Don't Miss the Lead Because of the Headline

Normally we like to highlight just one story that we think is overlooked and deserves your attention. But, today is different because the real story is how:

1) The indictment of the Bear Sterns fund managers...
2) Treasury Secretary Paulson's push for a stronger Federal Reserve regulatory role...
3) Banks' use of magic math can make a balance sheet look attractive to investors...
4) UCLA's prediction that economic angst and pain will continue until 2010...

...are really all moving parts of the same story.

The story is whether regulation or prosecution will rule the day as a way to restore investor confidence and market stability. AND, will it happen fast enough to limit more pain?

Why do you care? You care because if you can understand this then you'll have a sense as to how things are going to play out for the next year.

First, the Wall Street Journal's excellent reporting on the Bears Sterns indictments points out that prosecutors like to go with their best case first. That's the headline because if this sticks, then you'll see more prosecutions. But if the indictment is tossed out, then you're not likely to see much else. The email details may be delicious, but what matters to your home value and 401k is whether prosecutors chose the right case.

Second, Treasury Secretary Paulson's push for a stronger regulatory role for the Fed is the flip side to the indictments. Basically, it is the government doubling down to play two hands. A judicial hand in pursuing criminal prosecution, and a regulatory hand in the hopes of not having to play the court card in the future. Why do you care? You care because neither hand holds a scalpel, instead each holds a cudgel. On the one hand picking the wrong case to prosecute runs the risk of further undermining investor confidence that is hungry for accountability. On the other hand, any regulation (even appropriate and effective regulation) runs the risk of unintended consequences. What's the mean? That means mortgage mess fallout regulation will try to walk that line between safeguarding from another credit crisis and soothing jittery investors with making sure it doesn't grip too tightly and squeeze business out of Wall Street and into London.

Third, the Wall Street Journal did everyone a favor in deftly explaining how banks can legally move assets around (or simply redefine them) so that their balance sheets still look good to investors. This story goes directly to whether investors will feel good about jumping back in and the challenges for Paulson and the Fed.

Fourth, most predictions have things turning around in 2009, but UCLA contends it is going to be a slow burn all the way to 2010. Readers and viewers today will understandably be distracted by the sexy headlines of indictments in the Bear Sterns case and the details of the email exchanges, etc. But what shouldn't be missed is how decisions made today on the judicial end, and the debate and ultimate conclusion on the policy end are really going to leave their mark next year. And, that will be when we are in the midst of another year of teeth gnashing. Right when everyone is hoping the markets find their footing. Reporters and producers have a chance to put the parts together now into a digestible snacky piece so that come next year there's a collective sense of how we got from here to there. Oh, by the way don't you feel a bit more confident when you understand things?