Were he a private citizen rather than the chairman of the Federal Reserve, Ben Bernanke would have been thrown in jail for what he just did to Bear Stearns (NYSE: BSC ) . He literally stole the company from its rightful owners and handed it to JPMorgan Chase (NYSE: JPM ) for pennies on the dollar.
And no, Bear Stearns' prior shareholders weren't the victims of this theft. Their stakes were well on the way to becoming worthless, thanks to Bear Stearns' overleveraged positions. They should be writing Bernanke personal thank-you letters and pledging their undying loyalty to him for handing them a little something along the way. I'm talking about Bear Stearns' bondholders. The people who should most immediately feel victimized by this theft are the ones who held the $65.7 billion in long-term debt that Bear Stearns had borrowed.
When a company fails to meet its debt obligations, it goes bankrupt. Its bondholders get first dibs on the assets -- not some bank that has a powerful politician in its pocket. For those of us watching this particular horror unfold on the sidelines, that may seem like an academic distinction. But it matters. A lot.
What hell hath Bernanke wrought?
First, there's the minor matter that Bernanke's actions severely perverted the market's natural checks and balances by socializing risk and privatizing profit. If ever there was a signal to other large banks and investment houses to take unwarranted and unwise risks in the future, this would be it.
Second, not every bank will go under because of the subprime mess. Fifth Third Bancorp (Nasdaq: FITB ) proudly had this to say in its recent annual report: "The Bancorp maintains a conservative approach to both lending and investing activities as it does not originate or hold subprime loans, nor does it hold collateralized debt obligations ('CDOs') or asset-backed securities backed by subprime loans in its securities portfolio."
Even among the banks that were exposed to this mess, there are varying degrees. Wells Fargo (NYSE: WFC ) and US Bancorp (NYSE: USB ) seem to have intelligently limited their exposures so as not to sink their businesses.
Why should they and their shareholders be punished for behaving prudently? And yes, they're suffering from Bernanke's bailouts, just like the rest of us. Keeping the more poorly managed banks from failing makes it much tougher for the companies that should survive to take market share. That directly rewards failure, punishes success, and damages the market's ability to cleanse itself through such bankruptcies.
Third and finally, lost amidst all of Bernanke's heavy-handed government intervention is the fact that, if left alone, the markets still work. If there's still some semblance of real value in a failing institution, someone will step in and buy it, without sticking taxpayers with the risk. Just look at Bank of America (NYSE: BAC ) and its proposed buyout of Countrywide (NYSE: CFC ) . The last time I checked, that offer was made without the Federal Reserve kicking in $30 billion in guarantees.
With the Fed throwing around that kind of cash to guarantee loans, why would anyone risk his own?
The law of unintended consequences
Whether he wants to admit it or not, Bernanke's actions are:
- crowding out private money, thus exacerbating the lending crisis;
- rewarding failure, thus assuring more and bigger shenanigans later; and
- signaling that there are no (immediate) consequences to making bad financial decisions.
That's a long-term disaster unfolding right before our very eyes. Once we get through this mess, the risk/reward trade-off that ultimately governs financial interactions will be forever damaged. In a market economy, the fear of failure and its consequences provides the discipline that keeps risks reasonable and their aftermath contained. If the Federal Reserve keeps bailing out failures, the only limit to the size of the risks will be based on the willingness of people around the world to accept the dollar as currency.
Or in other words, if you think things are bad now, you ain't seen nothing yet.
For further Foolishness: