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World stocks tumble on credit worries

: It looks bad, right? Right. It could get worse, right? Right. It could get even worse than the worst “experts” are predicting, right? Probably right. So capitalism, especially the high finance part of it, is bad business, right? Wrong. High finance whizkids who were Page 1 darlings until a few weeks ago won’t say this now; some of them are too busy wondering which was a worse buy, the yacht or the complex clutch of derivatives on the firm’s books that no one quite understands. But the argument that the current global financial crisis is proof again of capitalism’s essential vitality can start by referring to yesterday’s Page 1 whizkids. Many of them are running for cover, and they are doing so because as capitalism has evolved, its ability to quickly punish over-confidence and over-cleverness has increased. The very speed with which many financial institutions’ vulnerability is being exposed and the brutal questions being asked about financial instruments that were hailed as proof of near-genius a year ago, are demonstration not only of capitalism’s systemic intolerance of wrong calls but also its capacity to self-correct relatively quickly. Right here, big players have had to adjust their ideas to market correction: Reliance Power’s public issue and the post-disappointment scramble by the company is particularly instructive. Many more examples will come from home. But to make the point, let’s take the example that scared world markets: Bear Stearns.

Roughly a decade ago, in September 1998, Bear Stearns was among the nine Wall Street firms that were asked by the New York Federal Reserve to rescue Long-Term Capital Management (LTCM), a superstar market player led by a legendary bond arbitrageur and two Nobel-winning economists, which went bellyup when Russia defaulted on its sovereign bonds. With prodding from the Fed, a consortium of banks and investment houses rescued LTCM. In 2008, Bear Stearns has been rescued, importantly, with direct financial help from the US Fed, which has provided $30 billion to the buyer, JPMorgan Chase, to help the latter absorb some of Bear Stearns’ unlovely assets.