June 18, 2007 (LPAC)--The collapse of the Bear Stearns hedge funds is only the "tip of the iceberg" of what promises to become a major financial crisis and lurking under the water are the collateralized debt obligations (CDOs) which are in fact worthless. This, according a report by Lombard Street Research will lead to a severe credit crunch in the United States as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, Ambrose Evans-Pritchard writes in today's Daily Telegraph.

The Lombard report reads: "Excess liquidity in the global system will be slashed. Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."

Experts are quoted as saying the failed auction of the BS funds where only 200 million of the $850 million of the funds assets were brought because prices at the auction began to collapse revealing the "dark secret of the CDO debt market."

"We don't know what the value of this debt is because the investment banks shut down the market in a cover-up so that nobody would know. There is $750bn of dubious paper out there in the form of CDO's held by banks that have a total capitalization of $850bn," Pritchard quotes one expert.

Pritchard then quotes Nouriel Roubini, economics professor at New York University, who said there are now concerns about "systemic risk fall-out" from the Bear Stearns crisis as investors look more closely at the real value of CDO's. "These highly illiquid securities have been priced so far on unrealistic and distorted credit ratings as the ratings industry has been complicit...They have not been re-rated in a way that is consistent with rising subprime default rates. That is why Wall Street is in a panic. Losses will be massive once these assets are correctly priced to market."