« Inside the Demise of Bear Stearns | Main | FactSet Research Systems »

In Slate, Elizabeth Spiers argues in favor of the Bear bailout:

The alternative would have been to let Bear slide into a Chapter 11 bankruptcy, which would have happened quickly. Among other things, Moody's, S&P, and Fitch all downgraded Bear on Friday, potentially forcing the firm to put up additional collateral to meet the requirements of a credit-default swap triggered by the downgrades—collateral it didn't have. Bear notionally holds $13 trillion in derivatives contracts, and even if credit-default swaps were only a small fraction of that, any sort of credit event would have been catastrophic for both Bear and its buyers, the latter of whom would find themselves holding guarantees from a firm that was not in a position to guarantee anything.

Bear's client assets would also have been frozen in the event of a bankruptcy, crippling not just the brokerage but many of the hedge funds that have collateral at the firm. (Fear of this happening is part of reason that the run on the bank—or run on the brokerage, rather—happened in the first place.) Taxpayers would have ended up footing the bill for assets that were federally insured, effectively a different kind of bailout.

Posted by edelfenbein at March 18, 2008 11:34 AM