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Why do they run?

When the bulls run in Pamplona every July,  who gets gored–and dozens always do, some fatally–is indiscriminate.   Herd of terrified animals… stampeding for their lives… stay clear.  Got it.

It’s harder to fathom the herd panic this past week of the most sophisticated investors in the world, Wall Street sharpies, which led to the unprecedented Fed-backed “controlled demolition” of Bear Stearns.  Perhaps better than bankruptcy, perhaps not.

So why did they run?  Was it a wild implosion of confidence as one opinion piece in the Wall Street Journal put it today?: ”As rumors of Bear’s troubles started early last week, counterparties stopped trading with Bear seemingly as quickly and carelessly as they had traded with it before.”  Or was it a more rational response to temporary market failure, as another opinon piece in the same paper suggests?: ”Bear Stearns made the error in these skittish times of relying on short-term borrowing, in the form of of overnight repo agreements, to finance its holdings of mortgage-related secuirities.”  You can read the full pieces here (if you subscribe).

There’s a stampede of opinions out there.  And we’re interested to hear what you think.  By the way, for a great review of the overal credit crisis and how we got here read David Leonhardt’s ”Can’t Grasp the Credit Crisis? Join the Club” 

Having spent some time in Spain myself (as a younger, more foolish man), and seen a charging toro or two up close, you won’t have to guess where I stand.  There’s nothing rational about a locomotive of panic.  Or the shockwave of badvocacy that sent counterparties, creditors and even loyal Bear customers running for the exit doors a few short days ago, and vaporized billions in wealth.  This was madness and mayhem like on the streets of Pamplona during San Fermin.  People got trampled.

Here’s hoping Fed Chariman Bernake proves to be one helluva a matador.  He appears to be for now anyway.  One thing’s for sure: volatility will continue to be the norm as will huge tilts in word-of-mouth and confidence.

What’s also clear is that aggressive communications responses, like the one led by Richard Fuld at Lehman last week, will be required.  But that’s a topic for another post.