Bill McDonough is still one of the most powerful and well informed people on Wall Street, especially in the current subprime crisis.

He’s seen it before in his former role of head of the New York Fed: the near meltdown of Long Term Capital Management in 1998 that was the last great crisis, and the stabilising of markets after September 11.

Now he’s Vice Chairman of investment banking giant, Merrill Lynch, and a special adviser to the chairman.

He’s one of the few people on Wall Street who knows what damage the current subprime mortgage-induced credit freeze is doing.

“During his tenure at the New York Fed, Mr. McDonough was credited with playing a key role in efforts to preserve liquidity in the financial markets after the attacks of September 11, 2001, and was instrumental to successful efforts to recapitalize Long Term Capital Management after its financial problems in 1998, ” according to his CV.

So he has the background to speak with authority about what’s happening in financial markets at the moment.

Yesterday he was interviewed for Australian clients of Merrill Lynch from New York. In the discussion he made it clear that thing are very different to LTCM and September 11.

He forecast up to possibly six more months of unease in financial markets as things got sorted, more problems to emerge post September 30 when assets have to be marked to markets, and big losses, especially from European banks.

And he also forecast that the US Fed would be forced to cut rates by 0.25% to 0.50% before the next meeting in mid-September.

According to notes of the discussion distributed within clients of Merrill late yesterday Mr McDonough said that the current lack of liquidity in credit markets is very different to previous financial market “events.”

He discussed his role with the LTCM crisis, saying that it was relatively straight forward to fix given there were 17 institutions exposed to the $US1.2 trillion of off-balance sheet positions — of which 14 were prepared to take on the risk when told there would be no government-backed rescue.

He told the Merrill clients that only time will repair the damage as markets cautiously re-discover what elements of the credit markets are safe. In his opinion if you are optimistic, credit markets will clear in Nov of this year but a more realistic assessment would suggest the first quarter of next year.

He said he expects serious losses to be reported over the next quarter – particularly from European banks.

He said the Fed’s mandate is to provide “sustainable economic growth and price stability” whereas the rest of the world focuses on “price stability” only. This gives the Fed the mandate to act to “stabilise” growth despite there being residual inflation risks

He said this may have unintended consequences such as a liquidity bubble in another asset class but the Fed has limited choice and a strong mandate to act.