ANDREW ROSS SORKIN ECONOMIC ANALYSIS

Just before JPMorgan Chase announced its deal to buy Bear Stearns last month, the chairman of the Federal Reserve, Ben Bernanke, held an extraordinary conference call. The participants were Wall Street’s biggest power brokers and top American government officials.
The purpose of the half-hour session on a Sunday evening was to raise a rallying cry in support of Bear Stearns - and more broadly, the financial markets, which, as it was described on the call, were on the verge of a major meltdown.
“It was much worse than anyone realized; the markets were on the precipice of a real crisis, said one participant. Given that Bear held trading contracts worth $2.5 trillion with companies around the world, “we were talking about the possibility of a global run on the bank.
In another era, the participants in the phone call would have been limited to the exclusive fraternity of high-powered Americans. But this conversation was also filled with accents from beyond the United States - from UBS, Credit Suisse, Deutsche Bank, HSBC and beyond.
While that diversity of voices seemed to take notice of today’s global finance, it was still more of a courtesy to those outside the United States than it was a genuine effort to gather outside views.
The “possibility of a global run on the bank may have been real, but the important decisions had been made long before the folks in London, Dubai and Hong Kong were let in on the plans.
So goes the self-centered world of Wall Street - when it comes to opening up its secret society to foreigners, oddly, doing so is still an afterthought.
But that may not be so much longer. For while America’s top financial officials, from investment houses to government offices, may still have views that are more local than global, there are increasing calls from experts and officials for their vision to broaden.
This is not just a problem in business. The Federal Reserve and the Treasury Department, for example, often check in with their counterparts in other nations. But when they act, their attention is first at home.
One of the participants in that conference call on March 16 was Henry Paulson, the secretary of the Treasury and formerly of Goldman Sachs. He has the power to propose a radical plan to regulate the financial industry in the United States, as he did recently, but that doesn’t address the larger problem: the United States is now so interconnected with the markets abroad, whether it be Japan or even Brazil, that whatever it does on its own is almost beside the point.
“We need much tighter global coordination, Bruce Wasserstein, the chairman of Lazard, said. “It is myopic to look at things in a narrow box. Where we’ve been moving right, the E.U. is moving left. That doesn’t seem sensible.
If the United States, for example, were to limit the amount of leverage - or debt - that investment banks or hedge funds could use, that would not offer any protection from debt-fueled implosions at rival firms abroad.
A blowup at a highly leveraged fund in China would still ripple across the system.
Superleveraged funds have been a major culprit in the latest market gyrations, because their use of debt to increase returns has amplified negative effects. When things go bad, the fallout does not stop at national borders. A fund in London may be connected to another in Thailand and not even know it. Who would have imagined that dentists in Germany owned subprime mortgages in Texas- (They did, or rather, still do - at a huge loss.)
The explosion in the use of financial instruments that balance investors’ risk has only tightened the global links - and made a worldwide meltdown easier to imagine. By using these derivatives, banks and hedge funds across the world are routinely on opposite sides of contracts tied to debt, interest rates or other, more esoteric benchmarks. The collapse of one party (or sometimes just the possibility of a collapse) can be disastrous for the other.
Bear’s downfall will very likely induce new calls to address the unnerving problem of “counterparty risk. To be more than just a public-relations campaign, any such effort will need to have global reach.
In case there’s a question about how interconnected the world really is, just witness the global markets’ near collapse in January when Societe Generale, the French bank, blamed what it said was a rogue trader, Jerome Kerviel, for $7.1 billion in losses. Societe Generale’s efforts to unwind its positions - before announcing them publicly - came close to creating a market panic. George Soros, who was attending the World Economic Forum in Davos, declared at the time: “This is not a normal crisis. It is the end of an era.
The Fed, itself unaware of Societe Generale’s ordeal, felt compelled to lower interest rates. But that didn’t do much, and three months later, the economy is in worse shape.
As Mr. Soros said then, “I question how far the Fed can go given the reluctance of people to hold dollars. In the end, he agreed, there will have to be worldwide regulation of some sort. “The financial system needs a global sheriff.