Learning from the Bear Stearns deal
The Federal Reserve is reluctant to support a Bear Stearns increase in share price because it doesn't want the deal to be viewed as a bail-out. Fortune Magazine's Allan Sloan outlines how the Fed can exact a price on the situation.
Allan Sloan is a senior editor-at-large at Fortune (APM)
TEXT OF INTERVIEW
Scott Jagow: There's a report this morning that JP Morgan might increase its offer for Bear Stearns. Perhaps from $2 a share to $10. The New York Times says JP Morgan wants the support of Bear Stearns shareholders and employees. But the Federal Reserve, which is backing the deal, could be resistant to a price increase. The Fed doesn't want people seeing this as an investor bail-out.
So, Allan Sloan from Fortune Magazine, how do you see the Bear Stearns deal?
Allan Sloan: I am not pleased. OK, you see all these mid-level people at the Beard getting killed. Just like I'm not pleased to see a lot of these small mortgage companies, many of which have done nothing wrong, they just get wiped out and their employees end up with nothing. And the people who enabled a lot of this, who are the high-price people on Wall Street, they may take a financial hit, but believe me, they're not gonna starve. This is a result of the way the Fed and the Treasury have chosen to operate, and maybe they have to operate that way. Because if you can show me an alternate way to save the financial system from massive defaults around the world, I'd love to know what it is.
Jagow: Do you think the situation would be different if this were another industry -- say, the auto industry -- and the government was stepping in? Do you think the attitude towards this would be different?
Sloan: Well, the government a billion years ago stepped in and saved Chrysler, and I thought that was an intelligent thing to do. And the government ended up making money in the deal, because it guaranteed some loans. Chrysler prospered, at least for awhile, paid back the loans and the government made a few hundred million dollars. I don't think in this environment, if say, General Motors were collapsing, or Ford, or . . . I don't think the government would step in and help them. The thing with the financial system is it's so inter-related that people are afraid to let a real big institution fail, because you run a risk of taking down the whole world's financial system.
Jagow: How do you think that the Fed could exact a price in this situation so that it doesn't happen again?
Sloan: By doing two things. One, enforcing some sort of penalty on the top people and really hitting them badly financially as a condition of the bail-out, making them make serious personal sacrifices financially. And second, if we're gonna put capitol into this bank, which we're doing, I'd like to see a structure where we the taxpayers get a piece of the company, so when it recovers we get rewarded for the money that we've put in at a time when they really needed it.
Jagow: All right, Allan Sloan from Fortune Magazine. Thanks.
Sloan: You're welcome.
