Other banks became hesitant to lend to Bear Stearns. Without cash, it could not operate.

Investors
began to bail out as rumors spread of liquidity problems, and the stock price plummeted. JPMorgan
Chase was interested in buying Bear Stearns to keep it from going under. However, JPMorgan Chase
was getting cold feet after looking at the billions of dollars in mortgage-backed securities in the Bear
Stearns portfolio. U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben
Bernanke had three options:66 1. Let Bear Stearns go under 2. Buy time by infusing cash to finance
Bear Stearns 3. Subsidize the JPMorgan Chase deal The first option was the least attractive, as the
web of relation ships between banks and the vulnerability of the markets made the Fed hesitant to
risk a large bankruptcy if there were other options. JPMorgan Chase eventually paid $10 a share for
Bear Stearns and agreed to eat the first $1 billion in a $30 billion pool of mortgage backed assets the
Fed would take off their hands.67

Federal National Mortgage Association, which became known as Fannie Mae, and Federal Home
Loan Mortgage, better known as Freddie Mac, were companies that guaranteed repayment of mort
gages that were turned into securities. They also built massive port folios of mortgages that they
held. Fannie and Freddie were owned by shareholders and run for profit, but everyone assumed that
they were backed by the U.S. government. In the summer of 2008, losses on mortgage-backed
securities the two companies had guaranteed grew and the share prices dropped by more than
half.68 Falling stock prices made it more difficult for the companies to borrow. Liquidity issues
caused more problems. Foreign investors became worried and asked the Fed if it was going to stand
behind Fannie and Freddie. In September 2008, Treasury would promise up to $100 billion in
taxpayer money to the compa nies. The catch was that the companies would go under government

In the summer of 2008, the market was unstable. Bear Stearns had already gone downandthestreet
waslookingfor whowouldbenext. Lehman Brothers posted a $2.8 billion loss for the second
quarter.70 Short sellers circled like vultures. Since no one was buying Lehman stock, there was
excess supply. Lehman Brothers, like Bear Stearns, Fannie, and Freddie, found it difficult to borrow
once it was per ceived as being in trouble. Investors closed accounts, making prob lems worse. There
were two possible buyers for Lehman Brothers, Bank of America and Barclays. Bank of America,
based in Charlotte, North Carolina, waslookingtomoveintotheinvestmentarenaandcompete with
Citigroup. Barclays, based in London, was interested in the broker dealer business. As the
negotiations with the two parties went on, Bank of America declined to bid, setting its sights instead
on Merrill Lynch. Barclays determined late in the game that it would not be able to do the deal. The
Fed did not step in and rescue Lehman Brothers. Perhaps the reason for not stepping in to help
Lehman Brothers was the heat that it took for helping Bear Stearns land in the lap of JPMorgan Chase
with taxpayer money. Another reason was that the possible buyers went away. Neither buyer really
wanted Lehman Brothers. Bank of America wanted Merrill Lynch and Barclays just wanted parts of
Lehman Brothers. When the Barclays deal fell apart, then president of Lehman Brothers Bart McDade
called CEO Dick Fuld. He told Fuld, “Nobody’s saving us.” Fuld was speechless.71 Lehman Brothers
filed for bankruptcy on September 15, 2008, and on the same day Bank of America announced it
would acquire Merrill Lynch. It must have stung the executives at Lehman Brothers to see their
potential rescuer pulling their rival out of the water instead of them. While the Fed continued to loan
money to LehmanBrothers’ broker dealer business to keep it open, the bankruptcy announcement
caused a huge disruption in the market

Merrill Lynch had massive losses in 2008 of $27.6 billion.73 An nounced on the same day as the
Lehman Brothers bankruptcy, Bank of America chose Merrill Lynch over Lehman Brothers because it
had a higher comfort level with Merrill Lynch than with Lehman Broth ers, specifically with the value
of the marks on the assets.74 Bank of America agreed to purchase Merrill Lynch for $29 per share,
which wasapremiumonthepriceatthetimeof$17pershare.75 Whilethere was plenty of encouragement
from the Fed, there was no taxpayer money to offset toxic assets on Merrill Lynch’s books. The deal
that JPMorgan Chase got with Bear Stearns’ assets, the so-called “Jamie Deal” for JPMorgan Chase
CEO Jamie Dimon, was not likely to be repeated, as there was a more pressing issue on the Fed’s
radar: AIG

