The markets were thrilled by J.P. Morgan’s quintupling (to $10 a share) its offer for Bear Stearns. But does this not make the whole operation, from a public-policy point of view, look like even more of a shambles? The Fed explained that its $30 billion of support for J.P. Morgan, secured against Bear’s most dubious assets, was not a bail-out because Bear’s shareholders were being wiped out. Well, now they aren’t being wiped out. The more general point is this: having secured Fed support for its purchase of Bear, is it now entirely a matter for J.P. Morgan how much it pays for the bank? (The Fed has apparently participated in the revised offer. The terms of its support have been adjusted: it is no longer standing behind the first $1 billion of Bear’s impaired assets.) Was the Fed’s support for the deal in the first place conditional on the price J.P. Morgan was going to pay, or not? To say that the authorities are making this up as they go along is putting it mildly.

I agree with Lex’s take:

Where does this leave the Fed? Outwardly better off. Under the new deal, JP Morgan guarantees the first $1bn of losses on the $30bn of illiquid Bear assets the Fed originally took on. But it also means that the Fed loses its sacrificial Bear. Its intervention has given shareholders $10 a share instead of zero. (Lehman shareholders did even better from the Fed. Lehman’s shares soared from their lows in large part because its future was guaranteed by the Fed’s decision to give investment banks access to the discount window.)

Moral hazard is returning to the fore. When the smoke clears, the Fed must get its pound of flesh by regulating Wall Street, and doing it more aggressively, to make sure this never happens again.