The Fed’s actions forestalled what might have been a disruptive and chaotic bankruptcy. But the inducements that J.P. Morgan had extracted were debatable, to say the least. Paul Volcker, the legendary ex-chairman of the Fed, would characterize them as extending “to the very edge of its lawful and implied powers.”16 Strict advocates of moral hazard logic would forever after argue that it was the Bear rescue that set up the Lehman disaster.17 With one investment bank having been rescued, Lehman’s management felt safe. A solution for their problems would be found too. They could afford to take
...more
