For many years, Robert Morgenthau has warned America that the nexus of capitalism and criminality poses a serious threat to our prosperity, security and growth. Now in the wake of the collapse of Bear Stearns, which pushed global markets further closer to the brink, perhaps the nation will listen to the Manhattan district attorney, whose scrutinizing gaze is fixed on targets well beyond New York.

As a legendary prosecutor of international financial crime, Morgenthau has long kept a watchful eye on the buccaneering crew at Bear, the firm that now symbolizes the worst in amoral capital. Its executives were notorious for testing the limits of the law by sheltering shady stock promoters and bucket-shop brokerages, and by swelling the assets of its hedge funds with dubious mortgage-backed assets.

When a pair of Bear hedge funds based in the Cayman Islands fell last summer, after their subprime mortgage investments went sour, Morgenthau sounded an early alarm. He urged the federal government to remember the fall of Long-Term Capital Management, the huge Cayman-based hedge fund whose implosion 10 years ago came close to sinking several major U.S. banks. The inevitable multibillion-dollar federal bailout prevented or postponed financial disaster — but we were not ready then to absorb the real meaning of that costly experience. That lesson, as Morgenthau explains, was simple: "Markets, like the hedge fund market, that are unsupervised and conduct business in secret, in tax havens, will eventually cause serious problems." He has always possessed a talent for understatement.

Ironically, Bear Stearns executives shunned any participation in the rescue of Long-Term Capital in 1998 — and indeed mocked the government intervention that they now covet. Like so many corporate leaders who proclaim strict adherence to free market principles and standards, the Bear gang doesn't stand up too well under close examination. When those Cayman-based funds — wonderfully named the "High Grade Structured Credit Strategies Fund" and the "High Grade Structured Master Credit Strategies Enhanced Leverage Fund" — nose-dived last year, Bear's clients lost billions.

Of course Bear's poor performance didn't dissuade James Cayne, its recently departed boss, from the gross display of buying himself a $28 million home weeks before his corrupted firm finally tanked.

There he sits in diminished splendor, while lawyers and economists bargain with the Treasury Department over the price of his company's distressed shares.

If we must preserve Bear and its profligate executives to protect ourselves, we should make comparable efforts to save the homeowners, cities and states that stand to lose so much in this deluge of stinking paper. There is no moral excuse to subsidize the losses of the super-rich, while leaving everyone else to the mercies of the market. What's good for the country club Republicans is good for the working family Democrats, too.

But as Morgenthau insists, we cannot sustain an economy of universal bailouts. A son of FDR's treasury secretary, he understands how the New Deal saved democratic capitalism from mindless greed 75 years ago, and he knows that the undoing of those reforms during the past 25 years has led to our present troubles. More and more of our capital (including public pension funds) has moved into offshore havens, where banking and corporate secrecy laws allow hedge fund operators to avoid regulation and taxes. This escape from transparency will continue as long as it is permitted by law and rewarded by the tax code.

All that will soon have to end, or we will find ourselves again at the edge of disaster.

Obviously, we should hope that the Treasury Department and the Federal Reserve find a way through this crisis without severe damage to the U.S. and world economy. The question is whether we will make the necessary changes to our political economy — including a renewed regulatory regime and a new New Deal for the American people — without suffering hard times such as we have not seen for decades.

As we mark the end of a long era of conservative excess, we could do much worse than heed Morgenthau's advice. In the name of free markets, we made ourselves and our economy vulnerable to the worst impulses of a greedy, remorseless few. He saw that on the horizon and tried to tell us. Now, perhaps we will listen.

Joe Conason writes for the New York Observer (www.observer.com). To find out more about Joe Conason, visit the Creators Syndicate website at www.creators.com.

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