Credit problems are too big for the feds to fix

By Bill Fleckenstein

Little could I know that just hours before filing this column Thursday, many of the fears expressed therein -- regarding the consequences of America's mortgage and credit mania -- would come to pass.

Yet, as this has been a near-constant theme in my columns for the past several months, the events of Thursday should not have taken Wall Street by surprise. Here is what I wrote the day before news of the combined impact of BNP Paribas (BNPQY, news, msgs) and quant funds rocked the markets:

Contemplating the nuances of the financial-dark-matter universe can confuse most people. One exception might be the word "conduit," readily understood to mean a channel through which something is transported. Innocuous enough, unless you're talking about structured-credit conduits. This variety has managed to snake its way to money-market funds. The potential threat to this safe investment is among the updates I'll share with readers this week, as I continue to chronicle the consequences of America's mortgage and credit mania.

However, Wall Street lately has focused not on the fallout but on hopes of a bailout, in the belief that Fannie Mae and Freddie Mac will be able to expand the size of their portfolios. Maybe Congress will give them the green light (though this is no sure thing), but it won't be enough to solve all of the problems. (It's just a variation of saying: Don't worry, everything is contained.)

• Video: Did the Fed make the right move?

More importantly, the whole notion that Fannie and Freddie should bail out the mortgage sector -- because of foolish behavior on the part of (a) the financial institutions that lent money to folks who could never pay it back if home prices didn't rise 6% annually and (b) the folks who bought a house they couldn't afford, because it just had to go up in value -- is anathema to capitalism.

Gambler Mae

The logical extension of that thought process would be: Let's go buy 100,000 shares of Google (GOOG, news, msgs), and if it doesn't work, we'll get Gambler Mae (the new entity created for all losses) to bail us out; or let's go to Las Vegas and put it all on black; or any other equally absurd examples we could come up with.

One of the lingering problems of the Greenspan Fed, besides its legacy of bubble-blowing, is this idea that one should always be bailed out. However, as noted in the past, I believe that the problem is too big to bail out, and therefore it's not going to happen.

Quants on the outs

To bring readers up to date on the latest fallout, a friend called to my attention the problems at Highbridge Statistical Market-Neutral Fund (HSKAX), a quantitatively oriented vehicle that has been getting pounded lately. He thinks other supposedly "market neutral" funds may be doing quite poorly as well.

Continued: Another crisis looms

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