JPMorgan Chase takes over stricken Bear Stearns. Panic is in the air
from Economist.com
THE credit crunch is a man-made disaster and, like its counterparts in nature, where and when devastation and chaos will strike is hard to predict. Few could have expected the speed and severity with which Bear Stearns collapsed.
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Bear’s shareholders will not benefit from the Fed’s largesse. Bear, a firm known in the past for its canny risk management, failed badly in its mortgage business and investors will take the full hit. Regulators are desperate to avoid a situation where shareholders bank private profits but losses are borne by the taxpayer.
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The Fed’s decision to introduce loans to brokers as well as regulated banks marks a significant shift in policy, and raises the question of whether the former should now be subject to more stringent regulation in return. But the Fed’s widening role is a sign of its fears that other pins might fall. Merrill Lynch looks decidedly wobbly. Lehman has lots of toxic mortgage securities on its books. Lehman’s shares plunged on Monday morning but it is not the only one facing trouble.
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Now the Fed has extended its area of operation, where will it stop? Investment banks are not the only parts of the financial system showing the strain.
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The regulatory regime for investment banks may now have to be rethought to make them more resilient to financial catastrophe.
