Bailing Out The Bear

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One of the more entertaining sideshows to the spectacle of the Federal Reserve bailing out Bear Stearns belongs to the contortionists -- the ideologues who've had to justify action at the expense of their principles. For Democrats who are normally sympathetic to government intervention (and recognize that markets are rarely, if ever, truly "free"), this wasn't too much of a stretch: sure it might be unfair to throw Wall Street a lifeline while letting millions of homeowners sink like stones, but as New York Senator Charles Schumer explained to the Wall Street Journal, "When you're looking into the abyss, you don't quibble over details."

For organized conservatism, the hoops were quite a bit skinnier. The Heritage Foundation ("Leadership For America") took a break from "promot[ing] the virtues of entrepreneurship and free market principles" to praise the Fed for its meddling. The Fed will apparently* absorb $30 billion — that's billion with a b -- in underperforming Bear Stearns assets from acquirer JP Morgan Chase, but according to the Heritage Foundation, this doesn't constitute "any sort of material bailout, as Bear's stockholders are left with almost nothing."

What a load of, ahem, BS. The Entrepreneurial Agenda continues to be amazed by the credence given such nonsense -- we heard it again just now on National Public Radio, voiced by both former Fed governor Laurence Meyer and über-talented correspondent Adam Davidson. Of course it's a bailout! Maybe not for Bear Stearns and its shareholders, but it takes two to trade -- and often many more. A lot of other actors enabled Bear Stearns' risky behavior, especially the bondholders and other creditors who foreswore due diligence on Bear's activities. They're off the hook now: not only has bankruptcy been avoided, but the Fed is preserving the assets that served as collateral for Bear's debt. (Economist Bill Conerly made this point on his blog.)

All of Wall Street, we've come to find out, is basically complicit in the sub-prime credit crisis, down to the agencies that fudged ratings on mortgage-backed bonds. In that sense, the Entrepreneurial Agenda has to agree with Reaganite Larry Kudlow, who argues that his alma matter is being thrown under the bus. Still, like Barack Obama, we're conflicted. We don't shed tears at BS's demise, nor for its senior executives who are already putting their weekend homes up for sale. Nor do we put any more faith in the merits of trickle down intervention than we do in trickle-down stimulus. On the other hand, if there's going to be a bailout, then what's good for the goose is good for the goslings. Hopefully. one benign result of the broad support in mainstream economic and political circles coalescing behind the bailout is to end the argument about the merits of the Small Business Administration's flagship loan programs.

Notwithstanding the views of the Heritage Foundation, fundamentally what the SBA does is not so different from the expansive new role the Federal Reserve has carved out for itself. Some have called it a loan, but you could also look at it as a guaranty to protect JP Morgan's investment, an incentive deemed necessary to encourage JP Morgan to wade into the mess that is Bear Stearns. By the same token, the SBA encourages commercial banks to loan money to the sort of small businesses they would otherwise avoid by guaranteeing the loans in case of default. The difference, of course, is that SBA doesn't guarantee loans to failing businesses -- you have to have pretty good credit to get an SBA-backed loan.

There's also been increasing talk about rebuilding the regulatory backstop for Wall Street, which seems only fair, considering the protection now being extended to the securities industry. As an angry taxpayer, let me humbly suggest, too, that we should be much more cautious about letting large companies merge their way into mega-companies. We've heard a lot lately about Bear Stearns being "too big to fail" (although some have rightly pointed out that it was really too interconnected to fail), and that might be a worthwhile perspective to guide antitrust review: if the answer is yes, then the decision should be no.

And, really, is it too much to ask that the hedge fund and private equity managers who made their money building up the sub-prime economy now shoulder their fair share of the burden of cleaning up the wreckage?

*One particularly astonishing aspect of the buyout is the absence of accountability on the part of the unelected Fed toward the taxpayers now on the hook for up to $30 billion -- we don't know what exactly the Fed did or promised to J.P. Morgan Chase. The only official description of the government's role is this vague statement from a press release issued jointly by JP Morgan Chase and Bear Stearns: "the Fed will provide special financing in connection with this transaction. The Fed has agreed to fund up to $30 billion of Bear Stearns' less liquid assets." The central bank has not elaborated on this, and my calls to the parties have yet to be returned.

Last updated: Mar 20, 2008




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