Bear Stern's Bailout

This Friday, Fed lent the money to Bear Stern to avoid Bear from falling down disorderly. Was this a right move? Should Fed bail out financial institutions which willingly made subprime mortgage loans and invented complex financial instruments to fool the investors? They knew in advance that these were bad loans, people won't be able to pay them back. And, to fool the investors and avoid the risk, they created CDO and sold it to pension funds, municipalities and other naive investors. Now think about the people who invested their life's earning into securities. Municipality workers who will lose their jobs because of these CDOs. Shouldn't financial institutions be held responsible for this?

I don't know what you think, but in my opinion this certainly is a bad move by Fed. Why? Because this tells investors that financial institutions instead of getting punished for such actions, get bailed out. There is no punishment for cheating investors. As an investor I will not trust any of the future complex financial instruments banks come out with. Though those instruments might be good. But what's the guarantee that they are good? And if they are bad who is gonna suffer? Bank or me? Obviously based on what is happening right now, I will assume that it will be me, not the guy who told me that this instrument was as secure as Treasury Security and provides me higher return.

In my opinion Fed should not bail out Bear Stern or any other financial institution. It is a free market and there is a direct relationship between risk and reward. Also, financial institutions needs to be held responsible for their action. People invest their hard earned money with banks and they need to feel secure that banks are not lending it to someone who can not pay it back. This will be a lesson for all other financial institutions that if they do not act responsibly, they will no longer exist. Before inventing complex instruments to fool the investors, they need to think not twice but at least ten time.

If you read this post, drop your comments. I would like to read your thoughts.

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