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If Bear Stearns had been a bank, events during the second week of March should have unfolded quite differently, the US SFRC states and voiced its concern about several aspects of the transaction.
Concerns relate to the use of government resources to finance a private sector acquisition conveys a windfall to an individual institution. Also, the Fed has accepted a wide range of collateral that goes beyond the traditional limits on the credit risk in collateral traditionally honoured by central banks. The perception that the Fed bailed out Bear has heightened political pressure to use the Fed’s resources to support other risky assets.
Finally, the Fed has now evidently extended its safety net protection to all investment banks that are prime dealers. As the Bear example shows, these entities are not subject to prompt corrective action, least-cost resolution, or a sufficiently wide range of resolution alternatives. The most important reform would be to convey to the Fed bridge bank authority for the resolution of systemically important financial institutions.