Bear Stearns Cos.’s rescue by JPMorgan Chase & Co., facilitated with government guarantees, was the “original sin” made by regulators in 2008 because it signaled that other firms would get aid, said Peter Wallison of the Financial Crisis Inquiry Commission.
“Participants in the market thought that all large firms, at least larger than Bear Stearns, would be rescued,” Wallison said today at a hearing of the panel in Washington. “Companies probably didn’t believe they had to raise as much capital as they might have needed because the government would ultimately rescue them, and fewer creditors were going to be worried about their capitalization.”
The FCIC is reviewing regulators’ decisions in 2008 to aid firms such as insurer American International Group Inc. while allowing Lehman Brothers Holdings Inc. to fail. The Treasury Department committed as much as $700 billion to bolster companies through the Troubled Asset Relief Program.
“The decision to rescue Bear Stearns, to me this was in effect the original sin, because everything changed after Bear Stearns was rescued,” Wallison said.
Scott Alvarez, general counsel for the Federal Reserve System, said the decision to aid Bear Stearns was difficult for the Board of Governors.
“They were worried they would be viewed not as simply a lender of last resort, but as the support for everyone,” he said. “One of the reasons, in the lead-up to Lehman, there was so much discussion about how there would be no government assistance, was in part to try to negate the moral hazard created by Bear Stearns.”
JPMorgan completed its 2008 purchase after the Fed agreed to take control of a $30 billion portfolio of mortgage-linked Bear Stearns assets. JPMorgan Chief Executive Officer Jamie Dimon told shareholders that he needed government guarantees to salvage the securities firm, which was facing an exodus of clients and lenders.
“We simply could not and would not take on any mortgage risk,” Dimon wrote in a letter in March of last year. “We were not buying a house, we were buying a house on fire.” Dimon said the purchase price was about $1.5 billion.