Financial Crisis Could Get Much Worse, Experts Say

The year-old financial crisis is not only far from over but could actually get much worse, bringing more big shocks to the US economy and stock market, a host of experts said Monday.

Among the predictions: the failure of some of the country's biggest financial institutions, the collapse of 1,000 banks and a possible government bailout of mortgage giants Fannie Mae and Freddie Mac .

"I think the financial problem is halfway through the cycle," David Kotok, chairman and chief investment officer from Cumberland Advisors, told CNBC. "There's another shoe to drop ahead of us and it could be more severe."

Worries about the health of Fannie and Freddie sent both stocks plunging and brought down the rest of the stock market.

Kotok thinks Merrill Lynch , Wachovia and other financial companies are at risk of failure as the cost of raising capital soars at a time when the banks need to pay settlements over auction rate securities.

The cash companies need to shore up bad investments, "is up to about $50 billion and will probably top $100 billion before it's over," he added.

"Those firms—Merrill,  Wachovia and others—are going to have to raise that cash," he said. "They are either going to have to get it from the Federal Reserve, through some direct or indirect means, which means more leverage, more Fed balance sheet, more regularly oversight or they're going to have to get it in the capital markets."

Is it time to buy financial stocks? Watch video at left.

Meanwhile, billionaire investor Wilbur Ross told "Squawk Box" that a thousand banks could fail before the financial crisis is over.

"Not very big ones necessarily," he said. "But a thousand banks is going to be a lot."

And the impact on the credit crunch could be severe, he added.

"Each dollar of bank equity that gets lost takes out about 12 or 13 dollars of loans so there's a tremendous magnifier effect of small changes in bank equity."

His comments were echoed by Morgan Stanley co-President Walid Chammah, who told a German newspaper that the financial crisis will probably not end until next year or even 2010.

"We will likely see more insolvencies among small U.S. regional banks that have focused on mortgage business," Chammah said. .

And a Barron's article over the weekend said the Treasury is increasingly likely to recapitalize Fannie Mae and Freddie Mac on the taxpayer's dime. The Treasury later said it had no plans to bail out Fannie and Freddie, but both stocks plunged.

CHECK OUT FULL COVERAGE ON FANNIE MAE AND FREDDIE MAC

The weekly financial newspaper said that such a move could wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities'
$19 billion of subordinated debt also suffering losses.

On CNBC, Kotok agreed that Fannie and Freddie are in jeopardy.

"Were it not for government aid and backing they would have already had to declare bankruptcy. Their portfolios have problems," he said.

"You see one brick at a time in the financial problem area become addressed. Here's Lehman trying to divest real estate holdings in a falling real estate market," he added.

© 2008 CNBC.com