Bernanke Will Take Your Shares to Zero

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Most people hovered around one little snippet of Federal Reserve Chairman Ben Bernanke's speech last week: "[This is] one of the most challenging economic and policy environments in memory."

Duh. Thanks for the news flash.

Here's some new information pulled up from ol' Ben's speech that should make holders of questionable financial stocks think twice about the Fed's role in the future.

No more Gentle Ben
Bernanke acknowledged what so many people griped over after Bear Stearns' bailout in March: the "moral hazard" dilemma of giving other firms the perception of being "too big to fail." As Bernanke put it, "[I]f no countervailing actions are taken, what would be perceived as an implicit expansion of the safety net could exacerbate the problem of 'too big to fail,' possibly resulting in excessive risk-taking and yet greater systemic risk in the future."

Amen, brother. Give firms like Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), and Lehman Brothers (NYSE: LEH) even the slightest inkling of a get-out-of-jail-free card, and they're sure to run with it. And since so many of these firms are joined at the hip, best to let them know Helicopter Ben has no intention of becoming Handout Ben. At least during this career.

So how does he plan on quelling the moral hazard issue? By taking common shareholders to the cleaners when necessary while still preventing the risk of systemic shock to the financial system.

He didn't give any firm plans (total shock: these guys never beat around the bush), but Bernanke's plan seems to propose giving the Treasury Department authority to intervene in cases where Bear Stearns-type banks border on failure, providing what's needed to keep vital assets and operations alive while not giving two thoughts about common shareholders.

Again, quoting Bernanke, "A statutory resolution regime for nonbanks, besides reducing uncertainty, would also limit moral hazard by allowing the government to resolve failing firms in a way that is orderly but also wipes out equity holders ..."

Sound familiar? This is similar to the type of bailout some speculate would be granted to Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM), should the need arise.

This should all be viewed as good news. Bernanke and Co. appear to be attempting to protect the economy from a financial catastrophe while reminding shareholders they aren't the ones who are too big to fail.

Related Foolishness:

• Value Investing Has Failed
• Too Big to Fail, Too Big to Bail
• A Stealth Lehman Bailout?
• Stop Bernanke From Swiping Your Savings