Experts: Bear Stearns aid could portend more bailouts

WASHINGTON -- The Federal Reserve's unprecedented intervention on behalf of Bear Stearns Cos. was intended to ease fallout from the credit crunch, but experts fear it augurs more government bailouts as the crisis worsens.

The move also reignited debate on Friday about how big a role the central bank should play.

Several banking experts were dubious about the Fed's plan to save Bear Stearns, saying it sets a bad precedent at a time when other investment banks could wind up in similar trouble due to bad mortgage-linked investments.

"There's a limit to how many of these entities they can bail out," said Franklin Allen, a finance professor at the University of Pennsylvania's Wharton School.

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 used dates back to the Great Depression of the 1930s but has rarely been used since that time, and 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 fall into bankruptcy in 1990.

Before Friday's action, the most significant similar move in recent history was the Fed's orchestration of a $3.6 billion bailout by Wall Street banks of collapsed hedge fund Long-Term Capital Management amid the Asian financial crisis in 1998. That action was widely viewed as an appropriate response to a failure that threatened to reverberate through the global financial system.

If the Fed bailout fails, taxpayers would wind up being on the hook, said Lawrence White, an economics professor at New York University's Stern School of Business.

"I know things are a little dicey out there, but we can't have the Fed going around protecting everybody in sight," White said. "You take risks and you lose, you're supposed to be shown the door, and these guys are not being shown the door."