The Three Magi of the Meltdown

By WILLIAM D. COHAN
NYT

Just because hindsight is 20/20 doesn’t mean we shouldn’t occasionally avail ourselves of it. The upcoming second-year anniversary of the collapse of Bear Stearns provides just such an opportunity to look back with a degree of analytical wisdom not available at the time of the firm’s shocking demise in March 2008.

The new, inescapable conclusion — thanks to the passage of time, of course — is that Wall Street and Main Street would be better off today had the power troika of Henry Paulson, Ben Bernanke and Tim Geithner (at the time, Treasury secretary, Federal Reserve chairman and president of the New York Federal Reserve, respectively) let the 85-year-old firm fail outright instead of crafting their clever rescue.

Had Paulson, Bernanke and Geithner handled Bear Stearns differently two years ago, we might have avoided Tarp, 10 percent unemployment and the Great Recession.

By arranging for Bear’s shareholders to get a tip — it turned out to be $10 a share in JPMorganChase stock at the time (worth around $9 a share these days, based on JPMorgan’s recent stock price) — and for Bear’s creditors to get 100 cents on the dollar for what was a bankrupt company (where creditors would likely fight for years over the carcass), these three men single-handedly sent to the market a powerful message it would all too quickly misinterpret, much to our collective peril: For the first time in the history of American capitalism, the federal government would not let a big Wall Street securities firm fail.

As painful as it may have been at that time, the Committee to Save the World, Version 2.0, could have just as easily sent a very different message, one sent to the shareholders and creditors of poorly managed companies all the time: Too bad.

You took risks you didn’t understand? Got too greedy? Took your eye off the ball? Kept in place executives and their cronies on the board of directors who should have retired or been replaced years earlier? Well, then, you are about to learn the valuable lesson of American capitalism and what it means to take stupid risks with other people’s money. You will lose your investments, your jobs and your company. Sorry about that. Stuff happens. The market understands that message loud and clear.

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