Forum Home Page

Bear Stearns Forum Home Page

Program Reference

Fed's Bailout Is Questioned by Ex-Staffer

WASHINGTON -- The Federal Reserve's rescue of Bear Stearns Cos. will come to be seen as its "worst policy mistake in a generation," a former top Fed staffer said.

Vincent Reinhart: An ex-Fed player's Monday-morning quarterbacking.

The episode will be seen as comparable to "the great contraction" of the 1930s and "the great inflation" of the 1970s, Vincent Reinhart said Monday at a panel organized by the American Enterprise Institute, a conservative-leaning think tank where he is now a scholar. Until mid-2007, Mr. Reinhart was director of monetary affairs at the Fed and secretary of its policy-making panel, the most senior position on the Fed's Washington-based staff.

His appraisal is one of the harshest yet by a high-profile observer. The Fed last month lent Bear Stearns money to prevent a bankruptcy filing and then financed $29 billion of its assets to facilitate a takeover by J.P. Morgan Chase & Co. Former Fed Chairman Paul Volcker has said the move went to "the very edge of [the Fed's] lawful and implied powers," although he has since said that that wasn't meant as a criticism. Congress and analysts have deferred to the Fed's judgment.

Mr. Reinhart said the bailout "eliminated forever the possibility the Fed could serve as an honest broker." In 1998, the Fed coaxed private creditors of Long-Term Capital Management to bail out the hedge fund but didn't have to put up its own money. If it ever tries a similar maneuver on a Wall Street cohort, he said, "The reasonable question any person in the room will ask is, 'How much will you contribute to the solution?'"

Mr. Reinhart said the Fed's move may have been justified if the alternative was a chain-reaction run on many other investment banks. But he asked if other options were available, such as taking a "tougher line" with J.P. Morgan, seeking other suitors, removing certain assets from Bear's portfolio or quickly implementing its previously announced offer to temporarily swap Treasury securities for dealers' less liquid assets. "All those things were possible but not pursued," he said.

A Fed spokeswoman declined comment Monday. At the time, Fed officials said that they had explored many alternatives to directly aiding Bear. The speed with which the company was losing cash and the due diligence most potential buyers needed left the J.P. Morgan takeover as the only way to shore up Bear quickly enough, and J.P. Morgan wouldn't do the deal without Fed support.

"A sudden, disorderly failure of Bear would have brought with it unpredictable but severe consequences for the functioning of the broader financial system and the broader economy," Federal Reserve Bank of New York president Timothy Geithner told Congress this month.

Write to Greg Ip at greg.ip@wsj.com¹

This Forum program is open, free of charge, to all shareholders of The Bear Stearns Companies, Inc. ("BSC") and to any fiduciaries or professionals concerned with their investment decisions.  Its purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their evaluations of alternatives, addressing issues described in the Forum Summary.

As stated in the posted Conditions of Participation, all Forum participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

Inquiries and requests to be included in the Forum's distribution list may be addressed to bsc@shareholderforum.com.