The Three Magi of the Meltdown

[kentuck]

http://opinionator.blogs.nytimes.com/2010/01/07/the-three-magi-of-the-meltdown/

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The new, inescapable conclusion — thanks to the passage of time, of course — is that Wall Street and Main Street would be better off today had the power troika of Henry Paulson, Ben Bernanke and Tim Geithner (at the time, Treasury secretary, Federal Reserve chairman and president of the New York Federal Reserve, respectively) let the 85-year-old firm fail outright instead of crafting their clever rescue.

By arranging for Bear’s shareholders to get a tip — it turned out to be $10 a share in JPMorganChase stock at the time (worth around $9 a share these days, based on JPMorgan’s recent stock price) — and for Bear’s creditors to get 100 cents on the dollar for what was a bankrupt company (where creditors would likely fight for years over the carcass), these three men single-handedly sent to the market a powerful message it would all too quickly misinterpret, much to our collective peril: For the first time in the history of American capitalism, the federal government would not let a big Wall Street securities firm fail.

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You took risks you didn’t understand? Got too greedy? Took your eye off the ball? Kept in place executives and their cronies on the board of directors who should have retired or been replaced years earlier? Well, then, you are about to learn the valuable lesson of American capitalism and what it means to take stupid risks with other people’s money. You will lose your investments, your jobs and your company. Sorry about that. Stuff happens. The market understands that message loud and clear.

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In retrospect, had Bear been allowed to fail and then been liquidated, the rest of Wall Street would have immediately come to grips with the seriousness of the situation instead of dallying for six months while thinking the Feds would step in and save them, too. Chances are Lehman rather than Bear would now be part of JPMorgan; Bank of America would likely still have bought Merrill Lynch. Morgan Stanley and Goldman Sachs would probably have just skated by with their investments from Mitsubishi and Warren Buffett, respectively.

But the Panic of 2008 could have been largely avoided, and with it large chunks of the $700 billion Troubled Asset Relief Program (the Fed’s $12 trillion — and counting — pledge to buck up the financial system), the misery of 10 percent unemployment and today’s Great Recession.

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