The perceptive and common sense-rooted Ben Stein, in a business column in The New York Times, has weighed-in on the credit crisis, and for market absolutists, it's an argument they probably don't want to hear.

Stein, like many of us, has pondered how the massively well-paid men and women of Wall Street could create such a catastrophe. How did some of the smartest, talented executives, Stein ruminates, generate such immense losses that "they made banks clam up on lending -- at great risk to the economy?"

Compelling questions

Stein asks: Where were the fail-safe devices? The government watchdogs? The ratings agencies? A speech by Greenlight Capital hedge fund manager David Einhorn at a Grant's Interest Rate Observer event, provided the answers -- the unfortunate truths of the recent housing/credit boom -- which Stein summarized:

Greenlight Capital is a very interesting and successful hedge fund ran by value investing superstar David Einhorn. The fund has annualized returns at 27% per year for the last 10 years. Einhorn's investment style is especially interesting because he is not afraid to make large, focused bets and because he specializes in special situations, specifically spinoffs.

Focus investing is a concept which has recently seen a resurgence due to the success of Mohnish Pabrai and many other focused hedge funds such as Greenlight. As I recently covered here, spinoff investing is a compelling method of investing which I consider to allow for "structural undervaluation."

Interestingly, Einhorn isn't a one horse pony when it comes to investing. He's also a very talented poker player. In fact, he came in 18th (of 8,773) in the 2006 World Series of Poker for which he took home almost $660,000. This is pertinent because many people believe there is a correlation between excelling in trading/investing and doing well in poker.

As the markets become more and more efficient and finding ideas is becoming more difficult for investors, the style of piggyback investing has emerged. Simply put, 'piggybacking' is following the smart money and making investment decisions based on the publicly-available position sheets of the best investors. By law, the majority of funds are required to release a list of their holdings to the SEC database via 13F-HR filings. Also, activists and any passive investor with a stake greater than or equal to 5% in a given company are required to file 13G or 13D filings. Therefore, it's not very difficult to follow the smart money these days.

Proponents of this school of thought, notably James Altucher of Stockpickr.com and TheStreet.com, argue that it makes much more sense for the individual investor to simply track and cherrypick the best ideas from the smartest investors' portfolios rather than try and interpret news events or randomly sort through stocks. And, for the most part, I tend to agree. As an individual investor, and more importantly a blogger, I constantly struggle to find new and interesting ideas to write about or invest in and I've found that this method has worked well to help me find new potential investments and create interesting watchlists.

I've referred to the $1.3 trillion subprime mortgage market as a bloody economic wound and a tornado. But now I think a rapidly spreading cancer would be a better analogy. BusinessWeek provides fresh evidence that the damage from the collapsing subprime mortgage mess is not isolated to the mortgage originators. Rather this article provides startling revelations about how hedge funds and Wall Street banks are going to post losses as a result of their involvement with subprime.

The biggest concern I have though is that nobody has yet provided a comprehensive map of how far the subprime damage has spread. But one way to think about it is that, like any industry, subprime has a value network. Moving from left to right are:

• Wholesale lenders to the mortgage originators,
• Investors in the mortgage originators,
• Mortgage originators themselves,
• Packagers of mortgage-backed securities,
• Agencies that rate the servicing capabilities and credit strength of the originators and packages of securities,
• Regulators who oversee the mortgage originators and packagers of securities
• Investors in the mortgage-backed securities, and
• Homeowners who borrowed from the subprime mortgage originators.

Damage to the subprime market will affect all of them in different ways and since there's no map, it will only be after all the damage has been done that evidence will emerge from investigations resulting from lawsuits which are sure to proliferate. And this doesn't even refer to the wider damage to the housing industry which affects building materials, construction, and real estate agents as well as anyone who owns a home and might feel a bit poorer as a result of declining home equity.

With stunning swiftness, the damage from the collapse of the subprime mortgage market is bleeding out to other parts of the economy. And that damage will explode on Monday as investors continue to flee the sector.

How so? Because late Friday afternoon, according to the Wall Street Journal [subscription required] two subprime lenders dropped several bombshells that have left them fighting for their lives:

• New Century Financial Corp. (NYSE:NEW), one of the largest subprime lenders, is facing a federal criminal inquiry into its accounting and trading in its securities. Furthermore, if NEW's lenders don't let it off the hook for meeting the terms of its lending contracts or it does not find new lenders, NEW stated that its auditors are likely to warn of "substantial doubt" over its ability to remain in business. Translation: NEW could go bankrupt very soon.
• Fremont General Corp. (NYSE:FMT) will stop making subprime residential loans and is negotiating to sell that business.