This is starting to get grim. 
       
Stocks are plummeting. Loan deals are faltering and banks, unable to pass the buck, are getting stuck holding on to a lot of unwanted junk. How will it all end?
    
Very badly, warns analyst Richard Bove, who has followed the banking and brokerage industries since the 1970s. When banks can’t move their inventories of corporate loans, it clogs up their balance sheets. That can limit their ability to extend new financing. And that could mean, according to Bove, a decade-long, Japanese-style credit crisis.
    
“(Banks) are putting the unsold debt onto their balance sheets. This is poisonous. The Japanese banks did this in the late 1980s and the early 1990s and then refused to mark the debt to market,” Bove said.
    
“The result,” he continued, “is that the liquidity of these companies was destroyed and the Japanese economy took 10 years to obtain the bank funding it needed. This process is beginning in the United States.”
    
The leveraged buyout market has a big supply-demand imbalance: more than $200 billion worth of debt financing has been announced amid the boom in private equity deals. But debt investors apparently have put their check books away until at least Labor Day. The credit markets are effectively closed, buyout executives say.
    
Junk bond spreads have widened in the past two months to 3 percentage points over high-grade corporate bonds. Credit protection costs have zoomed, making it prohibitively expensive to hedge.
    
The result, Bove told his Punk Ziegel & Co. clients in a note earlier this week, is that we’re not having a sub-prime crisis but a full blown credit crisis. Late on Thursday he told Reuters that regulators should force banks to mark down their assets, take their licks and move on.
    
Break out the sake, Wall Street. You may need it.

(Photo. Japanese traders in Tokyo. Reuters file)