F.D.R.’s Safety Net Gets a Big Stretch ..(Bear Stearns bailout)

[RedEarth]

March 15, 2008
News Analysis
F.D.R.’s Safety Net Gets a Big Stretch
By FLOYD NORRIS
It was an old-fashioned bank run that forced Bear Stearns to turn to the government for salvation on Friday. The difference is that Bear Stearns is not a commercial bank, and is therefore not eligible for the protections those banks received 75 years ago when Franklin D. Roosevelt halted bank runs with government guarantees.

Bear was, instead, emblematic of a financial system that grew up over the last two decades, one that largely marginalized traditional banking and that enabled lenders to evade much of the regulatory framework that had also begun during the Roosevelt administration.

The new system enabled loans to be made by almost any financial institution with the money coming from the sale of increasingly complicated securities backed by the loans.

Regulators believed that the new system spread out the risk. Alan Greenspan, a former chairman of the Federal Reserve, said the system had transferred risk from banks — which he called “highly leveraged institutions” — to “stable American and international institutions.”

It turned out he was wrong. Much of the risk had remained with commercial banks, but packaged in such a way that they were required to put aside fewer reserves to protect against losses. Much of the rest of the risk ended up with financial institutions that relied on their ability to borrow at low rates whenever they needed it.

http://www.nytimes.com/2008/03/15/business/15regulate.html?ei=5065&en=73e58419dcc82a3f&ex=1206244800&partner=MYWAY&pagewanted=print

[aquart]

1. What happens if we let Bear Stearns crash and burn?

It's what a free market would do. What are the consequences? MUST we save them to save ourselves? Because I hate their worthless criminal guts and would enjoy seeing them destroyed. (And if we could find a way for their aged CEO to die in prison, I would rejoice.)

[PA Democrat]

3. The guys at the top who made the decisions that resulted in their problems always make out like

bandits. The former CEO conveniently "retired" in January of this year after making more than $150 million over the past 5 years. These guys always have their corrupt and incompetent asses covered. They never pay the price unless someone can prove they've done something that is criminal. Unfortunately, much of what they do is perfectly legal.

If they failed, it would probably cause a ripple effect with even more bank failures. People would lose their jobs, their retirement savings, and it would be the little guy who suffers the most.

There needs to be much tighter regulation over the financial services industry. Unfortunately, they have wielded way too much power in Washington, and I don't think most people in Congress really understand how much the industry has changed over the years, without new regulations to reflect those changes.

[aquart]

4. They will when they have to support their relatives.

[PA Democrat]

2. Thanks for posting this. I was puzzled by the bailout because I didn't think Bear Stearns was a

member of the FDIC, so I was curious as to how the Fed was lending them money.