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Paul Kiesel
Paul Kiesel
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Fed Backed Bear Stearns Deal to Prevent a "Contagion"

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On Friday, the Federal Reserve released documents showing why, in March, it chose to save Bear Stearns from bankruptcy. Ultimately, the Fed felt compelled to do something because of fear that immediate failure within Bear Stearns would cause a contagion from infecting other parts of the nation’s financial system.

At first, the Fed solicited many investors to step up and take on Bear Stearns’ assets, however, they determined that JP Morgan was going to be the most capable investor to acquire the flailing bank. Once that decision was made, the Fed brought the $28.82 billion required to make the $30 billion transaction go through (JP Morgan only risked a little over $1 billion in comparison).

“The Fed’s decision to take this action was ‘based on recent, rapidly changing developments,’ the documents said. ‘These development demonstrated that there had been impairment of a broad range of financial markets’ that Wall Street firms rely on for financing,” (Los Angeles Times, 6/27/08).

Basically, the Fed applied the domino theory to Bear Stearns and felt that if it collapsed then several other banks in similar financial conditions (or with pessimistic future financial conditions) could fail to, causing a type of implosion on Wall Street. Most critics of this assessment suggest that the Fed’s actions are more or less akin to a government bailout; contrary to the White House which has been opposed to any sort of bailout to “lenders and speculators,” particularly President Bush, over the last six months.

Nonetheless, the documents released by the Fed add very little to the aftermath of the Bear Stearns bailout and why it took place, instead of first trying to help subprime borrowers who were preyed upon by companies like Bear Stearns. We’re still left with the feeling that if an IndyMac needs the capital (which it apparently does need), or a bailout, the government will come to their rescue and broker a deal, once again, before facilitating any aid to troubled homeowners.