Remember the ironically named Long Term Capital Management and what happened in 1998? Bunch of big daddy bond traders and ivy league egg heads joined up and wrote a formula for making billions in arbitraging markets without ANY risk. Their formula, they thought, so balanced the risk and liquidity of their portfolio that nothing could hurt them. They got so big, they influenced the investment patterns of other firms on the street. But they only took into account known risks. They hadn't planned on Russia defaulting on its debt and drastically devaluing the ruble. Took apart their whole house of cards. The entire street took a flight to quality. The fund that had been leveraged into the trillion dollar level got an offer from Buffet and a couple of big house to buy them for about $250million. They turned it down. Finally the Federal Reserve bailed them out.
They shouldn't bail them out again. Let the boys who played this dangerous game take the punishment. It's the only way people ever really learn the lesson that there is nothing that is guaranteed. Nothing.
The direct bailout is not the biggest problem. The problem back in 1998 was not the few billion it cost to bail out LTCM, although that did create moral hazards which are biting us now. The bigger problem was Greenspan lowering rates to inject liquidity. The problem is that the liquidity does the wrong things, sends the wrong messages. The Nasdaq took off and that made the 2000 crash much worse. The other thing that started in earnest in 1998 was adjustable rate subprime mortagage securities. Bear's stupidity was driven by the stupidity of injecting liquidity in 1987, 1990's, 2002/3, and as we speak.