Bear Gets Billions, But What About You?

As taxpayers save one of Wall Street's giants, what about homeowners?

March 25, 2008— -- Wall Street investors couldn't applaud enough last week when the Federal Reserve rode in and rescued investment bank Bear Stearns from bankruptcy.

But now, Main Street wants to know what justifies a taxpayer-backed bailout of the investment bank, especially with no congressional oversight. And, skeptics wonder, why undertake such a plan when it doesn't help the mom-and-pop store struggling down the road or the thousands of Americans who might lose their homes?

Peter Morici, a professor of international business at the University of Maryland, blames Fed chairman Ben Bernanke for not getting more concessions out of the banks. Morici said the banks acted irresponsibly in who they issued loans to, and that the Fed should have forced them to agree to tighter regulations before moving forward with a bailout.

Making a deal, Morici said, "without imposing conditions on the banks for the shoddy ways they have been doing business, is really inappropriate."

Morici said Bernanke had more leverage at his disposal and should have used it to make some real changes to the system.

"He really didn't serve the public interest in that regard," Morici said.

Past Government Bailouts

While rare, the government does come in from time to time and help major companies. The theory, as in the Bear Stearns case, is that there are some companies that are just so large that their bankruptcy would send shock waves through the entire economy.

Late in 1979, President Jimmy Carter and Congress stepped in to save Chrysler from bankruptcy.

Then-Treasury Secretary G. William Miller said at the time that such assistance was "neither desirable nor appropriate, being contrary to the principle of free enterprise."

But Miller said that Chrysler was an unusual exception. In that case, he said the Carter administration "recognizes that there is a public interest in sustaining [Chrysler's] jobs and maintaining a strong and competitive national automotive industry."

After the 9/11 terrorist attacks, the federal government stepped in to help out the airline industry with an aid package. The same argument was made then about the effects upon other segments of the economy if the airlines went under.

Morici said the Bear Stearns bailout is different.

"In both of those cases, there were congressional bailouts," he said. "There was a political process involved and, theoretically, the public interest was represented through that. While here, this was the decision of one or two or three men on behalf of the public … The notion was that something had to be done that weekend."

A Free Market Solution

Peter D. Schiff, president of Euro Pacific Capital, believes that the government does more harm than good and caused the current crisis by lowering interest rates more than the natural flow of businesses called for.

Schiff said the market will always work itself out and that government intervention will lead to larger problems.

"I'm afraid that it is going to create a climate that makes it more likely that these types of bailouts will be offered to homeowners," Schiff said. "It makes it easier for the politicians to say, 'look, how come we can bail out these billionaires or these Wall Street fat cats, but we can't bail out this guy who is losing his home?' It's unfortunate, because it's not going to stop there. So, we should bail out homeowners who borrowed too much money against their homes to take vacations and buy cars?"

What about bailing out people who put too much on their credit cards, Schiff said. What about small entrepreneurs?

"Where does it end?" he said. "Why should somebody get bailed out and somebody else get stuck with the bill?"

Will Gas, Milk Prices Keep Rising?

In this case, JPMorgan Chase would buy out Bear Stearns at fire sale prices and the federal government would take over the risk on nearly $30 billion worth of mortgage investments that everybody else is afraid to touch.

The bailout will ultimately cause the value of the U.S. dollar to drop, Schiff predicted, which will lead to massive inflation. Those who Schiff said will be hurt the most are people who have money in CDs, government bonds, or those receiving a fixed amount of money, such as a pension or Social Security benefits.

Schiff predicted that America will experience runaway inflation as seen in Argentina or Zimbabwe.

"The dollar is going to fall through the floor and the cost of living is going to skyrocket," he said. "Americans, in general, are going to be impoverished because of these bailouts. It's going to be the most costly bailout in U.S. history, paid for on the backs of savers. The American standard of living is going to plunge."

For Schiff, the answer is pretty simple: "The government should not be loaning out taxpayer money. These things should be sorted out in the free market."

What About the Little Guy?

William S. Lerach, a shareholder advocate and plaintiffs' lawyer, said in a Pittsburgh Post-Gazette commentary, Sunday, that such losses by Bear Stearns are part of the natural cycle of the market, "a purge of speculative excesses.

"This collective pain disciplines those who binged and sets the stage for a recovery," wrote Lerach, who was sentenced to two years in federal prison for his role in a kickback scheme involving class action lawsuits against some of the nation's biggest corporations.

The real beneficiaries of the bailout, he wrote, are the trading partners at Bear Stearns, which faced huge losses if the free market had operated and Bear Stearns had gone bankrupt.

"But what about the millions of families facing hardship, but whose financial profligacy pales compared with Bear Stearns'?" Lerach wrote. "Unlike poor old JPMorgan, they can't call Ben Bernanke and get a lousy $15,000 or $20,000 loan to avoid foreclosure, let alone billions over a weekend to finance a giant — and what will be — hugely profitable takeover."