The rapid succession of events in the financial services sector over the course of the last few days is one of the most significant in memory. For long-term investors, now is not the time to panic, given the steep declines in many stocks already. In the near term however, we expect more volatility in the capital markets. The potential for further failures in the financial sector still exists as weaker companies remain vulnerable.

The forces behind the demise of Bear Stearns, the nation’s fifth largest investment bank, will influence the world of finance for some time to come. That being said, the bank’s collapse and the resulting impact on the industry is a natural market response to the excessive build up of debt that has occurred over the last several years. The painful deleveraging process we are now going through is in many respects a sign of a functioning capitalist system (albeit, with a level of government intervention not seen since the Great Depression), and should ultimately arrest the deterioration of credit conditions.

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