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Editorial: Bear Stearns bailout a dangerous precedent

Editorial: Bear Stearns bailout a dangerous precedent

Fed takes on big risk with Bear Stearns move

Sunday’s $270 million sale of the venerable Bear Stearns investment bank was a fire sale pushed in desperation by the government to avoid a panic-inducing bankruptcy. It, along with a new policy by the Federal Reserve regarding other large investment banks with heavy exposure to subprime mortgages, may have succeeded temporarily in calming investors’ jitters, but longer term it ought to give American taxpayers considerable pause.

J.P. Morgan Chase picked up Bear Stearns for a song, considering that it was the Fed that agreed to shoulder the risk of its $30 billion troubled loan portfolio. J.P. Morgan and the government may well make money on this venture, depending on what happens to those loans, but if there are losses — and there are likely to be if the economy continues to falter and home prices continue to sag — taxpayers will get stuck with the bill.

Of even greater concern, the Fed has also agreed for the first time to let the industry’s other major players — Merrill Lynch, Goldman Sachs, Lehman — borrow against their own troubled mortgage portfolios. (Historically, only commercial banks have been allowed to borrow at the so-called “discount window.”) While that should prevent the kind of liquidity problems that caused Bear Stearns’ downfall, who knows? Suffice it to say that if more Bear Stearns-type failures do occur, the impact on the entire country will be substantial.

Now that the Fed is on the hook, it needs to impose the same kinds of restrictions on these borrowers as it does on commercial banks — not just in fairness to the latter but for the sake of U.S. taxpayers.

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