Pulitzer Prize-winning journalist Gretchen Morgenson believes the Fed's decision to bail out one of the key players in the country's home mortgage crisis -- Bear Stearns -- may come at taxpayers' expense.
J.P. Morgan's $2-a-share purchase of investment bank Bear Stearns over the weekend came with the aid of $30 billion in financing from the U.S. Federal Reserve to cover potential losses in Bear Stearns' securities holdings. New York Times business columnist Morgenson says the bailout crossed a line, because Bear Stearns -- as she puts it -- "helped create the titanic credit mess we are in." "Let's say you are a parent ... [and] your son takes the keys to the Porsche, wraps the Porsche around a tree, and then you -- after that -- go out and buy him another Porsche. That's ... what [we mean] when we talk about moral hazard," she explains. "You are basically encouraging bad behavior to continue. You aren't punishing bad behavior. "So the reckless behavior that Bear Stearns conducted itself in the mortgage arena is essentially ... being rewarded because the Federal Reserve is not backstopping $30 billion of those kinds of loans, and the taxpayer may have to cover that," Morgenson contends. According to Morgenson, Bear Stearns executives are unlikely to receive excessive compensation packages known as "golden parachutes." "What we do have to remember is that during the mortgage boom, these executives made tremendous amounts of money -- hundreds of millions of dollars," she points out. "And it was generated by the mortgage boom because that was contributing to Bear Stearns' profits. "Now that the boom has turned to bust," she continues, "it seems to me only fitting that some of those bonuses be clawed back. Why on earth should they be allowed to keep money that was made on questionable loans and dubious practices?" Morgenson wonders. The journalist says the Fed had no choice but to intervene because nowadays brokerage firms and big commercial banks are all interrelated, and the Fed needed to ensure that chain remained intact. However, she says the demise of Bear Stearns highlights the failure of regulators to "act before or prevent the train wreck." Morgenson, who was awarded a Pulitzer Prize in 2002 for her coverage of Wall Street, wrote a column Sunday titled "Rescue Me: A Fed Bailout Crosses a Line."
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