Greek rescue echoes Bear Stearns, sort of
Is Greece a sovereign version of Bear Stearns? The world had better hope not. But it’s tempting to draw parallels between an incipient Hellenic bailout and the rescue of Wall Street’s biggest outlier.
There are of course huge differences between a smallish investment bank and a Mediterranean state. But the European Union’s challenge is remarkably similar to the one Federal Reserve Chairman Ben Bernanke faced nearly two years ago: how to help out one of its weakest constituents without encouraging moral hazard and further contagion or complacency.
The stakes are far larger in the unfolding Greek drama. While Bear’s $400 billion balance sheet and its cat’s cradle of counter-party relationships put the financial system at risk, getting it wrong in Athens could threaten the stability of the European single currency and the euro zone economy.
So it’s worth recalling some of the mistakes made in the Bear case. In March 2008, the Fed — in concert with the Treasury — agreed to bear the losses on a big chunk of Bear’s assets to facilitate a takeover by JPMorgan Chase, a bank headed by Greek-American Jamie Dimon.
While shareholders were punished, creditors were made whole. Moreover, the Fed also agreed to open its discount window to securities firms for the first time in its history. Taken together, the message clearly on Wall Street was that the consequences of failure were bad, but not that bad.
And so the company most resembling Bear, Lehman Brothers, pursued its options with insufficient urgency until it was too late. Questions about its solvency led to a run on the firm in September. Cognizant of some of the hazards of the Bear Stearns rescue, the government let Lehman go.
This sent a new signal encouraging investors to bet against the rescue of other teetering financial companies, from Merrill Lynch and Citigroup to Morgan Stanley and Goldman Sachs.
Fast forward to the Athens. Greece’s precarious finances have roiled markets for the past week. On Thursday, the EU pledged to take determined and coordinated action to safeguard financial stability.
It’s not clear what that means. And encouraging signals have emerged from some European capitals suggesting any terms imposed on Greece will be sufficiently onerous to deter others from following its footsteps. But one lesson of the Bear bailout is that anything that encourages the sovereign equivalents of Lehman, Merrill or Morgan Stanley — call them Portugal, Ireland and Spain — to prevaricate over the tough fiscal measures necessary to get their financial affairs in order would be a mistake.