Deadbeat Worries Haunt Fund Managers

BOSTON -- Just how close did we come to systemwide meltdown?

Fresh news from Merrill Lynch(MER Quote) gives an alarming hint -- and suggests just how vulnerable market sentiment remains.

Two words leap out of the investment bank's latest monthly survey of fund managers around the world: "counterparty risk."

That's supposed to be Wild West stuff -- the fear that the other poker players can't cover their bets, or might fail to pay up if they lose.

You don't expect it to be a big issue on the minds of the kind of blue-chip institutional investors that Merrill Lynch talks to.

But by last week, when they were polled by Merrill, 74% of them cited counterparty risk as a real danger to financial stability. Seventy-four percent.

That figure had trebled just since July. In fact it had soared even from the panicky week in early August when Merrill conducted its last survey.

It shows how deeply and widely this summer's subprime mortgage crisis and the hedge fund blowups have shaken confidence.

No wonder the lending business froze.

When you can't trust the other players, no one's going to ante up.

This worry buttressed other data revealed in the survey. Overall, Merrill found institutional investors had become almost as fearful as they were back in the prewar panic of March 2003 -- 42% said they were holding more cash than normal.