Fed Completely Ignored Moral Hazard in Bailing Out Bear Stearns. Were the Fed's Moves Legal?
Over the weekend, the Federal Reserve committed $30 billion to facilitate the takeover of ailing Wall Street firm Bear Stearns by JP Morgan Chase. On Friday, the Fed had provided a bailout to Bear through Morgan. The Fed has utterly ignored the concept of moral hazard: if an institution gets bailed out of mistakes, it will keep making bigger ones. The takeover at a mere $2 a share was a big boon to Morgan, whose stock soared both Monday and today (Tuesday). Sen. Chris Dodd, head of the Senate Banking Committee, lauded the Fed, but he and Rep. Barney Frank, head of the House Financial Services Committee, pressed for legislation to help consumers facing mortgage foreclosure. Dodd and Frank should be challenging the legality of the Fed's committing of $30 billion to facilitate a Stearns bailout and Morgan windfall, according to Mike Aguirre, city attorney and a securities lawyer while in private practice. "Does the Federal Reserve have the legal authority to unilaterally accept Bear Stearns's collateral to support a $30 billion loan package when it couldn't possibly have done due diligence to see if the collateral is good?" asks Aguirre. Frank and Dodd should both launch investigations, he says. Groups such as the National Community Reinvestment Coalition have said the billions of dollars should have gone to consumers. Aguirre agrees. Over the weekend, the Fed also suddenly allowed securities firms to borrow from the central bank. But did the Fed have the authority to do this? Today, the stock market roared upward. There were several reasons: the Fed slashed interest rates, and the earnings of Lehman Bros. were better than expected. But I personally wonder if one reason isn't that Wall Street now knows that no matter how irresponsibly it throws money away, the Fed will come to its rescue.
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- Stunner: JP Morgan Buys Bear Stearns for $2 a Share. Earlier in Last Year, It Sold for $159. Federal Reserve To Subsidize Purchase — March 16, 2008