The Weak Link

Orange County. The collapse of Mexico. The Latin American chaos of the early 1980s. These were all reasons for the Fed to give the stock market a break. Of course, the Fed didn't mean to set a match under the market. It was just a byproduct of a policy meant to stabilize the financial system.

What's our catalyst this time? I think it's a couple of guys named Long Term. Neither will ever per se collapse, just like Orange County didn't or Brazil or Argentina for that matter. But the crippling of these two institutions are at the heart of the chaos this time.

We all know the story of Long Term Credit Bank. This is the test-case bank, the one that the Japanese are using to build a blueprint to wiping out their banking problems. The slowness with which this situation is being solved has the world on edge, but the need to give Japan some breathing room if they solve this, including pressure off their currency through a cut in our rates, makes a ton of sense.

In fact, it's not LTCB that worries me. It's Long Term Capital that is the weak link in the U.S. system. We don't know who is invested with these guys -- is it brokerage houses? Individuals? We will never know. But just going by what's been made public, whoever invested with it has to take a hit unless Long Term Capital bounces back tomorrow. Maybe that's the hit that has all of the brokerage house stocks so jittery, because maybe they have money with these guys. ...