Ring, Ring: Hello, This is your Margin Call for $325 Billion

JPMorgan Chase issued a report on Friday that Wall Street banks are facing a "systemic margin call" for $325 Billion due to their weakening subprime mortgage exposure. "A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," according to the report co-authored by analyst Christopher Flanagan. "We would characterize this situation as a systemic margin call."

This past week, JPM sent a default notice to Thornburg Mortgage after the lender missed a $28 million margin call – sending a ripple through the market. The Thornburg notice is just the start of the cycle according to JPM. There were others this past week missing margin calls, the Carlyle Group's mortgage fund also failed to cough up $37 million it owed. Is there any wonder, why sovereign wealth funds are now taking the position that they can not save Citi.

The worst news is that this is just the start of the cycle, despite the Fed planning to add an unprecedented $50B in liquidity at each of two auctions in March. The current margin calls are only for sub-prime debt; the deteriorating auto loan, credit card, and commercial real estate loan situations have not been addressed yet.

The jumps in unemployment, faltering consumer confidence, and other headwinds make it more likely that the first quarter of 2008 will officially be recorded as a recession for the U.S. economy.