03/25/2008 11:06 am ET Updated May 25, 2011

Ben Bernanke and Hank Paulson: Market Puppeteers

Read between the lines of the Bear Stearns-JP Morgan story and it seems clear that the parties who insisted on the original $2 deal price were not JP Morgan (JPM) executives but Secretary of the Treasury Hank Paulson and Fed Chairman Ben Bernanke. Dimon is scurrying away from the $2 price as fast as he can. The Fed has denied that it insisted on the $2 price, but Treasury (and Hank Paulson) have not.

Andrew Ross Sorkin reports:

There's been a lot of debate about the price that JPMorgan originally offered for Bear -- a price that even Jamie Dimon, JPMorgan's chief executive, suggested on Monday was unfairly low... So where did the guidance for that price come from? You guessed it. Ben S. Bernanke, the Fed chairman, and his teammate, Henry M. Paulson Jr., Treasury secretary, were calling the audibles in the boardroom. Timothy F. Geithner, the president of the Federal Reserve of New York, also was calling some last-minute plays.

Why would the Fed/Treasury want a $2 takeout price? So they could argue that they hadn't orchestrated a bailout of Wall Street fat cats while ignoring the cries of the nation's anguished homeowners.

Bear Stearns shareholders, not surprisingly, have cried bloody murder at this, but they shouldn't: If not for the Fed and Treasury, their shares would have been worth zero. Everyone else, however, should pause for a moment and consider whether we really want our Fed and Treasury chiefs playing investment banker.

By late last week, a consensus was emerging that Ben Bernanke's bold, brilliant move saved the world. I actually think it just set a lousy precedent. As a taxpayer, I'm not crazy about risking $30 billion of Fed money to transform Bear Stearns' crappy mortgage portfolio into a Treasury bill. And I'm really not crazy about the idea of Hank Paulson and Ben Bernanke telling JP Morgan what it should pay for Bear Stearns.

We're in unusual territory here, so perhaps major intervention is warranted. Unless/until someone persuades me otherwise, however, I think the government should have just let Bear Stearns fail.