The Federal Reserve was in absolute panic mode when the severity of Bear Stearns’ financial situation started becoming public knowledge in March of 2008 (Barr 2008). It was the Fed’s first priority to prevent such a prominent financial institution from filing bankruptcy and sending destructive waves of shock through the markets (Sidel, Berman, and Kelly 2008). As the Fed worked hastily behind the scenes with J.P. Morgan to strongly encourage a take-over of Bear Stearns, senior Fed officials reassured the public that no other major U.S. securities firm was in a situation similar to Bear Stearns (Sidel, Berman, and Kelly 2008). Meanwhile, Lehman Brothers’ CEO Richard Fuld returned to New York unexpectedly soon from a trip to India when hearing speculations about Bear Stearns’ possible fallout (Sidel, Berman, and Kelly 2008). Treasury Secretary, Henry Paulson, hoped that his announcement that the Federal Reserve would be helping bailout Bear Stearns would calm the masses (Sidal etal. 2008). Despite Paulson’s efforts and a not so convincing speech from President Bush that the economy was as sound as ever, Paulson quickly realized that a definitive agreement to sell Bear Stearns absolutely had to be in the works before the markets spiraled any further out of control (Sidal etal. 2008).
Bear Sterns’ Board of Directors
Originally when the Fed announced their willingness to financially bailout Bear Stearns, the Bear Stearns’ board of directors was informed they would have 28 days to get their affairs in order (Sidal etal. 2008). As the direness of the situation rapidly unfolded, however, the Fed cut that time frame of 28 days to 24 hours (Sidal etal. 2008). The speed at which this company was becoming derailed sent the board members into a state of shock where everything felt surreal; former board member Stephen Raphael said he had spent so much time right before the firm’s demise reassuring clients that their money was safe and that all of Wall Street was in a vulnerable spot (Lattman and Strassburg 2008). When commenting after the demise of the firm, Raphael’s comment was “I blame the system, I blame greed. Wall Street is really predicated on greed. This could happen to any firm” (Lattman and Strassburg 2008).
J.P. Morgan Chase’s Role
As evidenced by Appendix A, the size and financial power of J.P. Morgan Chase compared to Bear Stearn is similar to comparing California to Rhode Island. Given this extreme difference in size, with just a cursory glance, it appears J.P. Morgan could have swallowed up Bear Sterns during any Wall Street lunch break without a hint of indigestion. In reality, however, J.P. Morgan acquiring a company like Bear Stearns is extremely risky, despite its relatively lesser market value (Nutting and Robb 2008). This is why J.P. Morgan only agreed to buy Bear Stearns under very unique circumstances permitted by the Fed: they purchased Bear for a mere $2 per share, backed by almost $30 billion borrowed by the Fed, which completely protected J.P. Morgan from incurring any potential losses from this transaction (Nutting and Robb 2008). This was absolutely devastating to Bear Stearns’ shareholders given that in January 2007, just a year and a half earlier, Bear Stearns had been worth $20 billion, or $169.50 per share (Sidel, Berman, and Kelly 2008). One trader claimed that when he saw the $2 per share price listed, he thought it had to be a typo and assumed it should have been at least $20 instead (Lattman and Strassburg 2008). Appendix B depicts the stock price of Bear Sterns back in May 2007 and its brutal year where it spiraled out of control, right down to the $2 mark in March 2008. Bear Stearns’ 14,000 employees owned one-third of the company’s shares, which means the vast majority of their life savings virtually disappeared overnight, not to mention their employment status (Lattman and Strassburg 2008). Another unusual term to the deal is that J.P. Morgan was allowed the option to purchase Bear Sterns’ extremely valuable international headquarters in midtown Manhattan (Sidal etal. 2008). Even if Bear Stearns’ board of directors wanted to accept a competing offer for this highly valuable real estate, it would not have mattered – J.P. Morgan was guaranteed the option to purchase the building if they so chose, and they of course took advantage of the excellent opportunity (Sidal etal. 2008). As young J.P. Morgan trading analyst, Christopher Sanjurjo, said to me during a telephone conversation in February 2012, “It has been a crazy 5 years. I had just graduated from college and started working here in 2008 when I sat at my desk and watched the words ‘Bear Stearns’ be peeled off the building across the street, and today I sit here talking to you from that very building.”
Aftermath of Chase’s Purchase of Bear
One year after J.P. Morgan bought the remains of the 85-year-old Bear Stearns, J.P. Morgan somehow remained one of the strongest banks on Wall Street, despite the devastating financial crisis (Ellis 2009). After its purchase of Bear, Chase opted to buy what was left of Washington Mutual, for $1.9 billion, after federal regulators took it over (Ellis 2009). When commenting on J.P. Morgan’s status a year after these major acquisitions occurred, Robert Maneri, Managing Director at Victory Capital Management, stated: “between Bear and WaMu, it sure makes them a serious player” (Ellis 2009).
As the cartoon above demonstrates, there was a lot of ethical uncertainty surrounding J.P. Morgan’s acquisition of Bear Stearns and the implications for the American taxpayer. This is largely due to the Fed’s huge financial commitment (of $29 million) to backstop J.P. Morgan’s risky acquisition of Bear Stearns with taxpayers’ money (Barr 2008). As depicted by the elated J.P. Morgan Tigger in the cartoon, much of the public’s perception was that J.P. Morgan greatly reaped the benefits of this deal while the common taxpayer was not only left without honey, but also with a swarm of bees trailing him to make sure he had no chance of getting his hands on any. This viewpoint is captured by a phrase that many taxpayers asked during the craziness of 2008: “Why can the Fed bail out Wall Street but not the Main Street?” (Newman 2008)
According to Robert Nozick’s entitlement theory of justice in distribution, whether a distribution is just depends on the history of how it came to be held in the first place (Nozick 1974). Much of the ethical controversy surrounding the Fed backing J.P. Morgan in its purchase of Bear Stearns is about the use of taxpayers’ funds to do so. When analyzing how these funds came into the possession of the Federal Reserve, it occurred in an entirely just process. Ever since the Federal Reserve was established as the country’s central bank in 1913, it has always worked closely with the Department of Treasury in an effort to maintain a stable economy, normally through its influence on monetary policy (Smith 2008). The Federal Reserve states that three of its main duties include “maintaining the stability of the financial system and containing systemic risk that may arise in financial markets,” “regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system,” as well as “providing financial services to the U.S. government and playing a major role in operating the nation’s payments system” (Board of Governors of Federal Reserve System U.S. 2005). Clearly, it is completely in the Federal Reserve’s authorized power to use taxpayers’ money collected by the Department of Treasury and intervene with banking institutions if there is a major threat to the nation’s banking and financial systems. These funds were, therefore, justly obtained by the Fed, so its decision to back J.P. Morgan’s purchase of Bear Stearns with taxpayers’ dollars would be allowed under Nozick’s theory of distributive justice.
When considering the issue from a utilitarian standpoint, as the Occupy Wall Street Movement suggests with its emphasis on the ninety-nine percent and the greatest good for the greatest number of people, further ethical support for the Fed’s actions materialize (“Zteacher” 2011). It has been argued by many experts that despite taxpayers protesting that Wall Street was saved instead of the Main Street, taxpayers directly benefited from this “bailout” as well (Newman 2008). Susan Wachter of University of Pennsylvania’s Wharton School of Business was stated saying that if the Fed had not facilitated this purchase of Bear Stearns, “the cost of mortgages would have risen, the values of houses would have declined even more than they already have, and the effect would have immediately hit the pockets of American homeowners” (Newman 2008).
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