March 15, 2008
News Analysis
A Wall Street Domino Theory
By JENNY ANDERSON and VIKAS BAJAJ
The Federal Reserve’s unusual decision to provide emergency assistance to Bear Stearns underscores a long-building concern that one failure could spread across the financial system.
Wall Street firms like Bear Stearns conduct business with many individuals, corporations, financial companies, pension funds and hedge funds. They also do billions of dollars of business with each other every day, borrowing and lending securities at a dizzying pace and fueling the wheels of capitalism.
The sudden collapse of a major player could not only shake client confidence in the entire system, but also make it difficult for sound institutions to conduct business as usual. Hedge funds that rely on Bear to finance their trading and hold their securities would be stranded; investors who wrote financial contracts with Bear would be at risk; markets that depended on Bear to buy and sell securities would screech to a halt, if they were not already halted.
“In a trading firm, trust is everything,” said Richard Sylla, a financial historian at New York University. “The person at the other end of the phone or the trading screen has to believe that you will make good on any deal that you make.”
Commercial banks, mutual fund companies and other big financial firms with deep pockets would presumably weather such turmoil. Firms that traded extensively with Bear Stearns could be at great risk if the bank failed.
http://www.nytimes.com/2008/03/15/business/15risk.html?_r=1&hp=&oref=slogin&pagewanted=print