Moral hazard occurs whenever the government has to bailout multiple companies due to systemic risk (Thoma, 2008). Bear Sterns path to wealth was to make massive investments in subprime mortgages then bundle them into securities, then sell them to investors. As a result, Bear Sterns were overwhelmed with billions of dollars in toxic investments that they borrowed heavily to invest in. Furthermore, Bear Sterns was also involved in billions of dollars’ worth of credit default swaps on Wall Street and worldwide (Kirk, 2009). Due to their toxic investments, Bear Sterns needed help to satisfy their investments and credit swaps or their company was headed for …show more content…
In the governmental Hippocratic Oath, it is ideal to leave markets to work their magic, but if they have to intervene, they try to do as little as necessary (Thoma, 2008). Unfortunately, because of Bear Sterns unethical practices, Bernanke of the Federal Reserve Bank had to become involved since systemic risk in the market was foreseeable. The term “too big to fail” is used when systemic risk is involved. Its definition is to save the financial institutions from their own mistakes with taxpayer’s money (Moosa, 2010). Due to the premise of TBTF, Bernanke and Paulson forced JP Morgan Chase to take a deal worth $30 billion to cover Bear Sterns toxic assets. In the months to follow, the government was feeling the pressure of systemic risk, as they repeatedly perpetuated moral hazard as they bailed out one bank, let another one fail, and nationalized three of the nation’s largest companies, while watching the credit market come to a standstill. As a last ditch effort, Bernanke implied that the government must do a full scale bail-out of the nation’s financial system and shell out $700 billion to buy up all the toxic mortgage securities therefore allowing moral hazard to again be the only resort. The bail-out package passed with a proviso, capital injection. Even though Paulson was against moral hazard and injecting money into