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Lever up and mismark, a toxic combination. That's my understanding of

what happened at

Bear Stearns'


hedge funds. And I believe there will be

no fallout

whatsoever beyond the funds, despite the innate desire by so many people to rumor and panic the marketplace.

It's driving me crazy that there is such unsophisticated reportage of this subprime issue.

First, most of the subprime blowups

do not

involve credit defaults. In fact, other than New Century Financial, which had to restate all its financials

because of defaults

, most of the problems have been a lack of liquidity caused by the fear of defaults.

I say that because there is tons of demand for this paper from the likes of sophisticated hedge funds at Lone Star and Farallon Partners. I don't know the Lone Star guys, but the people at Farallon are just about the best in the game and there is

no way

they'd be buying up these loans if they weren't confident that there would be a payoff well in excess of what they are putting up. Lone Star seeks a similar return. These are the buyers of this kind of paper, and they have done amazingly with it.

That's because they have cash. Which brings me to what these crises are really about: liquidity.

When banks loan to these subprime lenders -- and they can't lend without that capacity -- the subprime lenders become hostage to the credit committees of the big outfits, outfits like




JPMorgan Chase

(JPM) - Get Report


If the credit committees of these big banks smell trouble, they cut off the credit. That's the real worry for the subprime outfits, liquidity,


creditworthiness. Any hint of problems and the liquidity dries up

even if there will turn out not to be much of a credit problem with the actual loans

. I say that because the Farallons and the Lone Stars are buying these loans fairly close to par. They wouldn't if there was a real risk of credit defaults on subprime.

Not everyone has been that careful. These Bear funds weren't. They borrowed a huge amount of money from the likes of JPMorgan and Merrill, and now those guys are squeezing Bear. And believe me, this is a competitive world and they


to squeeze Bear.

It was quite a business to do what the Bear hedge funds did, which was to borrow a lot of money and buy high-yielding debt at, say, 10 times the capital they had under management. But the same credit committees that were worried about the credit of the subprime loans -- and again, I am saying that there is an


by these credit committees but they are overreactors from way back because their whole job is pretty much to say no because one error can wipe out a year of profits -- are now worried about the lack of liquidity at the Bear fund, most likely because of redemptions.

The problem will go away with liquidity, which is why Bear Stearns is ponying up the money. The credit committees at the various other brokers will stop squawking and you will see an end to all of this.

But you have to understand that

at no time

was the credit of the actual paper really questioned. These firms just didn't want to lend to a hedge fund that had borrowed massive amounts of money to lever up in subprime and then suffered a hiccup when investors saw the true net worth of the portfolio marked to market.

I believe that had everyone had patience and had the credit committees not been so aggressive, this crisis would have been avoided. Again, it is


the subprime loans that are in question, it is the stewardship of the hedge funds themselves and the investors in those hedge funds that should be questioned.

Which is why I am saying that this problem will be contained. I don't want to be Bear; it will have to take a short-term hit on this stuff; but it is mostly a public relations issue. The vast and profitable organization of Bear can absorb any hit while the paper that the funds had comes back to life.

But you


understand that it is


or the lack of it,

not credit

(as the rumor and panic players want to force on you), that is driving this. One is just a fact of life, the other would be a true crisis. We don't have one.

Blame some bad managers, not the subprime mortgage business. I am not dismissing the problems of subprime. Lots of people bought homes, watched them appreciate and then took out home equity loans against them. Those people are in trouble. And there are a lot of them -- but that won't be more than a blip for the financial markets.

If people understood this enough, if they were sophisticated about the differences between credit and liquidity, you'd simply be saying, "Those guys had a bad strategy and who can blame people for pulling out before the leverage wiped out their assets? And who can blame the credit committees for worrying?"

Random musings:

I worry about


-- it chews up a lot of capital and we don't want supply here, especially with KKR behind it. Why do these firms need to do these deals? Why bother with the public? Just to get richer, I guess. I don't want to own this paper. ... UBS finally raises


(MA) - Get Report

to my price target of $190. ... Enough people get there and I am out of here! Will Friday's charms -- it always seems to go up Fridays -- be able to offset morning weakness based on the bogus reporting on the Bear Stearns stuff above? I think so. ... Did


(GE) - Get Report

ever seriously consider buying

Dow Jones


? Just asking.

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