Insana does not believe Bear Stearns’ failure represents a turning point for the sub-prime crisis or for the markets.  “Everything that needs to be done to resolve the crisis has not yet been done,” he said, adding “there is more plumbing to be fixed.”  He believes we are probably in the 4th inning of a 9 inning game.

“In my gut I do not feel we have reached a cathartic bottom,” he said, adding “economically, we are not strong enough.”  Some analysts are forecasting 10% drops in housing values in each of the next three years, the effect of which Insana characterizes as “catastrophic.”  It is something he fears and believes is possible.  “The pipes are just too clogged,” he says.  “How deep this gets – I just don’t know.”

Many institutions are lying about their exposure, and Insana cites Korean and Japanese institutions as examples.  He notes “European banks may blame their problems on rogue traders and then attempt to bury the true cause of their problems, and we will never know the truth.”

The Fed may be contemplating more unorthodox measures, including some which might take interest rates to zero.  “Ultimately, this could be where we are headed,” he said.  The overall impact of the Fed’s moves is to “quarantine Wall Street’s problems to Wall Street.”

In reference to the purported marijuana smoking of Bear Stearns’ CEO Cayne during critical periods, Insana added some levity, commenting that Cayne was culpable if he was high while his firm was low.  He called out former Merrill CEO O’Neil for similar culpability, in reference to his extensive golf outings during the time when Merrill dramatically increased its exposure to the CDO markets.  “But it’s the employees that suffer,” he said.

Insana believes we have been in a recession since December, although he notes some aspects of consumer spending appear to be unaffected.  Disneyworld, during Insana’s recent family vacation, was “as crowded as ever.”  Insana expects huge layoffs on Wall Street, and predicts Citicorp will layoff another 30,000 employees.  Cumulative layoffs could approach those following the 1987 crash, when 80,000 people lost jobs on Wall Street.  “The recession could be deep and short, deep and protracted, or characterized by a downward bumpy ride,” he said.

“The pendulum swings much more rapidly now than before,” Insana noted in regard to the ability of the financial industry to create products and elevate the level of risk in the system.  Both regulators and technology are behind the curve in their ability to cope with increased risk.  “When the social consequences of a systemic failure become so large the Fed has to step in.”

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