I believe an important factor in the Fed’s decision to help JP Morgan shore up Bear Stearns is the size of Bear’s prime brokerage business. A lot of hedge funds depend on Bear to support parts or all of their trading through clearing and custodial services and lending. While I am sure that some of them have already made contingency plans or migrated away, there would still have been a huge and unpredictable ripple effect as hedge funds might have been forced to unwind positions or been cut of...

I believe an important factor in the Fed’s decision to help JP Morgan shore up Bear Stearns is the size of Bear’s prime brokerage business. A lot of hedge funds depend on Bear to support parts or all of their trading through clearing and custodial services and lending. While I am sure that some of them have already made contingency plans or migrated away, there would still have been a huge and unpredictable ripple effect as hedge funds might have been forced to unwind positions or been cut of...

In 1970 George Akerlof wrote a seminal paper called “The Market for Lemons” which describes how the market for used cars can seize up if there are enough bad used cars (“lemons”) out there and if prospective buyers can’t tell lemons apart from good cars. In that situation there may be no price low enough for buyers to want to buy a used car and the market goes away. Used cars were simply an example for any market with a strong information asymmetry (this is what Akerlof, Michael Spence and Jo...

In 1970 George Akerlof wrote a seminal paper called “The Market for Lemons” which describes how the market for used cars can seize up if there are enough bad used cars (“lemons”) out there and if prospective buyers can’t tell lemons apart from good cars. In that situation there may be no price low enough for buyers to want to buy a used car and the market goes away. Used cars were simply an example for any market with a strong information asymmetry (this is what Akerlof, Michael Spence and Jo...