Bear’s Beatdown: A Run on the Non-Banks?

I wrote here a while back about what has really been happening over the last few months is a run on the shadow banking system, a kind of non-bank bank run. If that’s true, you can see why some are arguing that deposit-taking institutions have been able to find succor in the arms of the Feds, while non-banks — i.e., Bear Stearns — have not had that luxury.

The upshot? You could credibly argue that having allowed loan syndication to wildly expand the  total amount of credit in the U.S. economy, to the benefit, for the most part, of all of us, the non-bank banks were dropped out at the first sign of trouble last summer. By cutting rates and not providing direct support to the brokers, the Fed essentially let the non-bank banks fall on their swords.

Buy any of that? I do, to some extent. The real issue is the backwardness of the monetary and financial regulatory system in the U.S. The current system, with its Fed support for traditional deposit-taking institutions, creates distortions, which is the way things go, but most of them favor the incumbents.

Of course, does that mean the Fed should go around bailing out banks and non-banks alike? Of course not, but then again the current system is uneven in its unfair, market-distorting impact. For crying out loud, at least have the decency to be uneven-handed in an even-handed way.


  1. Paul;
    The traditional way to stop a bank run by the depositors is to throw enough money through the wickets to convince the mob that you are solvent.
    Does this work for a run generated by other banks?
    The Fed’s solution seems to be: take the first couple of customers in line, shoot them and ask if anyone else wants the same.
    At least that is probably how it feels to the shareholders of Bear Stearns. 2 lousy bucks! Just kill me instead!

  2. Frankie Madrone says:

    What separates these entities? Are there different standards they follow, or is one simply privileged at the Fed? The answer is that the banks are more regulated and membership has its privileges.
    The non-bank lenders don’t follow anyone’s rules but their own. Apparently Bear Stearns was not up to responsibly leveraging itself properly. Now someone else will act more responsibly, and America will have one fewer careless, private-banking speculator.

  3. Bear Stearn was more of a hedge fund than a “bank”–the bulk of their revenues and profits came from their “trading” operation. They were simply lucky enough to have entangled counterparties through unregulated derivatives to be considered too big to fail. If the Fed is going to rescue an entity like Bear Stearns–and rescue they did, just ask any lender or bondholder–they have to endure regulation.
    Restrictive leverage ratios, like those imposed on commercial banks, would likely have kept Bear out of this in the first place.