According to ‘Implode-O-meter‘ 86 major U.S. lenders have gone under. Until yesterday only middle and small size lenders were concerned, so many people wouldn’t take the anti-bubble crows seriously. The collapse of a first B-I-G domino such as Bear Stearns left many speechless. Once again one could read more about this dramatic event on the Net than in the printed news.

HISTORY OF A DRAMA: It all starts with the concept of Wall Street being a risk-free casino. Risk-free. Yep we kid you not. They told us that a remake of ‘The Savings and Loans‘ scandal would never happen again, remember? Well since then we have had Enron, WorldCom and now Bear Stearns.

… The Bear Stearns funds had borrowed $9 billion and made bets of more than $11 billion, one of the people familiar with the situation said. The creditors include Merrill, Lehman, JPMorgan, Goldman Sachs Group Inc., Citigroup Inc. and Cantor Fitzgerald LP, all in New York. Bank of America Corp., based in Charlotte, North Carolina, Barclays Plc in London and Frankfurt-based Deutsche Bank AG were the other lenders…

The first day after the fund’s demise, the rumor of a bailout circulated like a wild fire. Should this option go ahead, it would be the largest since Long-Term Capital Management LP that received $3.5 billion from 14 lenders in 1998. Cynically speaking, inflation adjusted the Stearns’ bailout is still a lot cheaper.

June 22 (Bloomberg) — Bear Stearns Cos. is proposing a bailout of a money-losing hedge fund by taking on $3.2 billion of loans to forestall creditors from seizing assets, the biggest rescue since 1998, people with knowledge of the plan said. Bond investors who financed the U.S. housing boom are starting to pay the price for slumping home values and record delinquencies in subprime loans.

FLASH BACK: bearish mood is never welcome in the land of ‘endless profits’. Nobody was listening to forecasters of gloom and doom who know that any red-hot market activity end in tears.

April 24 (Bloomberg) — Bond investors who financed the U.S. housing boom are starting to pay the price for slumping home values and record delinquencies in subprime loans. They will lose as much as $75 billion on securities made up of millions of mortgages to people with poor credit, says Pacific Investment Management Co., manager of the world’s biggest bond fund. Some of the $450 billion in subprime mortgage-backed debt sold last year has lost 37 percent, according to Merrill Lynch & Co….

Bondholders are as much to blame as lenders, Federal Deposit Insurance Corp. Chairwoman Sheila Bair in Washington says. “We should hold the servicers’ and the investors’ feet to the fire on this,'’ Bair said in testimony to the House Financial Services Committee last week. “We did not have good market discipline with investors buying all these mortgages.'’

The Economist had too its word to say about the Stearns’ debacle.

A prominent hedge fund’s implosion revives fears about the poisonous influence in America’s subprime-mortgage market.. With some $100 billion of adjustable-rate subprime mortgages due to reset to higher rates by October, investors are likely to remain twitchy. Moreover, lenders have tightened underwriting standards across the board for both prime and subprime mortgages, making it harder for borrowers to refinance loans… But perhaps the most worrying thing for financial institutions holding mortgage-backed paper is not the subprime market itself, but the unnerving parallels with an even bigger one to which they are also exposed: leveraged loans to companies.

Never mind, Wallstreeters continue to play their favorite musical chair game, turning a blind eye to the warnings concerning the hedge funds that have been labeled “unregulated businesses” which desperately need oversight. Last May 03, 2007, even the New York Federal Reserve warned that hedge funds pose the greatest risk since the meltdown of Long-Term Capital Management in 1998.

The Federal Reserve was obviously right on:

June 22 (Bloomberg) — Losses in the U.S. mortgage market may be the “tip of the iceberg'’ as borrowers fail to keep up with rising payments on billions worth of adjustable-rate loans in coming months, Bank of America Corp. analysts said… Homeowners with about $515 billion on adjustable-rate home loans will pay more this year, and another $680 billion worth of mortgages will reset next year, analysts led by Robert Lacoursiere wrote in a research note today. More than 70 percent of the total was granted to subprime borrowers, people with the riskiest credit records, they said. Surging defaults on subprime loans have pushed at least 60 mortgage companies to close or sell operations and forced Bear Stearns Cos. to offer a $3.2 billion bailout for one of two money-losing hedge funds. New foreclosures set a record in the first quarter, with subprime borrowers leading the way, the Mortgage Bankers Association reported….

Knowledge is power!

Alas one must be able to access information to grasp the whole picture. There are way much too many people out there who still remain confident in home values. Here are the two survey.

The survey by Boston Consulting Group showed that 55% of Americans believed they could sell their house for more now than a year ago, down slightly from the 59% who felt that way last summer. (06/21/07)

and

By Coldwell Banker Previews International on 06/21 — Many homeowners living in luxury are also upbeat about the future value of their homes — even as many markets are cooling, according to a survey released Monday by Coldwell Banker Previews International. Of the 301 U.S. homeowners surveyed, 56% of them said they expected the value of their home to increase at least somewhat during the next year, while 10% expect it to increase significantly. Fifty-eight percent think the value of their primary residence will increase at least somewhat over the next five years; 36% believe it will increase significantly during that time.

Not only the Fed. Reserve is sounding the alarm bells. The Wall Street Journal too.

Assessing the likely consequences of a correction is more daunting than merely predicting its inevitability. The array of lenders with wounds to lick is likely to be far broader than we might imagine, a result of how widely our increasingly efficient capital markets have spread these loans. No one should be surprised to find his wallet lightened, whether out of retirement savings, an investment pool or even the earnings on their insurance policy.

The bigger — and harder — question is whether the correction will trigger the economic equivalent of a multi-car crash, in which the initial losses incur large enough damages to sufficiently slow spending enough to bring on recession, much like what happened during the telecom meltdown a half-dozen years ago. But we have little choice but to sit back and watch this car accident happen. It would have been a mistake to dispatch the Federal Reserve to deflate the dot-com mania or the housing bubble. And it would be a mistake now for the Fed to rescue imprudent high-yield lenders. They have to learn the hard way. Hopefully, not too many innocent bystanders will share their pain.

Many are going to be caught by surprise as the era of easy money nears closer every day.