In 2006, well before the financial crisis broke on the shores of the American economy, Ann Lee wrote a 22-page paper on "Wall Street's House of Cards." It warned of the danger to the nation from the sale of trillions of dollars of complex financial products called "structured credit derivatives."

She watched as investment banks constructed and sold these paper investments that were supposedly backed by loans on houses, cars, businesses, and credit cards.

"Complete vapor money," she calls many of the derivatives. "Pretty much worthless."

With a Harvard Business School degree and 10 years experience on Wall Street, she quit as a trader for a hedge fund, hoping to expose the financial folly. "I was so disgusted with what was going on," she says

Since then she has taught corporate finance at Pace University in New York and this fall at China's Peking University. The $5 billion hedge fund where Ms. Lee had worked, Ritchie Capital, is headquartered in Lisle, Ill. [Editor's note: The original version made an incorrect statement about Ritchie Capital.]

Seeking a reaction to her paper, she sent it to officials in Washington. Lee received an e-mail reply from Lawrence Lindsey, director of the National Economic Council under the first President Bush, who wrote that "both the practitioners and the regulators are well aware of the risks that are out there," including those in the subprime mortgage market. Mr. Lindsey held that the deregulated mortgage market was "much better" in early 2007 than the more regulated one in 1991, when there were also credit-market problems.

Lee's warning was not acted on. The credit markets froze in the summer of 2007. She figures Wall Street and other financial centers face more damage ahead that could hurt the general economy, not just the banking industry. "I don't think we are close to being done," she says.

Here she has company. A. Gary Schilling, an economic consultant in Springfield, N.J., suspects the financial unease and semi-freeze will spread to the "overleveraged household sector."

Consumers account for more than 70 percent of all spending in the United States. Since many families have relatively little savings and are deep in debt through credit cards, car loans, home-equity loans, etc., he foresees a cutback in spending. This will lead to a deep recession next year, one that will spread beyond US borders, he says.

Unemployment will exceed 6.5 percent by this time next year, predicts Harald Malmgren, a veteran Washington economic consultant.

Presently, consumers and banks are both trying to de-leverage, that is, reduce the amount of money borrowed in relation to their assets or income.

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