Fed unfair treatment to Wall Street firms

While numerous Wall Street firms have gotten in trouble over the years, the response from Fed has varied widely. For most of the 20th century, "it wasn't thought to be part of public policy" for the government to step in and support or rescue ailing financial firms, says Roy Smith, a finance professor at New York University business school and himself a former Goldman partner. Indeed, after the stock market crash of 1929 and the ensuing depression, "the Wall Street firms didn't have many friends when they got into trouble." In 1970, Goodbody & Co., then the fourth largest U.S. brokerage, got into trouble from a market downturn and trade-processing delays. The New York Stock Exchange stepped in to sponsor an acquisition by Merrill Lynch & Co., indemnifying Merrill for some of its costs. The most prominent casualty of the 1987 stock-market crash was E.F. Hutton & Co., which suffered crippling losses on top of a damaging check-kiting scandal two years earlier. Hutton was able to arrange a rescue acquisition on its own with the Shearson Lehman Brothers unit of American Express Co. that December. The biggest precedent for a government-sponsored rescue occurred in 1998. That's when the Federal Reserve gathered Wall Street chief executives in its august meeting rooms to pony up enough capital to prop up giant hedge fund Long Term Capital. The move prevented a fire sale of roughly $100 billion in assets. Bear made some enemies on Wall Street by refusing to participate in this $3.6 billion rescue. But some firms are left to fail without aid. In 2005, commodities powerhouse Refco Inc. sought bankruptcy-law protection after questions emerged about its accounting only months after its initial public offering. Bear's own recent need for government support is ironic, says Wall Street money manager Michael Holland, because "they were a firm that was always known for doing the smart, risk-averse thing, take advantage of the opportunity and don't ever get blown up."