Bringing down Bear Stearns

Interesting article on the demise of Bear Stearns in "Vanity Fair." "Vanity Fair" you ask? Yes, that magazine...I don't get it either. Maybe they saw Jimmy Cayne's pouty lips and confused him for Angelina Jolie.

The article is intriguing in that it raises the "conspiracy theory" that Bear was brought down by a handful of conspirators. I doubt this theory will ever be substantiated as it seems a tad far-fetched. More likely Bear over-extended its risk position and when word spread the panic caused a run on the bank. Since Bear wasn't a true bank nothing could be done.

But the real story is that something was done. And that is where our wonderful Fed stepped in and brokered a deal. The article pains a very bad picture of Treasury Secretary Henry Paulson. He comes off as a politico who wants to keep up appearances by not looking as if he is bailing out Bear (by mitigating Chase's risk with our tax dollars) when he in fact was actually doing that very thing. This hypocrisy led to a $2 initial offer that more than quintupled after some griping by Bear shareholders. It also led to a Federal bailout of a firm that had no business being bailed out.

Bear was judged too big to fail. Which makes me wonder what other firms are too big to fail? The US government has done this before. Remember Lee Iacocca and Chrysler? Could we see a repeat of history in the next year or so? Similarly no one in the mortgage industry really believes that Fannie Mae and Freddie Mac are independent financial institutions. Their cost of funds is lower due to the commonly held believe that the Fed would never let them fail.

So who is not too big to fail. Countrywide? Obviously not since they were gobbled up without any intervention. But what if Bank of America starts teetering? My bet is that Bernanke and Paulson will be on their horse to the rescue again. How about Wachovia? Naaah...they're "too small to survive." I guess scale does have its advantages.