!Is not Over!

Even though the Dow Jones Industrial Average plunged nearly 400 points Thursday amid a deepening liquidity crisis, the Great Unwind of the global credit pyramid still has further to go.

The European Central Bank took the unprecedented step of injecting nearly €100 billion or $130 billion into the European money markets after BNP Paribas halted withdrawals from three investment funds because their assets -- of which more than one-third are related to subprime mortgages -- were impossible to value in the nonfunctioning secondary market. A week ago, the big French bank's chief executive asserted its exposure to U.S. subprime "is absolutely negligible."

The Federal Reserve also injected $24 billion into the U.S. banking system via repurchase agreements, a hefty but not unprecedented liquidity provision. The actions by the ECB and the Fed came in response to a sharp rise in the cost of overnight money amid a scramble for cash. In the U.S., the federal funds rate rose to close to 5½%, well above the Fed's 5 1/4% target rate. But the amid the crisis, the fed-funds futures market placed 88% probability of a quarter-point Fed rate cut next month, up from 20% odds on Wednesday.

The real story behind this money-market mumbo-jumbo is that there's a 21st century version of a run on the bank, and the central banks have had to step in to do their prime duty of supplying liquidity when the market won't.

The effects of the rolling subprime debacle, which has circled the globe, have come home to roost. Based on the DJ Wilshire index, the U.S. stock market has shed $1 trillion in value since its peak on July 13. So far this year, this broadest measure of the U.S. equity market is up 2.5%, as is the Standard & Poor's 500, far less than the 6.5% year-to-date gain in the Dow cited by the bulls.

But it isn't over.

"A mini Minsky moment" is how UBS senior economic adviser George Magnus describes Thursday's markets. That reference is to the late economist Hyman Minsky, who theorized that financial markets were inherently unstable, swinging from excesses of fear and greed, resulting in the business cycle. Indeed, strong economies will tend to breed overconfidence among lenders and borrowers, leading to excesses and their inevitable correction.

"It's another episode along the path," Magnus describes Thursday's market upheavals. "It's not the episode that has you reaching for tin helmets."

For now, he ticks off three things that are staving off a debacle.

Default rates are relatively low and "the denouement can take a long time," he observes. In housing, while subprime and alt-A borrowers are going bust, the prime sector hasn't seen a significant deterioration in delinquencies.

But, he adds, the full weight of resets on adjustable-rate mortgages have yet to been felt. From the beginning of 2007 through the middle of 2008, over $1 trillion ARMs will reset, many from low "teaser" rates. Then the extent of the declines in home prices and the financial fallout will be apparent, Magnus observes.

For now, he continues, corporate balance sheets in aggregate are in good shape even as highly leveraged companies remain vulnerable. Moreover, the global financial system remains awash in liquidity. And the global economy is humming, Magnus further points out.

Nevertheless, the lack of transparency for the new esoteric instruments, such as collateralized debt obligations and collateralized loan obligations, has exacerbated the current nervousness because nobody knows what they're worth, he also notes.

In that, it appears some of the problem lies with asset-backed commercial paper "conduits" and so-called structured investment vehicles. These ABCP conduits and SIVs are used to fund the purchase of assets such as trade receivables, auto loans, credit cards, whole mortgage loans, as well as securities such as corporate debt, residential mortgage-backed securities and CDOs, according to a Bear Stearns report.

The ABCP conduits and the SIVs then are able to issue high-grade commercial paper to finance these assets, which are less the prime quality. ABCP now comprises over half the $2 trillion-plus commercial paper market, up from 20% in 1998, according to MacroMavens' Stephanie Pomboy. And, money market funds own 27% of all CP outstanding, she also notes.

According to the Bear report, some $38 billion-$43 billion RMBS and CDOs could be liquidated from ABCP conduits. Got that? In other words, a load of these assets is backing ABCP and may have to be sold into a less than receptive market.

Fears of large and wholesale liquidations may be behind the big price drops in triple-A mortgage securities, the firm notes. The worst case may be discounted and these securities may be attractive, the Bear report concludes.

Maybe so, but just last Friday, Bear's CFO called the current fixed-income market the worst he's seen in 22 years, which would imply it's not the best time for these mind-numbingly complex securities. What Bear's fixed-income brain trust is currently thinking can't be reported here because the firm shut journalists out of a conference call on the state of the market Thursday.

More remarkable is that the capital markets have arrived at this "mini-Minsky moment" while central banks have not been pursuing restrictive policies and unemployment is low, observes F. Mark Turner of Babson Capital. And, it might be added, well before the real economy feels much impact from the current financial dislocations.