Bear Stearns Coverage Examined

By Reynolds Center Staff
March 17, 2008 02:42 PM

The nation’s business press coverage of the sale of venerable Wall Street firm Bear Stearns offered insightful reports on a complex subject. Some of the best reporting took the time to explain why the near collapse could have broad ramifications.

A BusinessWeek article by Matthew Goldstein and published on its web site explained why it would have been too risky for the Federal Reserve and U.S. Treasury Department not to get involved in helping Bear stave off bankruptcy.

“It would have been highly risky for other Wall Street firms if Bear Stearns had been allowed to go under because they are tightly interconnected with Bear as both borrowers and lenders,” he wrote. “Any firms that are owed a lot of money by Bear would have fallen under suspicion, on grounds that they might not be able to pay their own debts if Bear failed to pay them. That could have triggered a dangerous wave of defaults.”

That kind of reporting helps readers contextualize the story rather than simply view it as another Wall Street investment firm getting kid glove treatment from the government.

In fact, a Forbes story by Liz Moyer and Mitchell Martin highlighted the Federal Reserve actions.

“While JPMorgan was raiding its petty cash to buy Bear, the Federal Reserve took the highly unusual move of cutting the discount rate, charged on loans to banks, on a Sunday,” they wrote. “Not only did it act over the weekend, but it cut just two days before a regularly scheduled meeting at which it was widely expected to reduce the discount and the more important federal funds rates, probably by three-quarters of a percentage point each.”

In an opinion column, New York Times op ed columnist Paul Krugman said a taxpayer financed bailout of future faltering firms is the next logical step even as he pointed out Bear Stearns did not deserve to be bailed out.

“Bear was a major promoter of the most questionable subprime lenders,” he wrote. “It lured customers into two of its own hedge funds that were among the first to go bust in the current crisis. And it’s a bad financial citizen: the last time the Fed tried to contain a financial crisis, after the collapse of Long-Term Capital Management in 1998, Bear refused to participate in the rescue operation.”

“Bear, in other words, deserved to be allowed to fail — both on the merits and to teach Wall Street not to expect someone else to clean up its messes,” he wrote.

The New York Times front-page article by Andrew Ross Sorkin took time to explore JPMorgan’s role, particularly the actions of CEO Jamie Dimon.

“The deal is a major coup for Mr. Dimon, who slept only a handful of hours over the weekend while negotiating with Bear and government officials,” Sorkin wrote. “Over the last few years, he has focused intensely on cutting costs, improving technology and integrating JPMorgan’s disparate operations. But he also has been adamant about preparing the company for an economic downturn.”

A MarketWatch story by Alistair Barr and Greg Morcroft sought to point out how a “crisis of confidence” could spread to other investment banks.

“A crisis of confidence does not benefit any of the industry participants,” they quoted from an analyst report sent out on Sunday night. “No firm that is reliant on the secured funding marketplace and short-term borrowings is immune to a crisis of confidence.”

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Copyright © 2008 Donald W. Reynolds National Center for Business Journalism