In some ways the situations at Bear Stearns and Northern Rock had a lot in common. Both banks had a seemingly good quality asset book, but were heavily reliant on wholesale funding. Both were the subject of a whispering campaign that caused an investor exodus – though in Bear’s case, it was institutional investors clicking a button on a computer, rather than queues of savers standing outside in the rain. And both ended up in serious danger of running out of money before the central bank stepped in.
However, that’s where the comparison ends. Whereas the Fed orchestrated a JP Morgan-led takeover, providing funding and guarantees to push a deal through within 48 hours, the Bank of England let a putative Rock takeover by Lloyds TSB fall by the wayside – because it didn’t want to be seen to be using £30bn of taxpayers’ money to fund a takeover. And then of course there was Mervyn King’s whole ‘moral hazard’ argument: if it bailed out any bank that was going bust, it would just encourage excessive risk-taking.
Admittedly a Lloyds deal would have been politically controversial at the time. But with hindsight, six months of dithering and failed private bids followed eventually by nationalisation probably wasn’t much of an improvement. It certainly didn’t save the UK taxpayer any money.
Of course, the two banks are very different. Bear Stearns is not a regional retail bank – it’s a much larger investment bank at the heart of Wall Street. The consequences of its failure would be much more serious to the US financial system as a whole (in losing investors’ money, in distorting markets and in destroying confidence), which is why the Fed obviously felt radical action was needed.
Not everyone’s convinced that the Fed’s response will be enough to rescue the US system from meltdown – despite the drastic measures of the last few days, it doesn’t seem to have stopped the rot in the financial markets. And the Bear sale saga isn't over yet - it could well drag on for months, as shareholders desperately try to get some of their money back rather than see their bank get flogged to JP Morgan on the cheap.
Still at least the Fed’s taken decisive action, rather than sitting on its hands for six months. Let's hope they come out of this with more credit than King or Alistair Darling, or we'll all be in trouble...