How Much Pain for Bear Stearns?
Russ Roberts has no fondness for the Fed helping JP Morgan buy Bear Stearns. He doesn’t think Bear’s managers and stockholders (mostly the same people) bore enough responsibility:
But what I do know for sure is that by subsidizing the marriage of Bear Stearns and JP Morgan, the government has removed some of the loss from the profit and loss system. Oh, they tried to make Bear Stearns suffer by demanding a price of $2 a share. But now the deal has been renegotiated—ta-da!—to $10 a share, a mere five-fold readjustment. What’s going on here?
What’s going on here is that we’re in uncharted territory, a world where the Fed and the Treasury are making up the rules as they go along, where accountability is being ignored and a world where the government bails out Bear Stearns and its creditors rather than letting those who have been reckless learn a lesson for the next time.
Hurt and punishment are subjective notions. Putting the initial $2/share price and the renegotiated $10/share price in perspective we see Bear shareholders lost over 80% of their position from just before the stock tumbled. Would they have learned their lesson if they had lost 90%? 95%? Even if Bear had gone through the lengthy process of bankruptcy shareholders might have gotten pennies on the dollar. Would that have been enough pain?
Roberts is correct that we’ve entered a new place:
What’s going on here is that we’re in uncharted territory, a world where the Fed and the Treasury are making up the rules as they go along, where accountability is being ignored and a world where the government bails out Bear Stearns and its creditors rather than letting those who have been reckless learn a lesson for the next time.
Yes, letting Bear Stearns go under would have been dangerous. But helping JP Morgan devour Bear Stearns is dangerous, too. Where does the government stop in protecting people from irresponsibility? Home owners and lenders are next. The political pressure is inexorable for some sort of bail out. And then comes more regulation of investment banks.
There are going to be unintended consequences from the Bear Stearns buyout. Believers in the free market need to be ever vigilant.
“The Bear Stearns Debacle” [via Cafe Hayek]
