Mike Shedlock (a.k.a. Mish) tends to have a bearish bent, but does good analysis of the macro scene.? He’s got some very good articles about the Bear Sterns hedge fund situation, and what is happening behind the headlines…

Here are some of the high-points:

Losses at hedge funds are being masked by “mark to model” pricing.? That means that their illiquid holdings are worth what the hedge funds say they’re worth, not what they can actually be sold for.? This is important for many reasons, one is that it goes into the monthly balance sheet, which determines bonuses for the hedge fund managers.? Think there’s an incentive to avoid realistic pricing?

State pensions are currently holding large amounts of sub-prime related securities, and will likely see losses in those investments if subprime loans continue to fail.

Normal markets can become illiquid in rare cases (e.g., the 87 stock market crash), illiquid markets have the same problem, but start further down the spectrum of problems.

“The derivatives business is like hell — easy to enter and almost impossible to exit.”