Discussion-week#2 As you may have read, in 2008, the U.S. Federal Reserve Bank (

Question

Discussion-week#2 As you may have read, in 2008, the U.S. Federal Reserve Bank (The Fed), fearing the financial collapse of Bear Stearns, a major investment firm, engineered its sale to another Wall Street firm. In order to facilitate the sale, The Fed, guaranteed the value of almost $30 billion worth of Bear Stearns investments, much of which were based on questionable real estate loans. Many of those who questioned the appropriateness of the Fed's actions asked why it chose to "bail out" a large investment bank, at the possible expense of U.S. taxpayers? At the same time, others asked why the Fed had not instead chosen to guarantee $30 billion of home mortgage loans of individual homeowners facing foreclosure on their sub prime home loans? What ethical reasons would you give for choosing to bail r Bear Stearns over individual homeowners? Does ethics even enter into it? Is this simply a business decision with no ethical ramifications to it at all? What do you think?

Explanation / Answer

The Bear Stearns Companies Inc. was a New York based global investment bank, brokerage firm and security trading firm that failed in year 2008 due to global recession. It’s main business areas were financial services, investment banking, capital markets, wealth management.

Bailing out to failing a global investment bank may form an opinion that if any investment bank which is going to fail in market they may get bailout package from authorities. But the decision to provide a bailout package to firm may depend on the situation at that point of time by taking it’s aftermath into consideration. A collapse of big investment bank may shatter investor’s confidence in financial markets. It also may cause lasting damage to the country’s economy.

Let’s think that if Bear Stearns was not given a bailout package and then they would have filed bankruptcy because of non-provision of bailout. Then it would have more costly to the country’s economy as it would have led to higher borrowing costs.

Seems such bailout given to Bear Stearns may have given by taking into consideration points like prevention of systemic collapse of financial markets, protection of country’s economy and financial system.

Therefore, before providing a bailout package to a failing big financial institution the concerned authorities may think of it’s effect on economy, investor’s confidence in financial markets and accordingly a decision would be made.

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