The fire sale of Bear Stearns, the US investment bank, brings the credit crisis to a new, more dangerous phase. Many market participants seem to be hoping for a short-term miracle from the Federal Reserve to end the turmoil. They will be disappointed.

Bear Stearns could not borrow because its creditor banks and counterparties use modern risk management systems that require them to hold enough capital to meet potential losses on their portfolios. When the “value at risk” of its portfolio rises, a bank must either raise more capital to support the additional risk or shrink the risk (by selling assets, demanding larger “haircuts” – cash safety margins – from investors or not rolling over loans).