The attempted bailout of the Bear Stearns hedge fund that lost money in mortgage securities is taking place largely behind closed doors, with big banks acting both as creditors — who want their money now — and as owners of similar securities — who do not want to see prices plunge.

Because there is so much leverage involved, both in the securities themselves and in the funds that bought them, even a modest decline in the underlying asset could threaten to wipe out capital, forcing sales at any price. Eventually, fear can take over, and prices can fall to ridiculously low levels.

We are nowhere near that level, but this serves as a reminder that the American capital market is less regulated than ever. The largest players used to be investment banks, commercial banks, insurance companies and institutional investors, all subject to varying levels of regulation, and they traded stocks, bonds and futures in regulated markets.

Now the big players are hedge funds, which face virtually no government regulation, and they trade collateralized debt obligations and credit default swaps in unregulated over-the-counter markets.

Those who assert that all of this will work out say the banks are the real regulators, as they extend and withdraw credit, and arguably that is what is going on in the Bear Stearns fund. If it is unwound with no damage to others, it will be hailed as a new Amaranth, proving that hedge fund collapses are not to be feared by anyone except hedge fund investors.

Hedge funds have become faddish among institutional investors and rich individuals, who crave high returns. With a lot of leverage, a fund that gets one thing right can show impressive returns. This incident is a reminder that leverage works two ways.