UPDATE 2-US subprime debacle may spark 2-year credit recessi
ju4 wa4i dia4n zo1ng he2 ba4o da4o :\n  (Adds Lehman, Merrill market moves, background)\nBy Walden Siew\nNEW YORK, June 4 (Reuters) - A "credit recession" sparked\nby the U.S. housing market downturn and excesses in structured\nfinance may last more than two years, and the financial sector\nwill undergo "massive consolidation," leading Wall Street\nstrategists said on Wednesday.\nThe fallout from deteriorating subprime mortgages and the\nbroader housing and credit crisis will eventually lead to a\nhealthier market, but not until after a prolonged purging\nprocess, Jack Malvey, Lehman Brothers Holdings Inc's <LEH.N>\nchief global fixed-income strategist, said in New York.\n"We're going through a tough spell with regard to credit,"\nMalvey said at a Securities Industry and Financial Markets\nAssociation conference.\nThe "subprime debacle" due to years of excess and easy\ncredit will be followed by years of tight credit, Malvey said.\nMalvey spoke a day after his company's stock plunged to\nclose at nearly a five-year low on concern that Wall Street's\nsmallest surviving major brokerage may need to raise more\ncapital. On Wednesday, the Wall Street Journal reported that\nLehman is seeking capital overseas.\nMalvey said global diversification will be a "good remedy"\nfor investors seeking to offset losses from the downturn. "This\nis the biggest blowup that we've had," the strategist said.\nFinancial shares have been among the worst performers this\nyear. After yesterday's declines, Lehman shares rose 6.1\npercent on Wednesday to $32.53. Merrill stock climbed 1.2\npercent to $42.40.\nFinancial earnings have suffered due to exposure to\nso-called structured finance debt and collateralized debt\nobligations, repackaged bonds whose underlying securities may\nbe based on assets such as risky subprime mortgages.\nInvestment manager Loomis Sayles, one of the biggest U.S.\nbond fund managers, has been buying Lehman debt over the past\nseveral days, its vice chairman said on Wednesday.\n"The credit is good at Lehman," said Dan Fuss, vice\nchairman of Boston-based Loomis Sayles, which oversees more\nthan $100 billion in fixed-income securities. Lehman's common\nshares, which fell 18 percent over three days, are "dirt\ncheap," Fuss said.\n"MASSIVE CONSOLIDATION"\nRichard Bernstein, chief investment strategist at Merrill\nLynch & Co Inc <MER.N>, said that in the last market cycle\ndownturn, about 25 percent of financial firms -- including\nbrokers, banks and asset managers -- "went away," he said,\nreferring to bankruptcies or mergers and acquisitions.\nOnly 7.0 percent of financial firms have failed or been\nacquired so far in this crisis, Bernstein said.\nLike Lehman, Merrill's earnings have suffered due to\nstructured finance.\nBernstein also faulted U.S. government proposals to broadly\nmodify U.S. mortgages, which may create a "moral hazard" that\nencourages future risky behavior, he said.\n"Washington is misguided in focusing on mortgages,"\nBernstein said. The federal government should focus on "job\ncreation and people keeping their jobs," Bernstein said. "That\nis the key to rectifying this situation."\nFive-year credit default swaps on Lehman Brothers widened\nby about 17 basis points to 275 basis points, or $275,000 a\nyear for five years to protect $10 million of debt, according\nto data from Phoenix Partners Group. For details click on\n[ID:nSEO274732].\nLehman Brothers' bond spreads widened about 10 basis points\noverall, according to traders.\n(Additional reporting by Jennifer Ablan and Dena Aubin;)\n(walden.siew@thomsonreuters.com; 1-646-223-6333; Reuters\nMessaging: walden.siew.reuters.com@reuters.net))\n((Multimedia versions of Reuters Top News are now available\nfor: * 3000 Xtra: visit http://topnews.session.rservices.com\n* BridgeStation: view story .134\nFor more information on Top News: http://topnews.reuters.com))\nKeywords: USA ECONOMY/CREDITRECESSION