I was at the Mealey's Subprime-Backed Securities Litigation Conference in New York today and I heard an interesting take on why so many Americans have, contrary to expectations, continued to pile up debts in the face of what looks to be a fairly dramatic slowdown.

According to Joseph Mason, an Associate Professor of Finance at Drexel University and a speaker at the event, one reason for the disconnect may be the fact that few adults under the age of 55 have had first-hand experience dealing with the kind of gut-wrenching recession we last saw during the 1970s.

While there have been other downturns since -- the most recent was in 2001 -- they have not been as long-lasting and as traumatic as those that occurred three-or-so decades ago. Arguably, Americans' lack of familiarity with that kind of environment may be causing them to act in a way that ensures the current contraction will be a painful and long-drawn-out affair.

On another note, what appeared to be a sell-out crowd at today's conference, developed in collaboration with the litigation firm of Grais & Ellsworth, makes it clear to me, at least, that the legal community is gearing up in a big way to ensure that anyone and everyone who is responsible for fomenting the current crisis is held accountable.

One good thing about the current crisis is that lots of highly-paid twenty, thirty and fortysomething Wall Street hot shots are learning some valuable lessons -- hopefully, ones they'll never forget.

They are being taught, for example, how ephemeral market liquidity can be. They're witnessing the downside to excessive leverage. They're being shown that no matter how much control over their destiny they think they have, markets have a funny way of proving them wrong.

And as the following report, "Agency Mortgage-Bond Spreads Rise; Markets 'Utterly Unhinged'," from Bloomberg's Jody Shenn reveals, they're also learning about the breathtaking scale of havoc that can be caused by a contagious loss of confidence.

Yields on agency mortgage-backed securities rose to a new 22-year high relative to U.S. Treasuries as banks stepped up margin calls and concerns grew that the Federal Reserve may be unable to curb the credit slump.

The difference in yields, or spread, on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened about 21 basis points, to 237 basis points, the highest since 1986 and 103 basis points higher than on Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less.

The markets have become "utterly unhinged," William O'Donnell, a UBS AG government bond strategist in Stamford, Connecticut, wrote in a note to clients today. A lack of liquidity has "led to stunning air-pockets in price levels."

Investors are realizing that banks have little room to make new investments amid rising losses and a flood of unwanted assets, said Scott Simon, head of mortgage-backed bonds at Pacific Investment Management Co. The world's top banks have reported more than $181 billion in asset writedowns and losses, been stuck with $160 billion of leveraged buyout loans, and bailed out $159 billion of structured investment vehicles.

"Everything is telling you the financial system is broken," Simon, whose Newport Beach, California-based unit of Allianz SE manages the world's largest bond fund, said in a telephone interview today. "Everybody's in de-levering mode."

Agency mortgage securities outstanding, which are guaranteed by government-chartered Fannie Mae and Freddie Mac or federal agency Ginnie Mae, total almost $4.5 trillion, about the same size as the U.S. Treasury market

No Savior

The widening spreads prompted speculation the government may step in to support securities guaranteed by Fannie Mae and Freddie Mac, said Tom di Galoma, head of U.S. Treasury trading in New York at Jefferies & Co., a brokerage for institutional investors. The Treasury Department said the rumor isn't true.

"The Fed can't really save the mortgage market," di Galoma said. "As they keep cutting, mortgage rates aren't going lower."

The spread of current-coupon fixed-rated securities guaranteed by Ginnie Mae against 10-year Treasuries has climbed 55 basis points this month to 205 basis points, also the highest since the 1980s, according to Bloomberg data. Debt guaranteed by Ginnie Mae is explicitly backed by the U.S. government, and based on loans already insured or guaranteed by its agencies. A basis point is 0.01 percentage point.

Carlyle Margin Call

Carlyle Group's publicly traded mortgage bond fund, which raised $300 million in July and used loans to buy about $22 billion of agency mortgage securities, failed to meet margin demands and has received a notice of default. In margin calls, banks demand more collateral on their loans because of falling prices. Lenders have been imposing "additional collateral requirements" outside of margins call, Carlyle said today.

"The capital issues at commercial banks are making them, in general, reluctant to lend, so lending is either harder to find or when you do find it, it's more expensive or the other terms are more-limiting." Steven Abrahams, an analyst with Bear Stearns Cos., said in a telephone interview yesterday.

"If there's less money to finance positions and less balance-sheet available to warehouse positions, the markets are going to become more volatile," he said.

Carlyle Capital Corp. missed four of seven margin calls yesterday totaling more than $37 million, the Guernsey, U.K.- based fund said today in a statement. Thornburg Mortgage Inc., the Santa, Fe, New Mexico-based owner of "jumbo" mortgages and securities backed by adjustable-rate loans, said yesterday it received a default notice from JPMorgan Chase & Co.

Next to Blow Up

"The single biggest concern right now is who's the next hedge fund to blow up, and how big are they," Arthur Frank, the New York-based head of mortgage-backed-securities research at Deutsche Bank AG, said in an interview today. "The more the market widens, the more likely it is that another leveraged player has to sell, so it does feed on itself."

Bloomberg current-coupon indexes represent the average of yields for the two groups of bonds with prices just above and below face value, the ones that lenders typically package new loans into.

Prices for agency securities backed by adjustable-rate mortgages with five years of fixed-rates fell 0.63 percent this month through yesterday, according to Lehman Brothers Holdings Inc. index data. Fixed-rated securities fell 1.66 percent, according to the New York-based company. The various classes of collateralized mortgage obligations used to repackage agency bonds collectively have fallen 0.9 percent, according to Merrill Lynch & Co. index data.

"Traders are putting their phones down and backing slowly away from their desks," O'Donnell said today in a telephone interview. "Relatively little" agency mortgage-backed securities are being traded, Pimco's Simon said.