"There is increasing likelihood that some banks - even some large regional ones or some smaller national ones - may go under during a severe recession, regardless of what the Fed does," Roubini said in prepared remarks. Banks that are very exposed to mortgages are in the most danger, and may "join the 200 plus subprime lenders that have gone bankrupt."

He added that the Fed will have to "reaffirm the implicit doctrine that some banks are too big to be allowed to fail," but "these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions." Roubini pointed to Countrywide Financial Corp., which he characterized as "more likely insolvent than illiquid," as an institution that has been "bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders."

Naturally, Roubini's assertions were largely driven by the current state of the housing market. He noted that this is "the worst housing recession in U.S. history and there is no sign it will bottom out any time soon." Roubini predicted that housing prices will fall between 20% and 30% from the 2006 peak, leading to a loss of more than $1 trillion and as high as $2 trillion for financial institutions. A loss that size "would wipe out most of the capital of most of the U.S. banking system and lead most of U.S. banks and mortgage lenders - that are massively exposed to real estate - to go belly up."

According to Roubini, a housing decline of 30% would imply that more than 10 million households would have negative equity in their homes, with "a big incentive to use 'jingle mail,'" meaning mailing their keys to their mortgage bank. He claimed that reckless lending practices previously confined to the subprime market have slowly migrated to near-prime and prime loans, as 60% of mortgages from 2005 to 2007 involved "no down-payment, no verification of income, jobs and assets," as well as negative amortization or teaser rates.

Regarding the odds of a recession, Roubini pulled no punches. "The fact that the U.S. is now in a recession is, at this point, without much doubt even if the consensus forecast - always behind the curve - now gives only even odds." Furthermore, he does not expect a "mild two-quarter recession," noting that the last two U.S. recessions lasted eight months each, and he expects the current recession "will last much longer and will be more severe."

Roubini also said he does not expect bailouts of monoline insurers to work, claiming that "some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating." He added that "no private rescue package - short of an unlikely public bailout - is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products."

Roubini says policymakers' current strategies may not be able to stave off the crisis, either. Aggressively lowering the Fed funds rate will eventually lead to a collapse in the dollar while not stimulating consumer spending, considering the "glut of housing, consumer durables [and] automobiles," he said. Encouraging further recapitalization of the U.S. financial system by sovereign wealth funds will not work, Roubini said, since the losses caused by the credit crunch will greatly outweigh the infusion of capital provided by foreign investors. Roubini also criticized the limited scale of the HOPE NOW plan, among other strategies.

Deal activity remains sparse, but we hear that private money is lining up and transactions could include "club" deals, or transactions where a number of parties buy a stake in the target, and smaller investments that recapitalize banks and allow them to weather the storm in 2008.

A number of funds dedicated to the banking industry launched in the last few months, and we've heard that more than a handful of similar funds are in the works. High-profile names like former Commerce Bancorp Inc. CEO Vernon Hill and former Sovereign Bancorp Inc. CEO Jay Sidhu have transitioned from top execs to investors via their respective funds.

Experienced private equity players in the space, such as Castle Creek Capital LLC, Belvedere Capital Partners LLC and Financial Stocks Inc. (commonly known as FSI Group) among others, are also on the prowl.

Investors like Michael Kelly of FBOP Corp. were expected to be on the forefront of the activity, but have only tested the waters through small investments.

Start-up funds looking at the space have also yet to make a big splash.

"We haven't really seen that many new faces in anything we've been looking at," John Stein, president and COO of FSI Group, told us.

In fact, Stein joked that he wouldn't be surprised if deal terminations are outnumbering deal announcements.

So why hasn't anything happened?

There hasn't been much magic in the air for Stein, who said that on closer inspection many potential targets don't look so pretty. "We've been kissing a lot of frogs," he said.

Kent Carstater, president of Resource America Inc. unit Resource Banking Advisory & Management Co., noted that the multiples for deals inked up to a year back, if not six months ago, "are no longer germane" and that banks that have been acquisitive in the past have been sidelined due to their own asset quality issues.

As for potential sellers, there is reluctance on their part to ink agreements at the going market value, as even a 40% market premium would essentially offer shareholders the value of their stock at the beginning of 2007. Carstater said banks need to think about the possibility that their market valuations may have been overinflated in the early part of 2007.

The wide spread between the bids of buyers and asking prices of sellers makes capital infusions from investors, which previously seemed expensive, much more attractive, private equity executives told us.

Funds, meanwhile, are licking their chops at the thought of getting in at trough prices at institutions that are desperate for capital, but will likely be sitting pretty once the credit crisis is all said and done.

"There's still some good companies out there that with the right management that can get through this and will do well with additional capital," Stein said. "That said, it's definitely a time when you've got to know what you're doing because a lot of the situations are worse than they appear."

Martin Friedman, who recently launched a fund with a bias toward financials, told us in mid-February that investors stand to make money assuming they know how to navigate through a veritable minefield of credit quality issues.

"If you can avoid the mines, then this is a good time to buy," he said.

Partnering up to buy chunks of companies may prove to be the way to go for some firms. Belvedere Capital Partners set the stage, working to ink the first-ever club deal in the banking industry back in August 2006, and others are looking to follow suit. Castle Creek Senior Vice President Mark Merlo said at a recent investor conference that his firm is willing to use one of its existing platforms to acquire controlling stakes in institutions, while allowing other investors to buy stakes under 9.9%. This arrangement would prevent having to establish a bank holding company.

Carstater, who is working on putting together a club deal, said that some transactions, regardless of size, may require some form of partnership.

"It's increased competition on the one hand, but it's also opportunity on another, to perhaps see some other deals that you might not see," Carstater told us.

In addition to club deals, private equity firms may ink smaller transactions in the near term, Triumph Investment Fund LP Senior Analyst Peter Clarke told us, in what is akin to bridge financing agreements involving a $2 million to $3 million capital infusion. Such agreements would enable institutions to operate through a difficult 2008 and raise additional capital when more attractive valuations return.

"Banks don't want to load up on capital when they know that their currency isn't worth as much today as it might be in 12 months," Clarke told us.

The frequency of deals in general may stay low for the time being, but whenever potential sellers hunker down at the negotiating table, private equity will be elbowing its way into the buyer's seat, Carstater said. "And once it starts to happen, you're going to see more and more of it."