Forward

The markets, with a lot of help from an under appreciated and imaginative Fed, are finally starting to plow through the serious issues that have faced it over the past almost one year now. This can be seen tangibly in narrower spreads, greater clarity over sticking points out there, and earnings that are starting to trickle in. With respect to earnings, of course they are lower. However, it isn't all dire. The traditional profit makers over the past few years are gone (for now), but there are other items taking its place. Foreign operations (LEH reported that 62% of its revenue came from outside the US), private client divisions, and trading have all held up well. Somewhat lost in all the hysteria recently is that with all volatility out there, this has been one of the greatest trading environments in years, particularly in equities and equity derivatives. I deliberately left commodities off that list; it really doesn't take any trading acumen to make money in bubble markets. I'm sure many pilers on got crushed this week when the bottom dropped out of commodities as speculators took off or were forced out.

This post, however, is about what happens next. As what is now known as the "Great Unwind" continues, more hedge funds will go under. Without changes in regulations with respect to hedge funds, new ones will spring up in the ruins of the old. For the short term, all hedge funds will actually have to earn their substantial fees as the easy, follow someone else's strategy returns are gone.

Speaking of regulation, the current regulation system in the US needs to be overhauled, and perhaps scrapped, in favor of one that is more a reflection of today's market. Most US regulations date back to the Thirties. When Glass-Steagall was repealed, the '33, '34, and probably the '40 Act should have been adjusted or replaced to reflect the changed role of banks and investment banks. The tinkering of those laws over the years, including Sarbanes-Oxley, haven't helped in the long run, and in some way exascerbated the situation. A pretty clear link can be established between Sarbox and the rise of all of the offshore, off balance sheet vehicles that are at the crux of the current problem, in addition to the other Sarbox issue around corporate executives understating all forward looking statements for fear of being thrown in jail. It would be nice that while the government is focused on the current market problem, that they take some bold initiatives that give us some common sense, rules-based regulation that actually works. (wishful thinking). How about one regulator, one that is not the Fed, to deal with all securities market issues?

The final note here goes to Bear Stearns investors and employees. There is no other outcome where you end up in a better situation. The Fed took its action to stem a potential financial panic caused by a lack of confidence in Bear Stearns. There would be no lending facility otherwise, there would be no engineered JPM buyout of Bear Stearns. Bankruptcy would have meant locked doors, no jobs and significant dislocation. Go blame company management for allowing the firm to get into that predicament in the first place. Your anger is misguided and misplaced.