For a few hours on Monday it looked as though the Dow Industrials were on their way to headline gains. Up 130 points in the early going, the blue-chip average appeared unstoppable, even when crude oil quotes began creeping back up toward the $70 level around mid-session. But that was before nervousness over the mounting debacle in subprime mortgages supposedly overtook investors, causing stock-market gains to evaporate faster than dew on cactus. 

Just why investors would initially have been unconcerned about the rapidly metastasizing disaster in subprime mortgages, only to be “overtaken”  by such worries later in the day, we shall probably never know. But that’s the way a Wall Street Journal online wrap-up saw it, quoting one firm trader as saying that “headline risk” would continue to weigh on stocks as the mortgage story evolves.  No argument on that one. But there was nothing particularly earth-shattering on the subprime front yesterday – only a report that Bear Stearns is trying to work its way out of the hole, and another noting that some of the subprime paper issued by Goldman Sachs was getting downgraded faster than everyone else’s paper.

Radioactive Portfolio

We expect plenty of smart guys to get burned before the debacle has run its course, although it’s hard to imagine they could be much smarter than the partners at Goldman.  In the meantime, a possible rescuer has surfaced in the form of some college endowment funds that evidently are flush with cash and looking to do some distress buying. If so, the fire sale can’t happen soon enough for Bear, which may already have reaped enough bad publicity to turn the remainder of its portfolio radioactive. Unfortunately, in the investment banking world even the tiniest mote of notoriety could conceivably add a few crucial basis points to the weight of every deal that Bear might seek to launch henceforth.

Of course, the Fed could ease the firm’s PR troubles by making it look like the ongoing workout is a piece of cake. For all we know, though, the central bank may already have decided Bear will have to sink or swim.  Our guess is that, at least for the time being, Bernanke and company will use Bear Stearns’ troubles to send a message to other firms that may be tiptoeing around the edge of the same radioactive bog. There’s no telling who’s in that situation now, but if just one more company the size and stature of Bear turns up on the list, the Fed could have quite a containment job on its hands.