A couple of weeks ago Bear Stearns bailed out two of its highly leveraged mortgage-based hedge funds. As the bailout took place, the company insisted that asset values would be marked by Monday, July 16th (today).

Any news on the updated fund values from good ole’ Bear Stearns? You guessed it, nope.

With all the structured, cut-and-paste, trade-over-the-phone, lack of liquidity and other huge issues involved in the securities, it was only a matter of time before things blew up in the faces of many of the financial engineers. The sad fact is that credit bubbles lead to malinvestment as generally smart folks get caught up in the rising tide and fail to remain wary of the broad risk being created by their narrowly successful strategy (note: in this context, narrowly successful means things have to go perfect for them to continue to succeed, i.e. the ocean waves can’t pick up at all or the boat flips).

Now that the tide is headed in the opposite direction, those who are wading in the nude are starting to be shown in their true light: not ready for the general purge of risk that is a fact of nature (in spite of what central bankers want you to think).

Bear Stearns has yet to report their losses for a reason: either the losses are too ugly, or they have yet to actually figure out what the true measures are. Either way, it does not bode well for the “genius” financial engineers who society has given a blank check over the recent past.

One more note, if the federal reserve decides to bail out those who made foolish decisions in order to forestall the final tally of bad bets, the eventual outcome will only get substantially worse. At some point, risk needs to be purged from the system. Otherwise it will eventually purge itself.

Click here to read market guru Adrian Ash’s analysis of the Bear Stearns fiasco.

Filed under: Economics