Bear Stearns Buyout is Corporate Welfare

Some will rob you with a six-gun; and some with a fountain pen.

It's been said of U.S. economic policy that a rising tide floats all yachts. Last week, J.P. Morgan Chase offered to buy Bear Stearns for a fire-sale price that didn't cover the value of the real estate involved, with the backing of the federal government. This week, J.P. Morgan Chase increased its offer to a whopping $10 per share, after Bear Stearns' employees, who own close to a third of the company, threatened a class action lawsuit.

As part of the deal, the federal government agreed to guarantee $30 billion worth of subprime mortgage debt to facilitate the takeover. BlackRock Financial Management, a for-profit corporation, will handle the mortgages, and the American taxpayer will pay for the rescue with a weakened dollar and higher prices. The proof: treasury bond prices fell with the announcement of the scheme, even while Wall Street rallied.

The reasoning behind all the deal-making and jockeying is that it will prevent millions of Americans from losing their homes and that the collapse of a company like Bear Stearns would rock the market to its foundations. Neither position is entirely true. There were and still are other ways of dealing with the subprime mortgage market problem that do not involve government heroics.

While it is true that millions of people are in danger of losing their homes, it is not true that those who hold the mortgages have to foreclose. People who borrowed too much money on adjustable-rate mortgages and now cannot meet their obligations made bad financial decisions, without a doubt. But the lenders who marketed the mortgages to them without regard to their ability to repay share the blame. While neither borrowers nor lenders are innocent in the situation, the banks are guilty of a short-sightedness that the free market so dear to Americans cannot tolerate.