Fed faces political heat over Bear Stearns deal

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - The U.S. Federal Reserve walked into a political firestorm by pledging $30 billion in taxpayer money to guarantee Bear Stearns' assets while struggling homeowners at the core of the financial crisis default on their mortgages.

To be sure, the central bank could hardly sit idly by while the fifth-largest U.S. investment bank collapsed, potentially dragging down other financial firms with it. But by throwing out a lifeline believed to be the biggest single Fed bailout on record, it opened itself up to some pointed criticism.

"As the Fed rides to the aid of Bear Stearns, there is a growing disconnect between the Bush administration's willingness to help Wall Street and its willingness to aid the homeowners facing foreclosure," said Kurt Eggert, a professor at Chapman University's law school in Orange, California.

"When it comes to reducing foreclosures, the Bush administration has adopted a 'What me worry?' attitude, hoping that the market will fix the problem with some cheerleading by federal regulators," he said.

In an emergency Sunday night move, the Fed not only gave its blessing to JPMorgan Chase & Co's plan to buy Bear Stearns for $2 per share -- a tiny fraction of where it was trading on Friday -- but agreed to $30 billion in funding.

Should Bear Stearns' assets lose value, the Fed -- and therefore U.S. taxpayers -- would be on the hook.

Rep. Ron Paul, the Texas Republican and long-time vocal critic of the Fed, said the latest steps smacked of panic and would pile more pressure on the downtrodden U.S. dollar, inflicting added pain on taxpayers already struggling to cope with rising inflation.

"To me, it's an immoral act. It's deceitful and it's stealing from the people who saved money. It should be unconstitutional because technically they have never been given direct authority to create money of out of thin air," he said in a telephone interview.