The Start of Something Bigger?

Bear Stearns continues to garner bad press. Now they’ve announced the “freezing” of withdrawals from another hedge fund that’s got problems. Today’s Wall Street Journal announced their Asset-backed Securities Fund won’t let investors take out any more money. The claim is raising cash for redemptions will force liquidation of securities in the fund that are under a lot of “price pressure.” Liquidation now will cause the prices of those securities to go down further and faster, causing more redemption requests, causing more price declines…etc., etc., etc. It’s just like a run on the bank. Panic sets in and, of course, will spread to throughout the markets.

Bear drew a line in the sand. The buck stops right here at Bear. We’ll stop the thing before it gets started. The trouble is, it’s already started. The freezing of redemptions is like FDR’s “bank holidays” during the Depression. That was where the President of the United States declared banks closed to prevent more banks from closing their doors for good, due to all the customers demanding their money at the same time. Is the comparison with the Depression mania a fair one? Or is it just more or less a coincidence? We’ll have to see.

One thing we do know: the cat is out of the bag and the early signs of panic are starting to spread. Where it ends and if it ends soon, no one really knows. Expect more of the “no big deal” kinds of comments out of Wall Street and, ultimately, the U.S. government. What other choice do they have? One hint at real trouble, and the rush for the exits begins.

Odd that this is happening at just about the same time of year (July-August) as the crisis with Long Term Capital in 1998, isn’t it?