Bear Sterns, the biggest player in the subprime mortgage crisis, agreed today to sell itself to JPMorgan for an astounding $2 per share. The deal was set up by the Federal Reserve, which feared that Bear Sterns’ failing to find a buyer would have flooded the market with mortgage-backed securities and ruined more banks holding similar assets. In layman’s terms, it would have hella sucked, so they had to do some stuff to stop it.
Reading this article, there really is a lot to be said for having Bear Sterns die a mean death. It’s fitting as a consequence of their rough-and-tumble business dealings that went against everything my rural-Ohio landlord grandpa knew to be true about real estate: giving cheap money to people who can’t pay is generally a bad idea, and that’s extra true when it’s done on a nationwide scale.
The problem is that our national economy’s financing has become highly centralized, such that letting any one of the several big-time Wall Street banks — Citi, JPMorgan, HBS, Merrill Lynch and all those others where Northwestern MMSS kids go to become analysts — is a recipe for a major economic hurtin’ on people who don’t necessarily deserve it. We’d all love to see Bear Sterns’ disaster-makers get what they deserve, but the U.S. has given them such power in the first place that we can’t afford to let that happen.
That’s why I grudgingly support this bailout for the sake of those on the far end of Wall Street who would be hurt the most, with the caveat that the market needs greater regulation on the front end: the government can’t afford — literally — to keep waiting until things fail before it jumps in with lots of tax-provided cash to save the day. It’s odd that this happens in the same week that Eliot Spitzer, chaser of investor irregularity, took such a public dive. More action in the spirit of what he was trying to do could have prevented things like this, but if anything the momentum in that sphere has gone the other way in the wake of Spitzer’s hooker-induced political demise.
I just hope that Bear Sterns is a wakeup call to the public, but because it’s so complicated and industry-specific, I doubt that will happen. The funny thing is that it’s really not that complicated: people who think they know better probably don’t, and giving them too much leeway is asking for trouble.
Update 3/17: This Paul Krugman column says it better than I did.