One reality of bear markets is the customer margin call. This is a process where the babies get thrown out with the bathwater, driving emotions deeper and prices lower. That affects us all.

Another reality is that managers of capital prove their incompetence. That too affects all of us.

Note that I didn't say bad luck. That's because a portfolio, if properly managed, including speculatively managed, is not a casino game.

In futures markets, there are time-based contracts traded. These are not capital market securities, so they are in fact zero sum instruments. All the winners equal all the losers.

Sometimes the losers run out of capital and have to withdraw from the market. That came to pass this week with one hedge fund of note: the Ospraie Point Fund, which was pointed out by "stockman"

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June 08, 2006 Ospraie Closes $250 Million Hedge Fund

"According to reports, Ospraie Management LLC has decided to close a $250 million hedge fund specializing in commodity trading. The Ospraie Point Fund lost 29 percent in the five months of the year. It also incurred heavy losses on the betting on copper and other commodities. The Ospraie Point Fund is a small companion fund to the flagship $2.5 billion Ospraie Fund. It also focuses on commodities. According to anonymous sources, the hedge fund's losses stemmed from a combination of bad bets in commodities that fell sharply in recent weeks. The closure of the hedge fund is not good news for investors who always relied on Ospraie."

http://www.hedgefundreader.com/strategy/index.html

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Every time a Fund fails, there is an attack on the credit ring. Whenever one account cannot pay up, either the broker or the counter-party takes the hit. It is one of the problems of having a market linked to credit.

I have always said that markets should be strictly debit based and facilitators of transactions strictly between two parties, the buyers and sellers, and that the owners or managers of capital that require credit do so in separate business transactions between principal and banker.

Having a banker inside the market transaction is the source of our problems. Sooner or later, if not rectified, it will be the undoing of the market system.

You see, when an Ospraie or Bayou goes out of business, there should be no affect on the market. Players should come or go based on their ability to close a transaction in real-time. That eliminates con artists and the merely incompetent.

As I say the market should not be a place to play, but to work. Portfolio management is not a game, but is a serious business.

To be blunt about it, there have been weak players permitted in the market because some bankers think they are smarter than others about not handling "dubious" clients. Other bankers rationalize the losses with the added liquidity that losers bring.

None is this is right. I know it; you know it.

During this bear market -- when one Ospraie after another falls and cannot get up -- stop to think about how these failures are hurting you.

The People can do something about it, you know; they can demand a debit-based market, taking control of the marketplace out of the hands of bankers.

I am not advocating trading without credit. I am merely stating that the credit that is extended by a banker ought to be between you and your banker, like any other business.

A banker lends a real estate developer the funds to acquire a land inventory and perhaps more funds to build houses on that land, but the banker is not part of the marketing and sales of those houses. In the capital market they would be, and that is wrong.

The system in place today gets into short selling problems, among many others. If the owner of capital had to borrow that stock in a separate transaction with a lender, and then sold the stock to a buyer in a separate capital transaction, there would be no problem with short-selling.

I could go on and on about this. Very very few of the ubiquitous laws, and rules and regulations that try to hold together a market system that is fundamentally flawed are for the benefit of the owners and managers of capital. This morass of legislation and fine print exists almost entirely for the protection of, and to permit the involvement of, bankers inside transactions between private capital owners and/or managers.

I wish everybody could see that, and work toward changing it.

Bear markets are times we focus on the present. Rather than commiserate, however, we ought to be planning a better future so that these same issues do not repeat cycle after cycle.

Communications are now digital and borderless. Transactions can be executed, cleared and settled in real-time. No longer do the laws, and rules and regulations of any one country, or the federal reserve banking system of any one country, meet the needs of a global market.

What's stopping a solution here is the vested interests of bankers. But try as they might, the bankers do not have enough fingers to plug dikes that leak in bear markets.

It's a bit like the problem with the levees at New Orleans. Everybody knows what must be done, but nobody wants to solve the problem. They'd rather continue to plug the leaks because that's in the interest of the bankers holding mortgages and so forth.

Bayou, Ospraie, whatever. Soon there will be a Katrina that takes down one of the Money Center Banks. It's only a matter of time.