Saturday, March 15, 2008

Is Bear Stearns too big to fail?

This is classic moral hazard. If the Fed bails out Bear Stearns because of a domino theory (if Bear fails, it will bring the system down with it), where does it stop? From WSJ:
The overriding public interest at the current moment is to maintain a functioning financial system, and regulators clearly felt this was at risk from a Bear failure. Just once we'd like to see what would happen if a big bank did fail, but the current general market panic arguably isn't the best time to have that experiment. Presumably Bear will now be shopped to private buyers.

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