Bear Stearns should be allowed to fail but won’t becuase too much is connected to too much; once again tax payers will be on the hook to bail out the giants of finance and free markets
I find the news that the Fed has stepped in to rescue Bear Stearns simply remarkable. Even if it intended only as a temporary stunt to buy time for an orderly liquidation or sale.
In an extraordinary move, the Federal Reserve and J.P. Morgan Chase & Co. stepped in to keep Bear afloat following a severe cash crunch.
The lifeline gives Bear access to cash for an initial period of 28 days. J.P. Morgan will borrow the money from the Fed and relend it to Bear. Exact terms weren’t disclosed, but the amount is limited only by how much collateral Bear can provide, Fed officials said.
The Fed, not J.P. Morgan, is bearing the risk of the loan. It is the first time since the Great Depression that the Fed has lent in this fashion to any entity other than a bank.
And the reasoning, and this is the part that’s of concern, not the part that the move is unprecedented?
After initial relief, credit markets have taken a turn for the worse in recent weeks, breeding an every-man-for-himself attitude among Wall Street firms. With each firm intricately intertwined with others in a maze of loans, credit lines, derivatives and swaps, the Fed and Treasury agreed that letting Bear Stearns collapse quickly was a risk not worth taking, because the consequences were simply unknowable.
On the face of it, Bear Stearns deserves to fail. Over the past decade or more, the firm has been the principle enabler to the most egregious bucket shops in the land, clearing trades for scores of firms that exist for the sole purpose of pimping worthless stock. More recently, the good folks at Bear have engorged themselves on all manner of risky transactions, reaping extraordinary fees for their extraordinary prescience and skills, when really they just got lucky.
And now these titans of finance, these vociferous defenders of free markets and fat paychecks have gotten caught out. And now they want to be rescued by the evil they revile, the government (really any government will do), who let’s be clear, represents “we the people,” the people who are otherwise just so much canon fodder for those rapacious bucket shops Bear and others propped up; “we the people” who own the stock that creates the capital that the firm so blithely risked; “we the people” whose homes got turned into so much worthless paper . . . yeah those people.
Folks much smarter than me have been warning of the sizable mess that lurks stage left in the form of the vast, sprawling, and obviously interlinked unregulated corners of global finance. Except that they’re now very much center of the plate. And now Joe and Mary six-pack will once again, and this happens in glorious fashion every decade or less, will be called upon to shoulder the burden while those smart enough not to have risked their own capital on the way to risking yours and mine move on to the next great game.
You can tell I’m mad. Decisions have consequences. The people paying them are supposed to be the people making the decisions.
Tags: BearStearns, JP Morgan Chase, Joe and Mary Six-Pack, we the people, bucket shops, too big to fail, decision making, ethics, decision quality
