The Bear Stearns collapse has been a tragedy for 14,000 hard-working Bear (BSC) employees, all of whom deserved a more vigilant/competent management team. It has also been a major bummer for passive shareholders, who got their heads handed to them.
But both camps are walking away with about $10 more than they deserve, courtesy of Ben Bernanke, Hank Paulson, and U.S. taxpayers.
Bernanke and Paulson tried to engineer the Bear Stearns bailout so it didn’t look like a bailout–by insisting on a deminimus $2 takeout price. But by guaranteeing $30 billion of Bear Stearns balance sheet assets, the Fed effectively transformed Bear Stearns into a Treasury Bill. This did a lot more than save Bear from bankruptcy: It made it worth vastly more than the zero it would have been worth had the government not stepped in. And Bear Stearns shareholders, understandably, jumped on this.
Bear Stearns shareholders still got poleaxed, so the Fed will still be able to parrot its “No Bailout” line. But actions speak louder than words. US citizens who gambled on ever-rising home prices are a far more sympathetic lot than Bear Stearns traders and shareholders who gambled on ever-rising mortgage prices. So get ready for the Fed’s next great taxpayer-funded bailout, which is now almost guaranteed: The $1+ Trillion Rescue of the US Homeowner.