Jack Yetiv

How Systemically Important Is Bear Stearns?

I am no "credit crunch" expert, but I think the issue of whether the Fed should have bailed out Bear is quite a bit simpler than perhaps first meets the eye.

Clearly, there is a difference of opinion as to whether a Bear crash might have led to a financial market crash. I happen to be of the opinion that there was a very real chance that the contagion effect would have led to a significant system crash.

But I don't think the Fed really had to weigh whether the likelihood of contagion from a Bear crash was 20% or 80%. I think the Fed had to answer a simpler question: Is there a reasonable chance(say, greater than 5%) that the contagion effect could have brought the financial system to its knees?

If the answer was YES, they simply could not have afforded to take that chance by failing to do a bail-out.

I think the answer was, indeed, YES.

Jack Yetiv