"This will go down in the history books as one of the greatest fiascos of banking in 100 years," said Emmanuel Roman, of hedge fund giant GLG Partners. "In a fairly Darwinian manner, many hedge funds will simply disappear," he added.

The hedgies have good reason to be afraid, as the multi-quadrillion-dollar global derivatives market is collapsing and the so-called assets of the hedge funds and other speculators are vaporizing at an accelerating rate. As their assets disappear, the hedge funds and other derivatives players are being hit with margin calls on the money they borrowed to fund their leveraged bets, and facing redemption demands from the investors in their funds, who are being hit by the same crisis. This results in both waves of selling as they are forced to liquidate their holdings to meet their obligations, and a heavy demand for dollars to settle their accounts. The rise of the dollar in the recent period is one effect of this mad scramble, and serves a good marker for the turmoil in the largely hidden world of derivatives. Unfortunately for them, there are not nearly enough dollars in the system, despite the Fed's endless stream of bailout money, to allow most of them to cash out, leaving the fund managers and other speculators holding piles of funny money worth no more than the money in a game of Monopoly, or a pile of Confederate dollars.

GLG's Roman predicted that some 25-30 percent of the hedge funds would disappear, but his supposedly gloomy forecast is actually rosy optimism, given what is coming. As the system continues to collapse, the speculators, be they funds, financial institutions or individuals, will be increasingly forced to sell assets to meet margin calls and other obligations, and those sales will further depress the markets. The relentless sell-off in global stock markets is perhaps the most visible aspect of this process, but relatively minor in scale compared to the derivatives problems. There is no bottom to this collapse--the financial system is in a death spiral, as each loss triggers even more losses, in an accelerating manner.

This is what is causing the panic at the London hedge fund conference, as well it should. Bigger bailouts won't help, but will in fact only make the problem worse. The only solution is to shut the derivatives markets down completely, declaring all derivatives transactions null and void, and thereby eliminating all claims. The speculators reject this approach--when the solution is a flea dip, the fleas will never accept the solution--but we must clean up the mess these parasites have made, and that begins with shutting them down. They have failed, their system has failed, and it is past time to admit that, and let the adults take over. It is the only sane path.

www.larouchepac.com/node/11570/print