http://www.portfolio.com/news-markets/top-5/2008/03/10/Mortgage-Crisis-Investigation

“The drive for profits caused the industry to ignore or hide profound dangers, and led regulators to look the other way, while the full consequences weren’t anticipated as the crisis began.

In one respect, though, this disaster differs from every other big financial crisis, at least as far back as the 1929 market crash: No one is calling for an independent, blue-ribbon commission to investigate the causes, and to recommend ways to prevent such meltdowns from happening again.”

The idea that somehow all this could be avoided by a “blue-ribbon” panel of “experts” makes me sick - but it’s typical of the mentality that thinks that without the managing hand of the government, free market enterprise will ruin everything. Obviously, where fraud has been committed, there should be prosecution - but who is best suited to do so? A panel of “independent” pundits? Or those who have a personal stake and have been defrauded? Since when has anything been solved by a government panel faster and more effectively than free individuals seeking their own self-interest?

[On March 10, 2008 the company denied it had cash liquidity problems, but on March 14, 2008 the AP reported that JP Morgan Chase, in conjunction with the Federal Reserve Bank of New York, would provide temporary funding because “its liquidity significantly deteriorated over the past day.”]

Bear Stearns deteriorated rapidly due to hedge funds pulling their huge cash balances from them. I read one report where the hedge funds were concerned about some other banks and would pull their balances there as well. Lehman Brothers is the one most identified.

The speed that we can move capital around can be an advantage creating major efficiencies and less drag on transaction costs. However, like leverage, it’s a double-edged sword. Bear Stearns’ case demonstrates that. Their problems are, of course, results from accumulated decisions over a period of time due to the huge exposure to risk taken through their own hedge funds investing in the sub-prime CDO’s (Collateralized Debt Obligations).

One word about the concentration of wealth in the hedge funds (well, more than one word):

Their impact on market segments is as visible as the impact that the Baby Boomers have had on the markets they’ve touched from Gerber baby food to Rock & Roll to muscle cars to personal computers to . . . you get the point.

I’ve watched the momentum shift from sector to sector. It almost becomes a pump and dump operation, but on a large scale. They helped fuel the securitization of the mortgage markets. When they saw that the run was over they quit buying and began selling. The market did seize up before they could get out completely, so they will register losses from it. They’ve moved into commodities and have created exponential price displacements of value to unsustainable heights. When they decide that they’ve reached a breaking point, they will start selling them off. They’ve become a force in the markets due to the concentration of the wealth they control. I’m not ascribing evil intentions to them, although there could be. It’s a component of the law of diminishing returns at work. The larger a fund becomes the more difficult it is to find markets large enough to keep producing the high returns that attracted the funds initially. Thus, they become like roving packs of predators keen on finding and producing the next bubble sector.

The bottom line to all these economic problems is a reflection of society. We can blame one entity or another, private or public, foreign or domestic, but it’s society that’s allowed it. Since it’s become “morally bankrupt,” it will find itself “financially bankrupt,” maybe sooner than later. That is why returning to core values based upon principles will be the one of the saving graces for society.

Denny