Too big to fail, as usual
The Federal Reserve bail-out of Bear Stearns and its transfer at fire-sale prices to J.P, Morgan Chase (the third-biggest US bank by assets) is another illustration of the phenomenon of "too big to fail." Bear Stearns, which was taken down by its aggressive promotion of outrageous mortgage-based investments, is the fifth-largest US investment and security house.
But it is a key one, and it seems that the US government decided that its utter bankruptcy was insupportable, especially since it would take down other financial institutions. The Fed had already arranged one round of emergency loans to prop up the company. This time they liquidated the company, bought up some of its worst portfolio holdings ($30 billion worth), and shunted it off to one the chief creditors in the first round of financing, J.P. Morgan Chase.
The culprits at Bear Stearns, and there are a lot of them (the company has long been known as the bad boy even among other cutthroat Wall Street investment houses) get off, for now, scot free. Naturally no bonuses will be rescinded, no pension funds will be reimbursed, no scammed mortgage holders will be rescued, and many of the 14,000 employees will be out on the street, while the biggest malefactors to retire early with their tens or hundreds millions in past bonuses.
This "too big to fail" has been going on at an alarming rate. First Countrywide was propped up; mortgage insurance leaders MBIA and Ambac are being keep afloat; the British government is even today throwing billions in an attempt to rescue its banks. But will it be enough? Now Lehman Brothers, the #4 securities firm, is reportedly on the brink and others may follow. The Fed can keep printing money to paper over the problems, but that simply leads to the weakening if the dollar, the rise of gas and oil prices, and the impoverishment of the rest of us.
One analyst is quoted by Bloomberg News as saying; "They had to get this done or they would risk runs on other companies." Bear Stearns, founded in 1923, managed to survive the 1929 Panic. Its sudden collapse is matched only by one other company, Drexel Burnham Lambert in 1990.
The deal may be a sweet one for JPMorgan. It paid $240 million, got one of the top brokerage houses on Wall Street, and, it is thought, can avoid the worst liabilities - though it clearly hasn't had time to look at the remaining issues in detail. On the plus side, the Manhattan headquarters of Bear Stearns alone is estimated to be worth $1.2 billion.
No wonder big firms strive to get bigger. While smaller players will be whisked into bankruptcy with no ceremony, even the most reckless of the big boys will be given a lifeline. In some way or another, the blunders of the big will be covered over.
