Where's Pest Control?(Business)(subprime mortgage crisis)

Byline: George Wehrfritz and John Sparks; With Jonathan Adams in Taipei

Market turmoil is just beginning. The cockroach theory says debt woes travel like vermin: in packs.

If the subprime mortgage crisis is the cockroach that darts from under the kitchen sink and scares you half to death, what are the chances it's the only one there? Unlikely, according to the "cockroach theory" of credit, which holds that debt woes, like most vermin, travel in hordes. The theory's origins are obscure, but the logic behind it is clear: the same loose-lending, slipshod risk analysis and blinkered optimism that fueled America's housing bubble has most likely bred a lot of other bad stuff, too.

Investors battered in last week's global stock sell-off are beginning to understand that. Indeed, much of last week's pessimism stemmed from "fear that the credit crunch -- appears to have ramifications on corporate and consumer loans," says Tony Phoo, a Taiwan-based economist for Standard Chartered Bank. The big unanswered question is the stuff of childhood nightmares: just what is that thing lurking under the bed? Broom and spray can at the ready, NEWSWEEK peeked into various financial dark spaces, hidden corners and cupboards. Here's what we found:

Subprime, the sequel: This one first lunged in mid-2007. But nobody has yet figured out how many appendages this creature has or where the egg sacks are hidden--much less squashed it with a shoe. To date, various banks, insurance companies and hedge funds around the world have declared $130 billion in subprime-related losses. But last week Moody's Economy.com estimated that less than half of current losses have been disclosed. The Japan Research Institute forecast eventual worldwide losses at $463 billion. Loss declarations have been slow, in part, because the financial products involved are too complex to value. And one important variable is falling U.S. home prices.

AmEx, Visa or MasterCard? Take your pick, but the tab is now $940 billion. That's roughly the total revolving balance on all U.S. credit cards today. And according to credit-rating agency Fitch, it rose by 7.4 percent in December from a year earlier. Balances have increased over the past three months at their fastest rate since the 2001 recession. The good news: default rates are still below historical averages. The bad news: they're rising. Goldman Sachs predicts that credit-card losses could ultimately reach $99 billion.

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