Bundle up for a deep credit freeze

It has rarely paid to ignore Buffett, yet the credit markets are thumbing their noses at him. They've already taken down some pretty smart cookies who thought the worst was over, such as the British billionaire who lost a $500 million January bet on Bear Stearns, the Texas billionaire who lost a $7 billion April bet on Washington Mutual (WAMUQ, news, msgs) and the big value mutual funds at Fidelity, Legg Mason and Pzena that bought Fannie Mae (FNM, news, msgs), Lehman Bros. (LEHMQ, news, msgs), Countrywide and Wachovia (WB, news, msgs) all spring and have been crushed with losses of nearly 50%.

Then, of course, there are the brokerage, bank and energy company chiefs who have seen their net worth pulverized by leveraging themselves to the hilt to buy the nose-diving shares of companies they thought they understood.

If Buffett joins this group of limping luminaries, he'll have some historical precedent for company. One of the little-known phenomena of the 1930s was that not everyone lost money right away. History shows that chimerical fits of optimism ruined lives in waves. In 1929, the "dumb money" lost big. In 1930, the "smart money" lost big. In 1931, the "really smart money" lost big. And in 1932, the "really, really smart money" lost big before the market finally turned around.

At this point, we seem to be on course for that set of unfortunate events to recur. It's not just Buffett and the oil chiefs, mind you. We're also learning that one way the rich are different from you and me is that they have been able to borrow more, which means they are also losing more -- and more quickly.

When bears attack

From every corner of the country we're learning of business owners who sold to publicly held companies and received stock instead of cash. Brokers then allowed them to use that stock as collateral for loans to buy what they wanted -- such as big houses, boats and jets -- without touching the shares that were rising in value and yielding dividend income. Now that those shares have fallen, the rich are getting massive margin calls and are being forced to sell property into an indifferent market.

The latest victim is billionaire Kirk Kerkorian, who pledged his MGM Mirage (MGM, news, msgs) shares as collateral to support his lifestyle and has been receiving $50 million-plus margin calls as the stock has plunged 85%. People like that are not putting money into credit hedge funds anymore, and this in turn is killing the corporate bond market and setting us up for a bad recession.

Credit analyst Reynolds figures that bears are going to wait for a nice, strong run-up in stocks this year, just as they did last autumn before pouncing again to short corporate and sovereign credit in the derivatives market, which in turn has the knock-on effect of punishing stock values. At the peak, as much as a third of corporate profits were related to debt or financing, and half of that will never come back -- desperately disappointing bulls. To survive, investors will need to learn to leap nimbly out of the way once the onslaught begins.

Meet Jon Markman at The Money Show

MSN Money's Jon Markman will be among more than 50 investing experts gathered in the nation's capital Nov. 6-8 for the fourth annual Money Show Washington, D.C. Just days after the election, this elite group will present more than 170 free workshops to help you prepare for changes in the political landscape. Admission is free for MSN Money users.

To register, call 1-800-970-4355 and mention priority code 009554, or visit the Money Show Washington, D.C., Web site.

At the time of publication, Jon Markman did not own or control shares of any company mentioned in this column.

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