THE INVESTMENT BANKING industry as we knew it is no more. Change has been inevitable ever since the Bush administration and the Federal Reserve Board decided to use taxpayer money to back J.P. Morgan Chase’s takeover of Bear Stearns. R.I.P. the deregulatory trend that has dominated policy towards America’s financial institutions. Enter the lawyers, regulators, and politicians to reshape the nation’s financial markets.
Investment bankers might moan, but when they created a system rife with conflicts of interest and too few incentives to good performance, followed by acceptance of billions of taxpayer money, they sold their deregulated birthright. When Fed chairman Ben Bernanke received permission from the White House and Treasury Secretary Hank Paulson to take almost $30 billion of Bear Stearns’ paper onto the Federal Reserve Banks’ balance sheet–and to open the discount window to other investment banks, to use the jargon of the trade–it put the taxpayer at risk. If the IOUs on Bear’s books prove worthless, the taxpayer will have to bear the loss–J.P. Morgan has agreed to shoulder only $1 billion of the $30 billion of risk now transferred to the Fed’s books.
