(Note: Surprisingly, there are significant differences of opinion in the conservative/libertarian community on whether the Bear Stearns Fed deal was necessary. I speak only for myself in this blog post. -MV)
The Senate Banking, Housing, and Urban Affairs Committee meets today to afford Federal Reserve Board Chairman Bernard Bernanke and federal financial regulators an opportunity to pat themselves on the back for sticking it to taxpayers with the recent $30 billion Bear Stearns bailout. (Yes, loan guarantees for one company, JPMorgan Chase, to buy another is a bailout, no matter what politicians and bureaucrats call it.)
Senator Jim Bunning (R-Kentucky) bluntly denounced the Fed’s rescue of Bear Stearns. “I do not like the idea of the Fed getting involved. That is socialism.”
In his opening statement, Bernanke blathered on about the imagined market failures that the Fed supposedly needed to correct via loan guarantees in order to prevent market chaos:
…on March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for bankruptcy the next day unless alternative sources of funds became available.
This news raised difficult questions of public policy. Normally, the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company. Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets. The sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence. The company’s failure could also have cast doubt on the financial positions of some of Bear Stearns’ thousands of counterparties and perhaps of companies with similar businesses. Given the exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain. Moreover, the adverse impact of a default would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability.
Despite this dramatic intervention in the market, whether the bailout was a success is a matter of opinion. The market remains volatile and investor confidence is shaky at best, and Bear Stearns shareholders are justifiably infuriated at the fire-sale price that the government arrived at in what amounts to a forced merger of the investment bank with JPMorgan Chase.
You have to wonder how much more the U.S. government is willing to do in order to osculate the posteriors of the foolish investors and reckless speculators who created and sustained the housing bubble. It’s amazing how the government has been willing to keep throwing more cheap money at the problem by cutting interest rates (thus debasing the greenback) and potentially driving the U.S. economy into the ground.
Forcing the merger of Bear with Morgan, which is basically what the government did, and offering $30 billion in guarantees so there will be very little downside risk for Morgan is a horrible long-term precedent for the taxpayers, shareholders and the U.S. economy.
In this bailout, the government sided with creditors at the expense of shareholders of Bear Stearns common stock. By forcing this fire sale, the Fed ran roughshod over thousands of investors’ interests, and whatever effects this has on the credit market, the precedent may do untold damage to the retail investor market for equity in firms through common shares.
Another downside to the bailout is that the left-wing advocacy groups will scream, Why can’t the government help the little guy too? In fact, they’re already whining.
made political contributions to high-profile Democratic lawmakers and candidates, including New York Senator Hillary Clinton, Illinois Senator Barack Obama, former House Minority Leader Richard Gephardt, Indiana Senator Evan Bayh, unsuccessful North Carolina Senate candidate Erskine Bowles, Colorado Senator Ken Salazar, former Senate Majority Leader Tom Daschle, Representative Harold Ford of Tennessee, and the Democratic Senatorial Campaign Committee. Dimon has also given to Republican senators Mike DeWine of Ohio and Richard Shelby of Alabama.
As of mid-2006, the JPMorgan Chase Foundation donated almost $1.2 million to groups on the left, but ZERO to groups on the right. The corporate charity “gave over $31,000 to the NAACP, over $59,000 to Planned Parenthood, and $1,000,000 to the far-left Association of Community Organizations for Reform Now (ACORN),” as we previously reported. (See “Funding Liberalism With Blue-Chip Profits: Fortune 100 Foundations Back Leftist Causes,” by David Hogberg and Sarah Haney, Foundation Watch, August 2006.)