Bear Stearns Rescue Shows Legislators Have Work to Do
In the short run, the story of the successfully averted almost-collapse of the nation’s fifth-largest investment bank is a tale of triumph over near-disaster. But, in the long run, it is likely to be seen as a rallying cry for increased regulation of the reckless mortgage lending that caused the debacle.
Hundreds of lawyers and bankers, tieless and in their shirtsleeves, reportedly caught only a few hours of sleep in a 72-hour period between Thursday and Monday, as officials of Bear Stearns Cos. and banking regulators sought to stave off the mighty Wall Street investment bank’s collapse after its capital plummeted from $17 billion to $2 billion within just a few days.
By the time markets opened yesterday they had succeeded, invoking a Federal Reserve power to lend to nonbanks from the “discount window” that hasn’t been exercised since the Great Depression, recounts the Wall Street Journal in a page-one article today. A buyout offer from JPMorgan Chase, assembled at breakneck speed (and at a mere $2 a share, compared to Friday’s closing price of $30.85, and the $61.58 at which Bear stock had been trading as recently as March 12), also was critical to averting the debacle.
Even so, world stock markets sank yesterday. Ironically, by taking extraordinary measures to save the situation, federal officials fueled concerns that it could get even worse, notes the San Jose Mercury News.
“You keep waiting for the other shoe to drop, and it keeps dropping,” says Greg Rosston of the Stanford Institute for Economic Policy Research. “You have to wonder, ‘Is this Imelda Marcos’ closet?’ “
Fear of a more widespread financial debacle is what led U.S. regulators to do what they did, the Wall Street Journal writes.
As chief executives “deluged” U.S. Treasury Secretary Henry Paulson with calls at home Saturday morning, telling him of their worries that the Bear Stearns run would spread to other financial institutions, “Mr. Paulson realized the Fed and Treasury had to get the JPMorgan deal done before the markets in Asia opened on late Sunday, New York time,” the article says.
Although it’s still possible that angry Bear Stearns shareholders could quash the buyout, experts say this is unlikely.
While stockholders could seek an injunction to stop the deal, “that’s a tough hurdle,” partner Michael Kelly of McCarter & English tells Reuters. “I’m sure the board is going to say this is the best option in our judgment.”
Meanwhile, lawsuits are already being filed, including a federal securities case that contends the investment bank providing misleading information to investors about the value of its stock and a similar federal employee stock ownership plan action on behalf of Bear Stearns employees, the news agency notes. One enterprising law firm, Mark & Associates, has set up a website featuring the Bear Stearns name in an effort to sign up plaintiffs.
The bottom line, though, is that regulators were asleep at the switch as an unprecedented mortgage fraud juggernaut barreled down the track in recent years, and we are all now paying the price, according to a Baltimore Sun columnist. “If not for the Federal Reserve’s and the Bush administration’s refusal to stop crazy mortgage lending, former Bear boss James E. Cayne would still be chewing cigars in his Manhattan office, counting his money and complaining about regulators.”
Federal lawmakers are already revving their engines following the Bear Stearns crisis, and are likely to pursue legislation to offer increased help to millions of homeowners struggling to pay their mortgages, reports the Hill.
“In an election year, it will create the political impetus to do more,” an unnamed banking lobbyist tells the Washington, D.C., publication. “They can’t just sit on the sidelines.”
