The WSJ ended a 3-part series on the demise of Bear Stearns with a discussion of the buyout engineered by the Fed. It poses the issue confronting the Fed in engineering the buyout and the guarantees to other investment banks and their creditors as one of creating moral hazard versus financial collapse.
These were not the only choices. The Fed could have imposed conditions for its assistance. For example, it could have limited its guarantees and access to the discount window to investment banks that capped executive compensation at $2 million a year. This would have meant that taxpayers would not have to directly subsidize the incomes of the richest people in the country, as they are now doing as a result of the Fed's actions.
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