buying a house is not the same as buying a house on fire

During the week of March 10, market rumors swirled that Bear Stearns might not be able to stay in business. At the hearing Alan Schwartz, Bear Stearns's chief executive, said that the firm's balance sheet was strong -- as good as that of any other financial institution -- but that Bear Stearns couldn't keep up with the rumors. By Thursday, March 13, the rumors had become a "self-fulfilling prophecy" and resulted in a "run on the bank," Mr. Schwartz said. Bear Stearns reached out to the regulators, who worked throughout the night. By Friday morning, March 14, the Fed agreed to extend financing to Bear Stearns through J.P. Morgan. Then the firms and government officials worked through the weekend to spur Bear Stearns's sale and prevent a bankruptcy filing. At the hearing, those testifying danced around the question of how the initial $2-per-share price was determined. Mr. Dimon said both Treasury Secretary Henry Paulson and Mr. Geithner were aware that J.P. Morgan was prepared to bid $2 a share. Both men, according to Mr. Dimon, said the decision was J.P. Morgan's to make. However, Mr. Dimon said Mr. Paulson raised the point of view that the higher the price, the higher the possibility of creating moral hazard. Mr. Dimon said the $2 figure was not based on the value of the Bear Stearns, but "was based on protecting the downside" that J.P. Morgan faced. "I tell people that buying a house is not the same as buying a house on fire," he said. Mr. Dimon also disclosed that the Fed has lent Bear Stearns $25 billion -- separate from the $30 billion loan -- under the central bank's new program of direct lending available to major investment banks. Mr. Dimon said J.P. Morgan also guaranteed the $25 billion loan, which was made as part of the renegotiated deal that raised the price for Bear. Fed should have the authority and responsibility "to respond with adequate speed and force to the prospects of systemic threats to financial stability." That echoed a blueprint for a new regulatory system issued Monday by the Treasury Department that called for the Fed to take on a larger role as a risk manager for the financial system.