Filed under: JPMorgan Chase (JPM), Bear Stearns Cos (BSC)
The New York Times rants about the horrors of the Fed’s move to lend money to The Bear Stearns Companies (NYSE: BSC) for 28 days using JPMorgan Chase & Co. (NYSE: JPM) as its conduit. I think the Times has gotten itself into a religious frenzy over moral hazard that’s causing it to suspend a sober analysis of the costs and benefits of the options now facing the Fed. Based on my weighing of those costs and benefits, a credit collapse is worse than moral hazard.
Moral hazard is the idea that if I make a mistake and someone bails me out, I will have no incentive to keep from making that same mistake in the future. In this case, Bear Stearns made some risky bets on mortgages and now its customers want their money back so it doesn’t get tied up in bankruptcy proceedings. The Fed’s move doesn’t really bail out Bear Stearns — its shareholders are likely to be almost completely wiped out. It just preserves Bear Stearns long enough to sell its pieces quickly to bottom fishers.
The executives who got Bear Stearns into this mess will lose their jobs but they probably already have enough money stashed somewhere safe so they won’t really pay the price of losing all the money they made while they worked at Bear Stearns and being barred from working in the industry. I would not be surprised if its CEO Alan Schwartz resurfaced quickly at another investment bank that would value his contacts and experience.
Continue reading Which is worse: Moral hazard or credit collapse?
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