Bear Stearns rescue doesn't sit well with some critics

WASHINGTON -- The Federal Reserve's intervention on behalf of Bear Stearns Cos. was intended to ease fallout from the credit crunch, but some experts fear it augurs more government bailouts as the crisis worsens.

The move also reignited debate Friday about how big a role the central bank should play.

Several banking experts were dubious about the Fed's plan to save Bear Stearns, saying it sets a bad precedent at a time when other investment banks could wind up in similar trouble due to bad mortgage-linked investments.

"There's a limit to how many of these entities they can bail out," said Franklin Allen, a finance professor at the University of Pennsylvania's Wharton School.

If the Fed bailout fails, taxpayers would wind up being on the hook, said Lawrence White, an economics professor at New York University's Stern School of Business.

"I know things are a little dicey out there, but we can't have the Fed going around protecting everybody in sight," White said. "You take risks and you lose, you're supposed to be shown the door, and these guys are not being shown the door."

Federal Reserve officials likely were worried about a domino effect if Bear Stearns were to fall into bankruptcy, leaving other companies who have lent money to the investment bank in the lurch. That could cause a chain reaction, potentially threatening the financial system.

Joseph Mason, a finance professor at Drexel University, had little sympathy for Bear Stearns.

"Once an institution is insolvent, the only responsible thing to do is to unwind it in an orderly fashion," Mason said. "It's not a business enterprise worth saving."

"It is the first bailout of an investment bank by the Fed," said Charles Geisst, a Wall Street historian and finance professor at Manhattan College. By contrast, investment bank Drexel Burnham Lambert Inc. was allowed to fall into bankruptcy in 1990.