It’s raining shoes from the sky in Wall Street..

GEF @ 6:08 AM MST

Shattered in Less that 24 Hours

The final crack-up boom is no longer just on the horizon; it’s at the door.

A lot can change in a short time. Thirty minutes is all it took for half the value of 86-year-old investment bank Bear Stearns to evaporate after the firm announced it was seeking emergency federal funding to stay afloat. The financial world reeled on the news, stock markets panicked, and the dollar plummeted to a new all-time low.

Just like Bear Stearns, America is also about to wake up and discover that everything has changed.

On Thursday, Bear Stearns’s liquidity position was “very strong.” Twenty-four hours later, on Friday, the nation’s fifth-largest investment bank was on the verge of bankruptcy. By Monday, Bear Stearns was being bought out by J.P. Morgan Chase & Co. for a measly $2 per share (versus the $56 value a share held on Thursday, and $150 value a share held a year ago). Now, rumors are swirling that other banks could be dragged down too.

The announcement hit the market like dynamite—and the timing could hardly have been worse. The day before the announcement, the markets rallied strongly, and investors rejoiced after credit rating agency Standard & Poor’s released a report stating that the worst of the banking crisis was over. The Bear’s day-after announcement blasted craters in Standard and Poor’s credibility and sent the market into an unforeseen nosedive. Billions vanished in the blink of an eye.

Just days earlier, Bear Stearns ceo Alan Schwartz said he was comfortable that the bank would meet analysts’ expectations when it reported its earnings the following week. Schwartz reassured investors that the investment bank still had a $17 billion cash cushion against losses. “Our balance sheet has not weakened at all,” he said. “We don’t see any pressure on our liquidity.” Many investors believed Schwartz; after all, this was a bank acclaimed for surviving the Great Depression.

Then the bombshell struck. Just days after denying any problems, Bear Stearns announced that its cash position had “significantly deteriorated in the last 24 hours,” and it was seeking a bailout by the U.S. Federal Reserve Bank. Apparently $17 billion wasn’t nearly enough to meet its margin calls.

According to sources, Bear Stearns had borrowed and invested almost $34 for each dollar of assets it owned. Apparently the trouble began when some big investors began to question the value of Bear’s investments. When they tried pulling their money out, Bear couldn’t find buyers for its distressed investments, and the crisis ensued.

Standard and Poor’s was forced to slash Bear’s financial ratings, setting off secondary explosions across the financial industry and igniting concern that the failure of America’s fifth-biggest securities firm could spread across the entire financial system.

“Today marks the first day of the next phase of the credit collapse …: The Failure phase,” warned Money and Markets analyst Martin D. Weiss on Friday. “Bottom line: This is not the climax of the story. It’s just the beginning.”

As Weiss notes, the failure of America’s fifth-largest investment bank is no small issue. The financial links go everywhere. Consequently, damage control administrators at Lehman, ubs, Citigroup and other firms are in crisis mode. “Hopefully, their bean counters and management have their feelers in order,” says Kitco Bullion Dealers senior analyst Jon Nadler. “[I]t has been raining shoes for a while now so Bear is not the last one to drop from the clouds.”

On Monday, it was revealed that the damage was even more dramatic than expected. “At the end of the day, a firm’s solvency is a function of the perception of its solvency by the outside world,” says Nadler. “While the firm may very well be open for business next Monday, the question is whether or not its clients will dare to pick up the phone and do business with it. Et voila, the housing crisis is now a confidence crisis” (emphasis mine throughout).

Perception is everything. The Federal Reserve knew that no matter how much money it printed up and threw at Bear, if investors kept pulling their money out, and the financial community continued to shun Bear Stearns, its days as a viable independent institution were over—and the carnage would spread. That is why the Federal Reserve announced yesterday that it had worked out a deal with JP Morgan Chase to purchase Bear Stearns.

Previous to Monday’s announcement, analysts were comparing Bear Stearns to recently nationalized British bank Northern Rock Plc. The British government threw so much money at that bank to prop it up that British taxpayers ended up owning it. And despite all the government promises, the investment community continues to treat Northern Rock as a pariah. Bear Stearns was Northern Rock on a much larger scale. In high finance, reputation is everything, and trust is paramount.

The reason Bear Stearns’s failure matters so much is this: Just as tarnished reputations have destroyed Bear Stearns and Northern Rock, the same thing is happening to America’s economic system as a whole. There is so much debt in America that the financial system is becoming questioned. For proof, just look at the dollar’s value. Besides the fact that the U.S. dollar is now worth less that its Canadian counterpart and the Swiss franc, the greenback has lost an astounding 40 percent of its value in less than six years (as measured by the U.S. dollar index).

Seeing this, outsiders see a growing possibility that America—like Bear Stearns and Northern Rock—will not be able to pay all its bills. Investors are beginning to wonder where America will get the money from to pay back all its debt when the margin calls come in. Some wonder if America’s answer will be to just print up the money to pay the bills. If so, that is the quickest way America could irrevocably and catastrophically lose the trust of the world. Confidence in the dollar is already breaking.

Just like Bear Sterns’s 24-hour implosion, confidence in America could disappear overnight. With over $48 trillion of debt, the economy entering recession, growing job losses, a cascading housing market, and a rapidly aging retirement population, America could be facing the biggest margin call in history.

One day the alarm clock will ring and America will roll out of bed and find that the world has changed: worthless dollar, dysfunctional stock markets, wave of bankruptcies, mass unemployment, and inflationary food prices. All it took was a few hours and everything changed for storied investment icon Bear Stearns. The signs are already here; the trends are in place—just read the news.

The only question is whether or not you will be prepared. 1 Thessalonians 5 in the Bible talks about a thief coming in the night and catching people sleeping. Will you be caught with your eyes closed? •

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