The frustration for the bears is exacerbated by 2 factors: First, “short sellers” are getting accused of all manner of evil and manipulation (just as they were in every crisis before this one). Second, it’s almost as hard for the bears to actually make money as it is for the bulls.

Bear markets are brutal, angry, killing beasts. Ignore the headlines about 1 or 2 folks who nailed the timing and made billions on this meltdown. Being a bear doesn’t make you love bears anymore than being a Cub fan makes the annual Cub meltdown a joy. In markets like this, bears are no safer for understanding the beast than Roy Horn was safe handling tigers.

Generally speaking, the mission in bear tapes is survival, not making a mint. Anyone telling you otherwise is selling you something.


2008’s Special Sauce

Here’s what makes this meltdown somewhat different: Real, ancient, respectable companies are actually going out of business overnight. Even my dog expected Pets.com to implode. Webvan clearly never deserved to exist in the first place. The folks who got hurt trading those Internet Bubble faves knew they were playing with fire. They were greedy, and they got burned. Lesson learned.

But Bear Stearns getting nuked for 2 bucks? Lehman (LEH) going out of business entirely? AIG (AIG), a Dow stock, down 90% in 30 days?

The Long Term Capital plunge (and accompanying global currency crisis) threatened all kinds of banks, but didn’t actually kill any of them. The rescue of ‘98 made the current mess seem more benign than it actually is. The fact is, buying banks in the heart of LTCM was, in fact, a great opportunity (assuming you sold in the intervening decade - but that’s a different note).

The LTCM bailout made it impossible for some to believe that banks would actually fail. As recently as mid-August, previously respectable analysts were coming up with Strong Buy recommendations on Lehman. Meanwhile, certain bald television commentators were called names you wouldn’t yell at an umpire for responding that Lehman was, in fact, “obviously dead.”

The credit markets are effectively frozen. Companies simply can’t borrow if there's even the remotest chance of exposure to the various derivative devices floating about the Street.

Massive amounts of debt were created and priced far too low for at least a decade. The banks know this, because they were exerting influence on ratings agencies such as Moody’s (MCO) and the like to rate clearly non-prime debt at prime rates.

The banks aren’t trading with one another for the same reason no White Knight came in to rescue the Webvans of the world when they crumbled: The banks know exactly what kind of over-priced paper, ludicrous derivatives and questionable assets they have on their books. They can’t price it, exactly -- and they may not even fully understand what it is -- but they know it’s toxic and they’re stuck with it.

What's seized the credit market is the fact that the lending institutions don’t want to get stuck with the other guy’s over-priced garbage. They’re scared enough by the stuff on their own books, let alone what the other banks are trying to hide.

By itself, the above scenario would be a recipe for disaster. What’s making it potentially fatal is the ratings agencies, who incorrectly priced the assorted trash in the first place, have chosen now as a good time to start downgrading the credit ratings of the institutions involved.