If you add up the market caps of New Century, Fremont General, NovaStar , Accredited Home Lenders you only get $1.4 billion. According to some strategists (aka - “bulls”) - the small amount of market cap that could be lost in these stocks somehow means that it’s no big deal. And if you don’t buy into that argument, there is always the other comment that subprime lending is just a small percentage of the overall mortgage market. Personally, I’m believing a range of 14% (Banc of America Securities) to 20% (Mortgage Bankers Association) but this process of identifying the size of the subprime market is very distracting. By trying to get everyone to adopt a small number, the bulls want you to believe that subprime is not a serious threat to the stock market or the economy. Of course, this is dangerously ignorant and there are multiple ripple effects from subprime that are woven throughout the markets.

It’s not satisfactory to limit the discussion to the smaller subprime pureplays like NEW, FMT, NFI or LEND - and it’s bigger than CFC or the problems at HSBC. Through GMAC’s subprime operations, General Motors will have an impact on its already strained financial outlook and General Electric’s WMC Mortgage unit, a top-ten U.S. subprime lender, said last week that it would cutback lending and fire 20 percent of its staff. But it really doesn’t stop there, subprime divisions became popular at quite a few companies when the housing bubble was throwing off huge returns. Morgan Stanley’s acquisition of Saxon last August might not turn out so great and Merrill Lynch’s $1.3 billion purchase of First Franklin Financial looks like it will be a charge to 2007 earnings compared to the original accretive claim. In addition to direct operating units, Wall Street firms have benefitted greatly from the securitization of these loans and from lending to them directly. So, I am looking forward to the earnings reports coming from Wall Street in the next week and will be paying a lot of attention to guidance from the impacts of subprime.

Subprime loans are sprinkled through portfolios at institutions like pension funds and insurance companies so let’s not forget them. And how about the rating agencies? When Moody’s and S&P start ramping up their credit downgrading activities for the impact of subprime mortgages, the effects will be hard to avoid. Moodys’ Brian Clarkson, co-chief operating officer denied that his firm has been slow to cut ratings but whether by intent or not, it just hasn’t happened very much. If / when it does, there could be a selling surge for anyone that cannot hold securities that are rated below investment grade.

A few months ago, the bulls said subprime was not a worry and now they are working hard to say it’s a bunch of small issues that will not materially affect the economy or markets. Meanwhile, subprime lenders are going bankrupt (click here for updates), their lenders are taking hits, delinquency and foreclosure rates are rising, and in the pursuit to identify the size of this mess, I think we are missing a much simpler assessment. The consumer is cracking. Up to 2 million homeowners might lose their homes and their difficulties will impact many other aspects of consumer debt from credit cards, to car loans to general spending. Maybe the loans will be absorbed and the earnings impacts will be hidden by performance in other areas, but no matter how I look at this - the problems just don’t disappear. I am going to hold off on more subprime posts because it’s getting enough attention in the media. But despite what you might hear elsewhere - subprime is not a small problem and it has ripple effects thoughout our economy and markets.