Question

The Federal Reserve provided a loan to finance J. P. Morgan's purchase of Bear Stearns because Bear Stearns was too: A. interconnected with other banks to let fail. B. important to the check clearing process to let fail. C. large of a holder of U.S. Treasury deposits. D. big to let fail.

Answer 1

Answer:

D) big to let fail.

Explanation:

Once JP Morgan decided to purchase Bear Stearns, the FED agreed to offer JP  Morgan a $29 billion credit line against an estimated $30 billion worth of mortgage related assets owned by Bear Stearns.

This was a political decision since the collateral was not really worth $30 billion, a lot of it were just junk securities. But Bear Stearns was viewed as too big to fail, which means that its bankruptcy could cause a ripple effect that could damage the whole economy.

Actually the whole economy was damaged, although those who supported the idea of giving more money to those who ruined you, say that the damage would have been worse if the bailouts hadn't occurred.