Billionaire investor George Soros didn't mince words yesterday.

"This is a period of wealth destruction. The people who make money will be few and far between. There will be a lot more money lost than made.
"I think this is probably more serious than anything in our lifetime," he says. In short, his feeling is that the United States and Britain are facing a recession of a scale greater than the early-1990s, greater even than the 1970s.

If it was someone other than Soros that was saying this (someone like me, for instance), you could probably ignore these sorts of warnings. There is always someone who will yell, "The End Is Near!"

But why these messages of doom? Almost everywhere you look in the financial media these days someone is telling you that the economy has bottomed. Politicians are saying it. Morons at CNBC are saying it. Even foreigners are saying it. So why isn't George Soros getting on board with the happy talk?

For starters, the credit markets are saying that bad times are coming, and they are coming soon.

The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.
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But there are now concerns that the Fed itself may be exhausting its $800bn (£399bn) stock of assets. It has swapped almost $300bn of 10-year Treasuries for questionable mortgage debt, and provided Term Auction Credit of $130bn.

"The steep rise in swap spreads this week is ominous," said John Hussman, head of the Hussman Funds. "The deterioration is in stark contrast to what investors have come to hope since March."

Willem Sels, a credit analyst at Dresdner Kleinwort, said the banks are beginning to face waves of defaults on credit cards, car loans, and now corporate loans. "We believe we're entering Phase II. The liquidity crisis has eased a little, but the real credit losses are accelerating. The worst is yet to come," he said.

Dresdner doesn't sound like someone you want to take to a wild party. Neither is Tom Attwood.

"What was a liquidity crisis is likely to lead to a credit crisis," he says. "There is no sign of a return to liquidity in debt markets as a whole. Raising new funds will become increasingly difficult across the board."

So where does all this pessimism come from? There is obviously the record energy prices that are spilling into food prices and everything else. But the most disturbing fact is that mortgage rates are rising even while the housing market troubles spread.

The number of troubled Alt-A borrowers in the 2007 vintage rose an eye-popping 26.5 percent from March to April alone, nearly reaching 17 percent of loan volume.

The 2007 vintage isn’t the only Alt-A vintage facing problems, of course: 19.3 percent of borrowers with loans originated in 2006 were more than 60 days delinquent at the end of April, a jump of nearly 10 percent from March.

The troubles in Alt-A are appearing despite the fact that very few borrowers in any vintage are yet to face a strong wave of rate-reset activity.

For a refresher course in what Alt-A is, how big it is, and what the implications are, please click here

It's pretty obvious if you look at the chart above that interest rates on Alt-A mortgages arenot resetting to higher rates right now. They will in the future. Despite that fact defaults on Alt-A mortgages are going through the roof.
Which begs the question - what will happen when the Alt-A mortgages reset? To answer that, consider what is happening in the subprime market and then compare it to the chart of subprime resets.

For those that need an even more visual representation, I give you this.

As for our wonderful government in Washington, they are working overtime to come up with a housing bailout bill that the public isn't demanding as far as I can tell. And like everything in Washington, the devil is in the details.

Buried in the proposed legislation is something new and revolutionary, an effort to stop mortgage walk-aways.
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The Senate legislation addresses the walk away issue by saying that before borrowers can get FHA financing they must certify that they have not intentionally defaulted on any debt, not just their current mortgage. Lying about this issue can be considered perjury, and perjury can result in a jail sentence.

So basically our politicians are designing a housing "bailout" bill that will make certain that people can't leave their homes, or any debt for that matter, even if they want to. Which begs the question - who exactly is being bailed out here? It sounds more like an enforcement bill for the infamous 2005 Bankruptcy Bill that the credit card companies pushed through.