Fed and Bear: moral hazard or greater good?

By Ros Krasny - Analysis

CHICAGO (Reuters) - Federal Reserve backing of Monday's higher bid from JPMorgan Chase & Co to buy investment bank Bear Stearns Cos stirred new talk of moral hazard, even as it was cast as part of an ongoing effort to calm financial markets.

Critics argued that the U.S. government is prepared to rescue a failing Wall Street bank while dragging its heels on help for home-owners facing the possibility of foreclosure.

Still, investors pushed U.S. shares to a second straight session of big gains on hopes that the credit crisis, which has pushed the economy to the brink of, or possibly already into, a recession, might have turned a corner.

Recent moves by the Fed, culminating in Monday's revised JPMorgan-Bear Stearns terms, may have prevented other Wall Street firms from heading into a downward spiral, which would only add to the economy's woes.

The Fed has provided "unambiguous evidence" that it is "committed to being creative and aggressive to protect the U.S. financial system," said Robert Barbera, economist at the investment firm ITG in Rye Brook, New York.

JPMorgan agreed to raise its bid for Bear Stearns to $10 a share from the $2 per share terms in the initial agreement announced on March 16.

Still, Bear Stearns shares are down from $80 as recently as the end of February and from over $170 in early 2007, massive losses which to some made the concept of "moral hazard" -- the idea that investors take greater risks believing the government will protect them from losses -- seem spurious.

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