How rumour, innuendo destroyed Bear Stearns.

NO MATTER how much experience and how many business degrees you have or how many investment texts you've read, nothing prepares you for a sharemarket panic. Investment fundamentals and financial reality yield to the crazy, herd psychology.

It is a frightening situation for investors and, often, that scary psychology becomes a self-fulfilling prophecy.

For anyone interested in the psychology of markets and what drives a panic I strongly recommend reading the August issue of Vanity Fair magazine from the US. It explains in detail the collapse of America's fifth biggest investment bank, Bear Stearns.

It's an incredible story of how an iconic bank, battered by the credit crunch but still in good shape with $US18 billion in cash, was brought to its knees by rumour, innuendo and perception with scant basis in fact. And it all happened in just one week.

It was eventually sold to competitor JP Morgan Chase for $US10 a share. It had been trading at $US170 a share a year earlier.

It shows how a rumour campaign thought to be started by hedge fund investors, fuelled by competitors and embellished by a churlish and/or naive finance media combined to send an 85-year-old investment bank over the edge.

Bear Stearns investors were slaughtered in the panic but others profited from the collapse as they reaped huge financial rewards from "shorting" the stock - selling before they bought.

As a result, US regulators are investigating the collapse to determine whether the market was manipulated by hedge fund investors purely so they could make massive profits.

It's a timely lesson for anyone involved in skittish bear markets such as we have now. It highlights how easily panic can set in, how critical analyst recommendations can be and how the finance media must responsibly report the facts and be wary of being manipulated for someone else's gain.

It's also the responsibility of regulators to closely and quickly monitor these situations and clearly sort fact from fiction.

It's a sad fact of investment markets that panics can take on a life of their own and can often bear no resemblance to fundamentals.

This isn't to say analysts and finance commentators should remain silent if they find a problem with a stock for fear of exaggerating the situation and causing a panic. Far from it.

What I'm saying is that extra caution needs to be taken that recommendations and comment are based on fact and not rumour. There's an old investment saying that you "buy the rumour and sell the fact". In a strong rising market, it can be a reasonable strategy.

But when hedge funds and professional investors "sell the rumour and buy the fact" - and they started the rumour - a lot of innocent investors can be hurt. Not to mention staff and customers of the target.

In Australia the intense scrutiny of investment bank Babcock & Brown has seen a slump in its share price and a major restructuring of its board, senior management and portfolio.

Last week Macquarie Group shares dropped to a four-year low after investment bank UBS downgraded its recommendation from "buy" to "neutral" because of the pressure from the sharemarket downturn. Late last year Macquarie Group shares were nearly $100 each but dropped to $41 in the middle of last week.

"With the global credit crunch and bear market entering its second year and with little end in sight, we believe this is placing ongoing pressure on Macquarie's businesses and outlook," a UBS note to clients says.

"Globally we expect weaker equities volumes, investment banking pipelines and softer commodities trading opportunities, placing further pressure on Macquarie's revenues."

UBS sees Macquarie's net profit falling for the year to March 31 from $1.8 billion to $1.5 billion and has reduced its 12-month share price target for the stock from $60 to $48.

In fragile markets, no stock is safe from a change in sentiment, which can quickly escalate. More than ever the company, analysts, regulators and the media must deliver clear factual information to ensure the market is fully informed.