A really horrifying thought.
Remember that the year opened with a rogue trader at Societe General bank, gamed their computer systems and lost $7B in unauthorized trades (and while he was up, there were bonuses paid).
Now note that in the last week there have been 3 very large frauds: Madoff, IT Factory, and Mark Dreier.
Now note that even though the Federal Reserve has been willing to loan banks money at practically zero rates (0 to 0.25%), and the Treasury Department has put almost $350B into the TARP bailout plan, credit is still described as frozen. It's not clear why the banks aren't lending, and are just sitting on the money. On, as Kelly Spors wrote in the Wall Street Journal put it, "Why are banks severing the lifelines of small businesses despite the billions they received from the bailout?"
So here's the horrifying thought: What if the problem ISN'T just mortgage assets that are hard to price. What if the problem is a bunch of stuff that doesn't even really exist, just as with Madoff, IT Factory, and Dreier? What if there are falsified trades and Ponzi schemes running through large banks and hedge funds like holes through swiss cheese?
If there was fraud on this scale, there would be a conspiracy of silence because this would be the type of thing you wouldn't want to be made public. Instead, the government would try to help, and blame the crisis on some other visible, but smaller problem. In short, we would be seeing exactly the behavior we are seeing now.
I don't believe this myself, but with the level of financial fraud uncovered in the past week -- all under the watchful eye of some combination of the SEC (Madoff), Deloitte (IT Factory) and a large law firm (Dreier) -- it's hard not to be paranoid.