Academic

Streetfighters and Regulation

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

Streetfighters is a tick tock fo teh first step of what Steve Davidoff and I have called government by deal, that is, where the government began to regulate innovatively via transactions.  The Fed never bailed out investment banks before; it did bail out Bear, alieit in a way that involved discount-window eligible JPMorgan. 
What can we learn from the way the Fed did this?

• It was the first shot of "punish the shareholders, bail out the creditors," the paradigm that the Fed and Treasury would return to throughout the crisis.
• It pursued systemic stability through transaction and regular conversation.  They say Americans govern by rule, rather than relationship, but the regulators had close relationships with Bear and JPMorgan - both the Fed and the SEC

Who made these decisions?  Kelly's work is a fascinating look in at the deliberations, and makes it seem like the principles begun by Bear's bailout, and continued thereafter, were Paulson's and Geithner's choices.  Bernanke and Warsh - the Fed governors - were quiet.  But she knows more about the banks than the regulators, only some of whom spilled the beans to her.  Bob Woodward access Kelly does not have ... yet.

Full post as published by Conglomerate on June 16, 2009 (boomark / email).