Capital Markets Won and Lost from the Bear Experience

Contraction of credit by the Money Center Banks forced traders to take profits and losses last week in bizarre market action. At the source of the problem was the rejection of some interbank trading that is essential to stable markets.

The core of that problem was large investment bank Bear Stearns (BSC), that on Wednesday reported all was fine, and followed up a day later that they were actually bankrupt, unable to make payments that day.

After JP Morgan (JPM) jumped into the fray with emergency support from the Fed, the rest of Wall Street was still unnerved at the prospects of their lack of credibility and the assured onset of humongous lawsuits that would mire the industry in courts for years. But then along came a deal between JP Morgan and Bear Stearns that would bring a large measure of relief, despite cries from traders who lost more money on that they had believed a deal was a deal.

In the end, the capital markets both won and lost. The foundation of markets is now always going to be suspect in that a deal might never be a deal, but at least the credit ring is presumed to always stay intact, as long as the public servants in Washington don’t impeach the Fed and the Treasury Secretary for stealing from the future to address the damages of the present.

So for now the capital market will go forward, like a patient exiting the hospital in bandages in a wheelchair, with hopes of a full recovery that remains to be seen. Clearly the psychology of markets has been fundamentally changed by this experience.