Bulls Trample Credit Fears

But others say there's more pain to come in the financial sector. These observers say the bullish take on the banks and brokerages underestimates the economic impact of the summer's unrest. They caution that it's impossible to say right now how much pain the credit squeeze could end up causing, regardless of Prince's return-to-normal comment.

"I don't see how that can be true," says Richard Bove, an analyst at Punk Ziegel who has a market perform rating on Citi. "They can't make an accurate assessment ... because they don't know where liquidity is going or the economy. It's just their best guess."

The recession question aside, Bove believes that the banks will be dealing with the impact of this credit crunch for at least the next two years. And while it's true that conditions in the debt markets have improved recently, a look at the prevailing winds there show why a word of caution is wise.

Investors say the underwriters on recently placed LBO debt for First Data and Biomet are eager to do what they can to support prices in the high-yield bond and leveraged loan markets. Underwriters offered investors cheap leverage to buy the deals, say loan market participants.

Likewise, with hundreds of billions worth of debt still to sell, the brokers are loath to paint a picture of a declining economy. The firms have to do everything they can to keep the junk credit markets from falling further. If the economy slowed or default rates ticked up, they'd be selling their pipeline at even lower prices, and re-doing their mark-to-market assumptions all over again. Citigroup says its writedown on LBO commitments includes deals scheduled to be funded through 2008.