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Ben Bernanke Is Destroying Our Financial System

Chuck Saletta
March 20, 2008

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 marke