It's A Process: Denial, Anger, Bargaining...

It's a process, according to Elisabeth Kubler-Ross's well-known meme of dealing in stages with grief, tragedy, impending doom or one's own demise.

Denial, Anger, (Fear*), Bargaining, Depression and Acceptance.

In the extant global financial catastrophe, which 18 - 24 months ago was first manifest in peaked residential real estate prices** particularly in California, Nevada, Arizona and Florida and other U.S. states and developed nations, the various constituencies are at differing points of Ross's grief process.

Banks and investment banks and insurance companies, in general for example, appear now to be firmly in the Bargaining stage, at least in their dealings with governmental authorities including central banks, administrations and legislatures.

They are Bargaining for their survival, those that have survived thus far. They are agreeing to partial government ownership, limitations on executive compensation, increased deposit insurance guarantees and, in the instance of investment banks, agreeing to forgo the highly leveraged model of the past in favor of the capital restrictions of bank holding companies.

If the collapse of Bear Stearns in March represented the transition to Anger from Denial, the bankruptcy of Lehman Brothers, the seizure of Fannie Mae and Freddie Mac, the rescues of AIG Insurance and Merrill Lynch, the shotgun marriages of Washington Mutual and Wachovia Corp. and near-death experiences of Goldman Sachs and Morgan Stanley in a busy September completed the Anger stage, with a healthy dose of abject Fear near the end, allowing a move to Bargaining.

Interestingly most consumers and businesses are not yet as far along in the process, perhaps harboring some shred of hope the global government bailout somehow will return the calendar to late 2006.

Most consumers appear firmly in Denial, in that they still are consuming, and still consuming on credit. Some, of course, are moving toward Anger, as credit card limits are reduced, interest rates are hiked, home equity lines of credit are cancelled and applications for new credit for cars or homes are denied by lending institutions no longer lending as they are too busy Bargaining for their own survival.

Data now are showing some cracks in that stalwart consumer facade, however, as retail sales begin to decline and personal consumption in the 3rd Quarter 2008 may decline for the first time in nearly 20 years.

Ironically, banks and lenders, in their dealings with their customers, mostly now are Angry, belatedly having realized that $100,000 in unsecured credit card balances to an individual client, whom no one in charge of approving such credit availability over the last two decades ever met in person, reviewed a tax return, analyzed a financial statement or obtained a copy of a pay stub, may not be such sound lending practices after all.

The lenders, in their Anger, are reducing consumer credit limits and cancelling or freezing cards or home equity lines to the extent possible, hiking interest rates and imposing hefty penalties for late payments or overlimits.

Yet in one sense, lenders remain firmly in Denial: in many troubled regions they are refusing to rework troubled mortgages at more realistic terms reflecting the reality of collapsing residential real estate prices, preferring instead to foreclose on properties in a misguided expectation that once bank-owned, somehow their losses will be minimized when the former owners are evicted are the property is resold. Except there are no buyers even at current forclosure prices.

For businesses, Angry survival-mode banks are seizing the umbrellas liberally extended while the sun was shining and curtailing or withdrawing credit lines, refusing to honor letters of credit and denying new requests for business credit now that the rain (deluge?) has begun.

Only central banks and governments seem to rapidly have accelerated to the end-stage of Acceptance. Last weekend's G-7 meetings, which largely rubber-stamped the hastily arranged national plans formulated in previous weeks to pull out all stops to stem the growing tsunami of asset deflation and debt destruction, marked the quick transition to an embrace of an all-encompassing rescue of the world's financial system, ostensbily to "unclog" the pipes of lending.

It remains to be seen if this giant dose of financial laxatives is able to quickly transition banks and lenders to that serene state of Acceptance, especially when bank customers remain Angry or in Denial.

If, however, the fundamental problem in the extant crisis is a decades-long accumulation of too much debt by too many debtors who are unable to service, much less repay, those debts, then a global financial rescue designed to stimulate more lending may not, in fact, be the palliative solution envisioned by government and central bank mandarins.

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*With apologies to Dr. Kubler-Ross, in the extant crisis one would be tempted to add another stage - Fear - which likely would be reached immediately before Bargaining. Fear, indeed, in our opinion, was palpable on numerous occasions from September 12th to October 10th, and Fear, no doubt, was a motivating factor for the sweeping, coordinated government and central bank programs hastily developed to, for the moment, calm the escalating sense of panic enveloping global financial markets and their participants.

**U.S. and developed-nation residential real estate prices, once peaked, was the first domino to fall, cascading into, secondly, a global liquidity crisis (August 2007), thirdly, a global credit crisis (July 2008), and, lastly, a global solvency crisis (September 2008). The "sub-prime mortgage crisis", which in early-mid 2007 became the next domino to fall, was a direct result of falling real estate prices (and, thus, not the true cause of the current crisis). Once residential real estate prices peaked and began to fall, sub-prime borrowers faced with scheduled interest-rate resets and significantly higher, unaffordable monthly payments, and for whom the exit strategy merely would be to quickly sell their residence to another buyer at an expected appreciated price (as they were led to believe would be their exit strategy), were unable to find buyers, precipitating a downward spiral of asset deflation and debt destruction. In this sense, the crisis is similar, yet exponentially greater in magnitude, to all other involuntary asset deflations once a point is reached where buyers are unwilling or unable to pay the next higher price for an asset, most recently observed in early 2000 when the U.S. dot-com-driven stock market bubble burst.