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Here is my piece [2] on the Bear Stearns debacle that aired on NPR’s All Things Considered. I argue that the government’s role creates a moral hazard problem and creates political pressure for a homeowner/lender bailout as well as raising the probability of increased regulation of investment banks. Arnold [3] disagrees with the moral hazard point:
Bear Stearns was liquidated in a hurry. The market was in the process
of liquidating it and forcing it to sell its assets for less than what
I believe they were worth. I believe that both J.P. Morgan and the
taxpayers are going to make a profit at Bear Stearns’ expense. I don’t
see this as creating moral hazard.
My reasoning is that the government is playing with prices. The Fed and the Treasury originally wanted a price for Bear Stearns of $2 a share to make sure that Bear Stearns execs didn’t make "too much" from the transaction. Then the shareholders balked and JP Morgan agreed to pay $10 a share. But even that price would have been higher if the Fed hadn’t guaranteed $29 billion of the $30 billion in Bear Stearns assets that are in subprime mortgages. So Bear Stearns isn’t paying the full price for its failure.
I assume Arnold is arguing that Bear Stearns is "really" worth more than that but I don’t know how you can know that if no one else seems eager to buy them. One of the stranger parts of this episode is why JP Morgan was given the access to what now appears to have been a sweetheart deal of $2. Would no one else wanted to bid at that rate? Especially now that JP Morgan is still willing to go through with the deal at five times the original price.