Bear Stearns
David Skeel takes on the conventional wisdom regarding the bailout of Bear Stearns, with the benefit of 15 months of hindsight, and questions the wisdom of now institutionalizing "bailout in lieu of bankruptcy:"
On Sunday, March 16, the Federal Reserve crossed a big line directly bailing out a non-depository financial institution and our fifth largest investment bank, Bear Stearns, for the first time since the Depression. The Fed forced Bear Stearns out of existence by loaning J.P.Morgan Chase $30 b. to purchase it at a fire sale price of $236 million on Sunday after Bear Stearns stock closed with a market valuation of $3.5 b. on Friday, March 14th.
The transaction raises a lot of questions. The ones I would like to deal with are: Why didn't the Fed just let Bear Stearns go bankrupt? How big a windfall was this for J.P.Morgan Chase? What risks does this Fed action pose for the future?
We don't know why the Fed took this action. Their press release announced the action in one sentence without any explanation.
