When Bear Stearns looked like it would go for $2 a share, there was a lot of sympathy for investors who stood to lose tremendous amounts. Employees—who own about a third of Bear—faced not only losing their jobs but their savings as well. So when they gnashed their teeth and hollered that their firm was being stolen by a conspiracy led by the Fed and carried out by JP Morgan Chase, it was just plain polite not to point out that their firm was on the verge of bankruptcy, that its failures had arguably put the larger financial system at risk and that what little they were getting was the result of a government-led bailout.
But now that the price of the deal has risen to ten dollars and shares are trading even higher than that, the backlash has begun. Writing for Smart Money, James Stewart writes that the protests against the rescue of Bear Stearns from insiders are “galling.” What’s more, it shows the Wall Street is all too willing to seek a government safety net when it stumbles on its free-market high-wire act, he argues. The profits from risk are private, but the losses are all too public.
Having artfully solved a thorny problem a week ago, the government has now embraced a deal whose terms reek of the bailout it was at such pains to avoid. If the government is willing to bestow such a windfall on a James Cayne, where will it it stop? Why should other financial firms reduce risk and shore up their capital? What discipline will the market ever be able to impose? Future disasters will only be worse, which will dwarf the immediate cost of the current rescue.
Yves Smith at Naked Capitalism is even more blunt, and he criticizes the media for being too sympathetic to Bear’s employees and investors. “Bear was going to fail as of Monday,” he writes. “Bye bye equity and many if not most jobs. How hard is this to understand? I thought anyone who was remotely financially literate understood what bankruptcy means. The employees should be grateful to get anything. But no, the media slavishly accepts their sense of entitlement.”
No Tears for Mr. Cayne [Smart Money]
Bear: Did the Fed and Treasury Push Too Hard? [NakedCapitalism]