I've gotten that question a lot over the last few days. What, my questioners want to know, made Bear more worthy (or needful) of a bailout than Lehman.
Answer: nothing but timing. The Fed gambled that by supporting Bear into a quick sale, it could stop the liquidity crisis and prevent the contagion from bringing down the broader market. By the time Lehman fell, it was clear that this hadn't worked. Moreover, the bailout had introduced a serious moral hazard problem into the market: AIG (and allegedly also Lehman) turned down private offers that were too paltry in the belief that the Federal Reserve wouldn't let them be forced into liquidation. Other bankers required an object lesson.
Too, by that point, the various institutions involved had had some time to work out contingency plans for such a collapse. They weren't complete, but they were adequate. With Bear, on the other hand, it would have been utter chaos.
In my humble opinion, Ben Bernanke did the right thing both times. Given the cost of a collapse (which we're now seeing), it was worth gambling $30 billion on the chance that it might be averted. That gamble didn't pan out, but getting a bad outcome doesn't mean you made a bad decision. Bernanke played a bad hand well, but ultimately it just wasn't enough to take the pot.
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A little analysis of the difference in their balance sheets might give your post a little heft.
There are lots of really strong opinions floating around out there; getting an explanation of the factual basis for yours would help in establishing why you're right and so many others (who, for example, assert that Bear's counterparty exposure being much larger than Lehman's as a reason for the difference in Fed behavior) are wrong.
I agree with Francis. Bear was a much larger player in the $62 trillion OTC CDS market, which should be and I believe is the Fed's priority in handling this meltdown. It's the same reason why AIG got bailed out - I am, as I'm sure regulators are, terrified as to what would happen if there was a crisis of confidence in the credit default swap market.
I strongly feel that after all of this is said and done there needs to be a central, regulated exchange for CDS contracts. There's just way too much inherent uncertainty in the current system.
This morning the WSJ conjectured that the reason that the financial crisis hadn't translated into the larger economy (yet) was that the government had acted decisively early.
One man's contagion is another man's reality.
Didn't read the journal article, but the government's action, if it had any effect at all, only postponed the inevitable reckoning. High risk almost always entails high costs.
Megan,
I respectfully disagree.
To my way of thinking, the ultimate reason for any principled bailout is to make sure that the machinery of the market doesn't permanently seize up or collapse. To that end, Bear's large prime brokerage business needed to be saved so that trades could clear. Additionally (as has been pointed out above me) Bear was much more heavily involved in the derivative and CDS markets which means that there would be significantly greater counterparty risk if it went under. Lehman has a lot of assets whose liquidation will hurt, but that's a more normal contagion risk that the market should bear without assistance.
Incidentally, I would say that all four bailouts to date (BSC, GSE's, AIG) were fairly 'principled' in that all four represented clear and present systemic threats to market machinery (GSE's going would have blown unbelievably large holes in foreign bank balance sheets and irreparably harmed the US Gov's financial rep and AIG represents enormous and crippling counterparty risk), the lower parts of the cap structure were badly torched and the rest of the business will be wound down or sold off ideally for a profit (although I think that that's pretty starry-eyed).
- Ben I
Why do you say the Bear gamble "didn't pan out?" It appears the Bear assets, so far, aren't looking so bad. This is from Forbes yesterday:
http://www.forbes.com/home/2008/09/16/fed-treasury-bailouts-biz-beltway-cx_jz_0917costs.html
It's hard for me to believe things would have been better if Bear had been allowed to fail. And my guess is the Fed (and hence the taxpayer) will end up making money on the AIG deal.
I'll add another voice supporting the difference b/t BSC and LEH being related to differing CDS positions. Yes, timing was definitely an aspect, too, but the reason the timing had an effect is b/c of CDS.
So, my kid has a summer job (last year) at GS. The head of Goldman comes down to her desk and borrows her chair, and sits along side the traders, and oversees the write down and sale of CDS and other mortgage backed securities. The decision making was swift, brutal, and smart. That's why Bear had its tit in a ringer and that's why Lehman went down and that's why Goldman is still in business.
It's no use crying over it, but it is a bit ironic. We at Lehman kicked the shit out of Bear. We beat them quarter after quarter. At the height of our powers, we were taking Investment Banking businesses away from JP Morgan and Morgan Stanley. We were landing punches on the big boys when all the analysts said that we were just a little bigger and better than Bear.
But because of Dick Fuld's stubbornness and refusal to admit red ink for nearly a year, we had an epic collapse.
We beat Bear. But we also beat ourselves.