We're just getting started. Here come the hedge fund, pension fund and bank failures, whether they know it or not.
Liquidity underthreat as banks' capital is about to be slashed
The bright, liquidity-driven prospects for the stock market, versus the hard landing for the US economy, have been a puzzle all year. Prolonged weakness in the economy without some stock market weakness would be odd. Yet the implication of a hard landing, lower interest rates, has even boosted stock prices, given the predominance of debt-driven private buy-outs in setting prices.
The Bear Stearns hedge fund fiasco removes the paradox. Banks' capital is about to be slashed, and with it excess liquidity in the global system.
A bunch of hedge funds may have problems, but that is the tip of the iceberg for "Titanic" Wall Street. Who holds the toxic tranches? Answer: the originating banks and syndicating investment banks for the most part.