the house into a bouyant market for more than they paid for it and that they can save on other things if interest rates to go up. And history shows that when the market goes down, when infaltion goes up, when employment is harder to find and when interest rates increase, that the self assessment portion of the market is often hit harder than predicted.

Hold out the fingers on one hand and count how many of those factors are already in place. Now use the other hand to rub your eyes.

So expect Countrywide to not be the last to take a long hard look at this sector. It could easily be shaping up to be the next big thing after sub-prime. And that's not a good thing.