Fed's Bailout Is Questioned by Ex-Staffer
By GREG IP
April 29, 2008; Page C3
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.
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
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
"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