The highly educated risk assessors on Wall Street were wrong. And the investors who believed the old name conservative firms such as Bear Stearns knew what they were doing were wrong. And as much as it pains me to say it, those who think the market always behaves in rational terms were wrong.

This is not the first time we saw the public bamboozled even in the face of federal SEC regulation. Less than twenty years ago we saw the great bailout of the S&L industry under Bush I. We then saw the obvious (at least in hindsight) bubble of high tech firms that received billion dollar valuations if their business plan (if they had one) used the word ‘internet’ more than three times.

Then we saw the massive bankruptcies and frauds of Enron and WorldCom. Even the most respected auditing firms such as Arthur Anderson (RIP) missed what became obviously ridiculous business models, as they drank each other’ s bathwater like champagne.

Regulators are unable to assess new investment vehicles as fast as Wall Street can invent them. Even when they warn the public as Greenspan did in his famous ‘irrational exuberance’ speech, they get criticized for cutting moral support for the market.

For the private investor, the lesson is clear: there is no substitute for diversification across companies and industries, as well as investment vehicles. For the professionals, there is no substitute for the fundamentals of an understandable business model, a sustainable profit and cash flow, and common sense.

For the citizen, as long as we have professionals in the business community whose greed and hubris exceeds their sense of responsibility, we will have regulation and something less than a free market.

Just remember in a few years when we hear complaints about the restraint on growth caused by overzealous regulators, how so many on Wall Street breathed a quiet sigh of relief when the Fed and Bernanke bailed out Bear Stearns.

-HKO

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