Should the Fed give a hand?

Bear Sterns Cos. Was bailed out by JPMorgan Chase & Co. and the federal government last month. The Federal Reserve's unprecedented intervention on behalf of Bear Stearns Cos. was intended to prevent the complete collapse of the company which could have shaken the very foundations of the U.S. financial system. However, this particular action ignited a debate about how big a role the central back should play.
The arrangement allows JPMorgan Chase & Co. to borrow from the Fed and provide that funding to Bear Stearns for 28 days. As a commercial bank, JPMorgan can do so, while Bear Stearns, an investment bank, cannot.
Fed officials said the procedure that was used actually dates back to the Great Depression of the 1930s which has rarely been used since then, and financial experts said they believed the action was unprecedented for an investment bank." It is the first bailout of an investment bank by the Fed," said Charles Geisst, a Wall Street historian and finance professor at Manhattan College. By contrast, investment bank Drexel Burnham Lambert Inc. was allowed to go bankruptcy in 1990.
Most of the financial experts had little sympathy towards Bear Stearns. Joseph Mason, a finance professor at Drexel University, commented: "Once an institution is insolvent, the only responsible thing to do is to unwind it in an orderly fashion," He said, "It's not a business enterprise worth saving."
Lawrence White, an economics professor at New York University said: "I know things are a little dicey out there, but we can't have the Fed going around protecting everybody in sight," He continued by saying, "You take risks and you lose, you're supposed to be shown the door, and these guys are not being shown the door."
In fact, not only the experts were highly dubious about the Fed’s plan to save Bear Stearns, taxpayers also revealed their oppositions to the act. People like Nathan Schneeberger, an ordinary middle class complained, “banks and investment firms (and the wealthy men and women who run them) can benefit and profit disproportionately more than the middle class and working poor during the good times, but when their judgments and leadership turn out to be wrong, they do not return the disproportionate earnings from the good times. Instead, we the taxpayers, end up paying for their poor judgment.”
Federal Reserve officials’ arguments were that if Bear Stearns were to fall into bankruptcy, it would leave other companies who have lent money to the investment bank in the lurch, which could cause a chain reaction, threatening the financial system.
As the Subprime Mortgage Crisis has deepened, complaints of government intervention to back up distressed financial companies have risen tremendously in recent days. The Fed thinks that some firms are simply “too big to fail”, yet many people believe that these firms deserve punishments and it is simply beyond the Fed’s obligation to bail them out, as we are all living in a Free Market with everyone playing a fair game.
Sources: Business Week and New York Times