Out of Control Policy Blog

Bear Stearns One Year Later

This Wall Street Journal article asks some key questions on the one year anniversary of the Federal government's bailout of Bear Stearns. At the time Bear was bailed out to avoid market collapse. Looking back the best our regulators can say is, "oops..."

The WSJ piece:

Mr. Bernanke warned at the April 2008 hearing that "a default by Bear Stearns could have been severe and extremely difficult to contain." At the time of the Bear rescue, other officials whispered that if the government didn't bail out Bear, Lehman Brothers could be the next to fall.

One could argue that the Bear bailout not only didn't prevent the failure of Lehman and AIG six months later, but it may have contributed to the autumn meltdown. If nature had been allowed to take its course, Bear's directors and executives would have faced the liability tsunami of bankruptcy, and creditors would likely have suffered as well. Watching this horror show, would the leadership at AIG and Lehman have spent more of the next six months seeking to avoid this fate?

Bear stockholders ended up receiving $10 for each of their shares. Responding rationally to this government intervention, and knowing that their firms were each significantly larger than Bear, executives at AIG and Lehman might have believed that the feds had just built a floor under them.

Full article here.

Anthony Randazzo is Director of Economic Research


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