Shareholders of big stupid banks (and little ones, too, I guess), who for some reason, could not predict that many 100%, no doc loans would default, are going to have to accept a huge haircut. If they wait too long by holding out hoping for a miracle, they will be left with nothing.

The problem is that they need a huge injection of capital, and as Gross points out, nobody is stepping forward to invest. They can only sell off so many assets, they still need more capital. They probably can't sell new shares in the public market because they have no clear idea how bad the problem is, and they would get sued when their shares drop after the next quarterly loss is reported. What they're going to have to do is beg some of the new American creditors (the oil exporters and Asian countries that have been selling us all that stuff that was paid for with home equity loans) to buy new shares, and give them lots of warrants that are executable at lower prices, when their share price eventually drops. The warrants would have to be priced and structured to eliminate the downside risk that the investors would have over the next year or so, such that all of the new capital would be priced at the lowest share price. The new capital will keep them solvent, but dilute current shareholders by maybe 50-75%.

If they don't do that, the government will surely bail them out, using newly printed money that will increase inflation to levels that will make the oil-driven inflation we are enjoying now seem like a rainy day (think South America, mid 80s).

Now I know the current president is incapable of understanding the financial system, and would have no clue that something like this could happen. But what I don't understand is how the heads of these giant firms, who made all those ridiculous loans, could not understand that the house of cards would collapse? Did they really believe the low tax, deficit spending, never-ending bull market fantasy? That low income regions of the US could absorb all of the houses that builders could build? How do those guys just ignore the basic math behind where the money for loans comes from? What were they thinking? And why weren't their big shareholders, the pension and mutual funds, willing to not only let the CEOs destroy these firms, but pay them a fortune while they made these insane decisions?

So that's what economists mean when they talk about the Brazilianization of America.

Hey, isn't the american business model for ceo's is to join a company get "profits" up as much as possible by any scheme they can think of, take a huge billion dollar bonus, then get out of Dodge?.