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Shaggy Rogers

Rescue of Bear Stearns 'cowboys' questioned

by Frank James

President Bush said some very nice things about the Federal Reserve's rescue, once removed, of Bear Stearns, the wobbly investment bank.

"... We've taken strong and decisive action," Bush said. "The Federal Reserve has moved quickly to bring order to financial markets. Secretary (Henry) Paulson is supportive of that action, as am I," said Bush, referring to the Treasury Secretary.

Not everyone is joining Bush in singing the Fed's praises. Some say the central bank's actions violate notions of fairness. Why is a large investment bank rescued while homeowners are left to the rough justice of foreclosure and bankruptcy?

This from Kurt Eggert, a law professor at the School of Law at Chapman University. Eggert once served on the Fed's Consumer Advisory Council.

Said Eggert:

"As the Fed rides to the aid of Bear Stearns, there is a growing disconnect between the Bush Administration's willingness to help Wall Street and its willingness to aid the homeowners facing foreclosure. The subprime crisis is largely caused by excessive defaults and foreclosures, and coming up with real plan to reduce foreclosures should be the first point in the agenda.”

“To help Bear Stearns and Wall Street, the Fed, with Treasury Secretary Paulson and Bush's approval, is taking heroic, and historic efforts, lending to non-banks for the first time since the Great Depression. When it comes to reducing foreclosures, the Bush Administration has adopted a "What me worry?" attitude, hoping that the market will fix the problem with some cheerleading by federal regulators.”

“Of all the investment houses, Bear Stearns was the one most deserving of going under because of the subprime crisis, both for its ownership of a subprime lender and its work packaging those loans. However, the Feds are doing more to help Bear Stearns than the borrowers facing foreclosure because of Bear Stearns actions.”

Then there's the criticism that not allowing Bear Stearns to fail will only make it easier for other Wall Street companies to take other risks and hope to be saved from their misjudgments by the federales.

Anthony Sabino, professor of business law at St. John's University, said:

" The only saving grace of the Bear Stearns rescue is that it is being consummated as a buyout by JP Morgan Chase, so on its face its a private transaction. But that's not the whole story.

This buyout could have only been possible with the backing of the Fed, and one can suspect with the Fed giving a healthy push to JP to get it done, in order to head off more unrest in the market.

And that's what makes it bad. Bear Stearns gambled and lost. They took enormous risks with CDOs and such. When they made money, they kept it. Now they lose money, and they get a quasi-government bailout. That's wrong. The taxpayers should not have to pay for the lost wagers of some Wall Street cowboys. As for the "too big to fail" theory, if the Fed follows that, it will be spending countless trillions to bail out anybody and everybody in the subprime mess, and only encourage such reckless behavior in the future. "

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