Financial regulators came under pressure during Congressional hearing on Thursday regarding the decision to intervene in the JP Morgan purchase of Bear Stearns. Federal Reserve Board Chairman Ben Bernanke and officials form the New York Fed and Treasury strenuously stressed that the Fed did not bail out Bear Stearns.
Bernanke and others pointed out that the Fed intervention in this matter would not lead other investment banks to take more risks because no one would seek the fate of Bear Stearns. Of course that is a matter of opinion. There is the matter of millions, if not billions of dollars of bonuses that were awarded to executives that would have had to be forfeited in a bankruptcy. That was preserved by this non bail out.
Perhaps the most telling remark from Bernanke was that while the Fed’s intervention was not a bail out of Bear Stearns, he added, “If you say we bailed out the market in general, that’s true.”
Which raises the question, what is the Fed doing bailing out the market. Doesn’t it defeat the whole concept of a market economy?
Bernanke and his regulatory colleagues kept on stressing the extraordinary events that created the liquidity crisis in general and Bear Stearns’ problems in particular yet some how the notion that these very real, very serious problems should not be reflected in market price.
