On the Second Anniversary of Bear Stearns

Jeffrey Garten The Daily Beast March 15, 2010

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Richard Drew / AP Photo It’s been two years since the Fed and J.P. Morgan rode to Bear Stearns’ rescue, heralding a wave of federal bailouts. Jeffrey E. Garten on why so little has been done since to prevent another collapse.

This Sunday evening marked the second anniversary of the rescue of Bear Stearns by J.P. Morgan, backed by a $30 billion capital commitment from the Federal Reserve. The bailout was the opening curtain for a drama that would see an unprecedented level of federal involvement in the U.S. financial system—even greater than the 1930s when you consider the TARP funds, the Fed’s takeover of AIG, and the Fed’s purchase of more than $1 trillion of mortgage securities.

The J.P. Morgan/Bear Stearns/Fed deal was put together over a few days of frantic meetings and phone calls among Treasury Secretary Hank Paulson, Fed Chairman Ben Bernanke, New York Fed President Tim Geithner, SEC Chairman Chris Cox, J.P. Morgan CEO Jamie Dimon, and Bear Stearns CEO Alan Schwartz, with Paulson briefing President George W. Bush on multiple occasions. It was a race against time, the administration driven by a fear that if a merger agreement wasn’t completed before the Asian markets opened on Monday morning, March 16, then the financial system itself could melt down.

Congressional efforts, no matter how sincere, are ultimately constrained by the fact that the legislature has only national jurisdiction. On the other hand, the financial problems are global.

In the few days of white-knuckle deal-making—J.P. Morgan, at first very reluctant, needed heavy financial inducements from Uncle Sam—all the elements of the worldwide banking crisis that would soon break out in the open were, in retrospect, present. That included banks that had recklessly borrowed 30 or more times their capital; the fear among policymakers that banks were too big and too interconnected to be allowed to fail, and hence needed billions of dollars injection from taxpayers; the appearance of securities that had become too complex and too opaque to understand, let alone value and trade; and all the other features of the financial crisis we have come to know only too well. With the bailout of Bear Stearns, moreover, it became clear that Uncle Sam would never again allow a major global financial firm to fail, no matter how much money it took.

Two years on, here’s the question: What has happened to make sure that the financial system never again verges on collapse, and requires so large a federal intervention, with all the collateral economic and human damage that entails? And here is the answer: not much.

To be fair, the problem that had to be addressed was horrendously complex. In the level of debts they acquired, in the peddling of arcane securities they didn’t understand, in the sound risk management they disregarded, in the greed they exhibited, the banks were guilty of a degree of irresponsibility that boggles the imagination. But that was just part of the story. From the Fed to the SEC, the regulators’ neglect in failing to curb risky banking behavior constituted serious malpractice. The credit agencies, paid by the financial institutions they rated, engaged in egregious conflicts of interest. The Clinton and Bush administrations, in cahoots with Congress, pushed deregulation well beyond anything that made sense. Senior policymakers allowed the U.S. to run budget and trade deficits that required importing massive capital from abroad, flooding the country with cheap money that found its way to subprime mortgages and other highly risky products. How could the administration and Congress, buried in vicious partisanship and weighed down by a massive and contentious legislative agenda, have possibly addressed all of that effectively?

They have certainly tried. President Obama early on presented a fulsome blueprint for regulatory reform. The House, led by Congressman Barney Frank (D-MA), passed a thoughtful and comprehensive thousand-page bill in December. On Monday, Senator Christopher Dodd (D-CT) is due to report out a bill from his committee without Republican support. The Senate will have to debate it and pass it with 60 votes. Assuming that happens—a big assumption—then the two bills will have to be reconciled, another major challenge because there will be big differences over certain issues, particularly the establishment of a Consumer Protection Agency for financial products. Whether all this can successively transpire in the wake of whatever happens with health-care legislation is highly problematic.

View as Single Page 12 Back to Top March 15, 2010 | 8:25am Facebook | Twitter | Digg | Share | Emails | print var OutbrainPermaLink=document.location.href.replace(document.location.search, '').replace(/\/\d+\/$/,'/').replace(document.location.host, 'thedailybeast.com'); var OB_Template = "The Daily Beast"; var OB_demoMode = false; var OBITm = "1255455386150"; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ''; document.write(str); } The Federal Reserve, Financial Reform, Jp Morgan, Bear Stearns, Congressman Barney Frank, Chris Cox, Sen. Chris Dodd, Securities And Exchange Commission, Tim Geithner, President Obama, Hank Paulson, Jamie Dimon (–) Show Replies Collapse Replies Sort Up Sort Down sort by date: Centrist420

I am tired of the rhetorical questions always asked by the pundits in these economic articles that deal with the Crisis, brought about by the sub-prime meltdown. There's this question and that question...blah blah. There are NO questions. I can prove, without any doubt, that almost ANYONE who had a conventional adjustable mortgage also qualified for a 30 year fixed at virtually the same price as the ARM. So, Q:] Why sell the ARM? A:] Greed and stupidity. RESULT: The current crisis. That said, I have notified any number of Senators offices about this, numerous federal agencies and news organizations. None seems to give a damn. So, I wondered, "why not?". I think it's because if the truth were known, 3 things would happen. 1) The American public would REALLY get pissed; 2) Most ARM's would have been ILLEGAL, which would mean you would NOT have to give up your home in bankruptcy or foreclosure, in fact, the banks would have to give you your money back and that would tie up the court system, indefinitely; 3) The banks would suffer even worse than their current situation. That is why NO MONEY should be given to these jerks. BOTH parties supported this stuff (not you and I) and now they want to pretend that they're serious about doing something about it. Our representatives have done a great job in demonizing Wall Street, but in reality, THEY also deserve just as much blame, along with the loan officers and mortgage brokers who played this dangerous game without any consideration for the end user who is now losing their home, after having signed an illegal contract, under false pretense, coercion and deception. want to see the proof and explanation? Contact me at mortgageabuse at g mail

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On the Second Anniversary of Bear Stearns

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