"On the one hand, you've got moral hazard and on the other you've got what's right for the markets, what's right for the stability of the financial system and the US economy."Īt its monthly meeting on Tuesday, the Fed is widely tipped to cut US interest rates, which have already come down from 5.25% to 3% since September. "I really understand the moral hazard argument," said Paulson in a round of interviews on Sunday morning talk shows. He said the risk to financial stability outweighed the so-called moral hazard of shielding investors' money. Paulson said the Fed's intervention was "not a difficult decision - it was the right decision". "And I'm convinced that they're going to come out of this situation very strong." "Our financial institutions, our banks and investment banks are very strong," said Paulson. The Fed's decision to guarantee a temporary credit line from JP Morgan was the first time the central bank has bailed out a brokerage firm since the Great Depression of the 1920s. With a busy economic week ahead, the US treasury secretary, Henry Paulson, embarked on an effort to steady nerves by expressing strong support for the Federal Reserve's decision to throw Bear Stearns a temporary lifeline. Over the weekend Bear Stearns' management, led by chief executive Alan Schwartz, also had tentative takeover contact with private equity firm JC Flowers – which was among the potential bidders last year for Northern Rock. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner." JP Morgan's chief executive, Jamie Dimon, said the tie-up meant customers could once again "feel secure" in the institution's financial viability: "Bear Stearns' clients and counterparties should feel secure that JP Morgan is guaranteeing Bear Stearns' counterparty risk. Senior management rushed to negotiate a takeover before the start of the week's trading on Asian markets to avert mass withdrawals of funds by clients in Japan, China and elsewhere.įearful that a bank collapse could cause reverberations around the financial system, the US Federal Reserve is standing behind the deal with $30bn of special financing to fund Bear Stearns' less liquid assets. Without a buyout, Bear Stearns would almost certainly have been forced to declare itself bankrupt. But the firm was hit by an evaporation in confidence culminating in a bank run by clients last week. "This transaction represents the best outcome for all of our constituencies based upon the current circumstances."īefore the credit crunch set in, Bear Stearns had a market capitalisation of more than $140bn. "The past week has been an incredibly difficult time for Bear Stearns," said the 85-year-old firm's chief executive Alan Schwartz.
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