Bear Stearns Hedge Fund Collapse: Dress Rehearsal For Something Much Scarier?

Includes: BSC, IVV, SPY
by: Michael Panzner

News of a run on the bank at two hedge funds sponsored by Wall Street trading house Bear Stearns (NYSE:BSC) rocked the financial world this week. Creditors seized collateral and investors clamored to withdraw funds as word got out that losses were escalating and collateral values were disappearing fast.

While Bear and those with direct ties to the funds, including some of the firm's big-swinging rivals, were poised to take major hits, the real worry coursing through financial centers around the globe was that this week's events might represent the early stages of something much worse: a systemic crisis. While it is too early to say for sure how things will pan out, those fears are certainly warranted.

One risk, of course, stems from the mountain of leverage underpinning today's financial system. If events such as those that occurred this week somehow serve to undermine confidence on a large enough scale, it could easily trigger an avalanche of loan recalls and forced sales, as well as growing fear and panic, that rapidly spirals out of control. In "Bearish Turns," the Economist offers up a helpful overview of the current situation.