“This line-of-credit, the stop-gap measure that was supposed to solve the problem that hadn’t really existed in the first place had done nothing but worsen it. When we started the week, we had no liquidity issues. But because people had said that we did have problems with our capital, it became true, even though it wasn’t true when people started saying it… . So we were forced to find capital to offset the losses we’d sustained because somebody decided we didn’t have capital when we really did. So when we finally got more capital to replace the capital we’d lost, people took that as a bad sign and pointed to the fact that we’d had no capital and had to get a loan to cover it, even when we did have the capital they said we didn’t have. ”
- From a New Yorker article by Malcolm Gladwell on the psychology of overconfidence, in this case how the rumor of illiquidity took down Bear Stearns in the matter of a week. Gladwell goes on to make parallels between the hammering of the finance industry and the disastrous British landing at Gallipoli in WWI, where the Brits thought they had it so in the bag that they landed with half the force that they needed to do the job.