U.S. Treasury Secretary Tim Geithner had already been thinking that trying to save companies one at
a time was not the best strategy. Internally, Geithner’s people called the plan “break the glass,” as in
“In Case of Emergency, Break Glass.” He had asked Congress for $700 billion to buy troubled assets
from Wall Street firms and try to stabilize the market. On September 29, 2008, the House of
Representatives voted the bill down, 228 to 205, and the Dow Jones Industrial Average fell 778
points, its largest one-day drop to date.78 It would lose 1,096 points for the week, and another 1,874
the next week for a two-week drop of 2,970 points.79 The house reconsidered a new version of the
bill a week later on October 3. Fifty-seven members changed their votes (33 Democrats and 24
Republicans) and the measure passed. What Congress did not know was that everything it had been
told about what the funds would beused for had changed in the mind of the Treasury Secretary. He
had reconsidered Troubled Asset Relief and was now planning to invest directly in individual banks
rather than buy toxic assets.80 Buying up toxic assets was complicated. As the rapid decline of Bear
Stearns, Fannie Mae, Freddie Mac, and Lehman Brothers had shown, “there was too much room for
fudging the numbers when it came to valuing them.”81 On Sunday October 12, 2008, Geithner
invited the heads of the nine largest banks to appear at Treasury the next day. He would give them
anoffer they couldn’t refuse. The following day each of the nine banks was told to take a capital
injection on generous terms. If they refused the capital, and then asked for capital in the future, the
terms would not be as good. The nine banks were offered the following in a take-it-just-take-it deal:
Citigroup– $25 billion JPMorgan Chase– $25 billion Wells Fargo– $25 billion

TARPfunds as they ultimately got used were meant as a liquidity cushion, so the banks would start
lending again. However, they also gave Congress the right to call Wall Street executives to
Washington to be grilled about excessive pay, incentives that were out of align ment, and possible
regulatory reforms to replace the ones Wall Street had lobbied to remove. Everyone said all the right
things. SoontheTARPrecipientswerepayingbackthemoneytothegov ernment. First to repay was
Goldman Sachs in the summer of 2009, then JPMorgan Chase, Morgan Stanley, Citigroup. As
investigative reporter and author Vicky Ward put it, “...the devil was back in the casino—and was
eager to spin the wheel again.”8
Looking back, what was the policy of the federal government regard ing financial firms that
were too big to fail during the Great Panic? Here is what actually happened: ■ Bear Stearns
was acquired in a deal subsidized by $30 billion in taxpayer money, preventing bankruptcy. ■
Fannie Mae and Freddie Mac were put under government con servatorship. ■ Lehman
Brothers was allowed to go bankrupt. No subsidy was offered to potential merger partners. ■
Merrill Lynch was acquired in a deal with no subsidy. ■ AIGwas nationalized for $183 billion.
■ The top nine banks were given boatloads of money
What we see is that there was no real policy. Investors and cred itors could not be sure what
would happen because the government did something different every time. This only
increased the instability. The main purpose of Too Big to Fail policy is to prevent instability.
Here are the three main reasons given for the government’s Too Big to Fail policy:84 1.
Preventing instability in the banking system from occurring and spilling into the rest of the
economy 2. Protecting uninsured depositors and creditors 3. Protecting credit allocation

Looking back, what was the policy of the federal government regard ing financial firms that
were too big to fail during the Great Panic? Here is what actually happened: ■ Bear Stearns
was acquired in a deal subsidized by $30 billion in taxpayer money, preventing bankruptcy. ■
Fannie Mae and Freddie Mac were put under government con servatorship. ■ Lehman
Brothers was allowed to go bankrupt. No subsidy was offered to potential merger partners. ■
Merrill Lynch was acquired in a deal with no subsidy. ■ AIGwas nationalized for $183 billion.
■ The top nine banks were given boatloads of money
What we see is that there was no real policy. Investors and cred itors could not be sure what
would happen because the government did something different every time. This only
increased the instability. The main purpose of Too Big to Fail policy is to prevent instability.
Here are the three main reasons given for the government’s Too Big to Fail policy:84 1.
Preventing instability in the banking system from occurring and spilling into the rest of the
economy 2. Protecting uninsured depositors and creditors 3. Protecting credit allocation