Big Fat Wall Street Bonuses Imperiled

Loose credit terms such as so-called covenant-lite loans -- which contain few if any maintenance provisions that would allow an investor to ensure performance -- are returning to haunt banks. When the markets were hot, banks had no choice, one banker noted, because "if you don't extend credit on weak covenants, then you risk losing the business forever."

Whatever the case, at this point, credit worries appear to be having the spillover impact many observers portended would happen back in early spring when subprime slime oozed from lenders like New Century, which went into Chapter 11 in short order and is being liquidated.

Banks are locking up their balance sheets and consigning the balance sheet to lower market rates, said Punk Ziegel analyst Richard Bove, who notes that portions of deals such as Chrysler have been done for rates of 8.5%, which is far cheaper than the going rate for junk-rated debt of 9.17%.

Last week Bove downgraded brokers including Morgan StanleyMS, Goldman SachsGS, Lehman Brothers LEH and Merrill LynchMER to sell.

"Their loan losses are likely to increase," Bove said, speaking generally about banks holding bridge debt.

Goldman alone has some $72 billion in noninvestment grade debt on its books, according to its most recent filing with the Securities and Exchange Commission.