Congress Hears Justification for Bear Stearns Action

Federal Reserve chief Ben Bernanke and Treasury Undersecretary Robert Steel tell the Senate Banking Committee on Thursday that the fear of widespread financial meltdown justified their actions in the Bear Stearns takeover. Lawmakers say they're concerned about potential costs to taxpayers.

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MICHELE NORRIS, host:

Federal Reserve Chairman Ben Bernanke was back on Capitol Hill today. He was defending the Fed's recent rescue of investment bank Bear Stearns. He was joined by several other main players in that deal. They all testified before the Senate Banking Committee. They included the heads of Bear Stearns and the company that acquired it, JPMorgan Chase.

NPR's Jim Zarroli has been following the story. He joins us now. Jim, why did the committee want to hear about this deal today?

JIM ZARROLI: Well, basically because this deal set a very big precedent for the Federal Reserve. The Fed not only helped engineer the acquisition, it also agreed to back some of Bear Stearns bad mortgage debt. And perhaps more important is it has extended credit to other non-banks.

So, I think the senators had questions like, you know, why was the Fed bailing out a big Wall Street investment bank. What kind of precedent does it set? What kind of exposure is there for taxpayers?

NORRIS: So, a lot of questions. Did we learn anything new about the deal itself?

ZARROLI: Well, I think the hearing really drove home how close to the edge Bear was. Alan Schwartz, the CEO of Bear, testified about how the bank had faced sudden liquidity crisis on March 13th. There were rumors that firm was in trouble. He said they were unfounded but — they were unfounded, but investors were pulling their money out. And there was a real risk of bankruptcy. So, the Fed agreed to step in and make cash available, but that was really only short term.

So, everybody spent the weekend trying to find another firm to acquire Bear Stearns. The only one that stepped forward was JPMorgan Chase. But Chase was - JPMorgan Chase was understandably nervous about taking on Bear's problems and spent the weekend trying to decide what to do.

Here was JPMorgan's CEO Jaime Dimon.

Mr. JAIME DIMON (Chief Executive Officer, JP Morgan Chase): By Sunday morning, we have concluded the risks were too great for us to buy the company entirely on our own. We informed the New York Fed, Treasury and the Bear Stearns of our conclusion. This wasn't a negotiating posture, it was the plain truth.

ZARROLI: So, Dimon said he went to Federal Reserve and he said, you know, the -we want to go through with this, but the only way we can is if you agree to back $30 billion in Bear Stearns bad debt so we won't lose money. And that's what the Fed ultimately agreed to do.

NORRIS: So, how did Ben Bernanke and Jaime Dimon and the others respond to this criticism about the Fed's decision to help out Bear Stearns?

ZARROLI: Well, they were all asked, you know, sometimes sharp questions like, you know, why was the Fed taking chances like this with taxpayer money? Why is it rushing to help a big Wall Street firm when it's not rushing in to help all those homeowners out there with mortgage problems right now who are facing foreclosures? And they all said the same thing. This wasn't about helping Bear Stearns, it was about protecting the broader economy. If Bear Stearns had been allowed to go bankrupt, it just would have been a huge disaster at a time when the economy is already weakening. It would just been devastating to people's confidence in the economy.

Here was Fed Chairman Ben Bernanke.

Mr. BEN BERNANKE (Chairman, Federal Reserve): Given the exceptional pressures on the global economy and financial system, the damage caused by default by Bear Stearns could have been severe and extremely difficult to contain.

ZARROLI: Bernanke was asked at one point by New Jersey Senator Robert Menendez to try to quantify how much taxpayers were on the hook for, and he said he didn't know. You know, the Fed had guaranteed about $30 billion, but he said he didn't think the Fed would lose much money if any at all. It had cherry picked through Bear's securities to collect the best ones and was holding them as collateral.

Bernanke was also quick to point out that, you know, this wasn't a bailout. Bear's shareholders had lost huge amounts of money, and it's unlikely that any Wall Street firm out there wants to have the same thing happen to it that happened to Bear Stearns.

NORRIS: Thank you, Jim.

ZARROLI: You're welcome.

NORRIS: That was NPR's Jim Zarroli.

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