The Best May Not be Yet to Come

In my family, we love to ask the following trivia question: What was written on Frank Sinatra’s gravestone? The answer: “The Best is Yet to Come”, the title of the song written by Cy Coleman with lyrics by Carolyn Leigh and famously sung by old Blue Eyes himself in 1964. I thought about that classic after reading a particularly downbeat assessment of the global credit crisis yesterday.

According to Professor Kenneth Rogoff, a leading academic and a respected former chief economist of the International Monetary Fund from 2001 to 2004, it’s going to take some time before we can croon those famous lyrics. Speaking at a conference in Singapore, Rogoff said “The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come.”

How much worse could it get, you ask? Rogoff contends that the problems could devolve further and cause the failure of a large US bank within months. “We’re not just going to see mid-sized banks go under in the next few months, we’re going to see a whopper, we’re going to see a big one — one of the big investment banks or big banks.” So far, only eight federally regulated banks or thrifts have failed this year, but more than 100 others are on the government’s watch list.

I find this particular prediction both ominous and welcome. Of course if a major US institution were to fail, there would be widespread panic and markets would get roiled for the third time this year. The first time occurred when Bear Sterns came within hours of filing for bankruptcy in March and the second instance was the Fannie Mae/Freddie Mac melt-down in July, which has continued into August, as concerns reignited about the government sponsored entities’ viability this week. Shares of Fannie and Freddie plummeted to their lowest levels since the early 1990s yesterday, amid fears that both would be nationalized sooner than later.

To some extent, a third crisis would not be a big surprise, although the guessing game of which firm might actually meet its maker could become a sport in and of itself. Odds-makers would probably make Lehman Brothers tops on their “death” list, but don’t count out another biggie like Merrill Lynch or Citi from the dubious distinction, or perhaps another firm that is not on the radar right now. Regardless of whether or not there will be an outright failure, it is indeed likely that divestment and consolidation of the financial services industry will go on for some time.

But perhaps a third phase of cleansing is necessary for us to put in a bottom in this mess and that would definitely be a welcome occurrence. Of course the bottom does not mean that everything is going to turn around quickly, but it would signal an end to the worst part of the suffering. Then, and only then, we just might be able to sing a few lines of the following and hope that better times are just around the corner.
“The best is yet to come, and wont that be fineYou think you’ve seen the sun, but you ain’t seen it shine”