Panel Quizzes Bernanke On Financial Crisis

The Financial Crisis Inquiry Commission was established to investigate the causes of the financial crisis. On Thursday, panel members questioned Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corporation Chairman Sheila Bair.

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And I'm Melissa Block.

The financial crisis of 2008 lingers on. We still have subpar economic growth and high unemployment. But today, we heard about one, very big problem that could be changing. The commission appointed by Congress to determine the cause -or causes - of the crisis questioned Federal Reserve Chairman Ben Bernanke and Sheila Bair, the head of the Federal Deposit Insurance Corporation. Together, they made the case that financial institutions considered too big to fail are on their way out.

NPR's Tamara Keith reports.

TAMARA KEITH: Today, the nation's biggest banks are even bigger than they were before the financial crisis. So if one of them got into trouble now, wouldn't the government have to swoop in with another expensive bailout? That's what commission chairman Phil Angelides wanted to know.

Mr. PHIL ANGELIDES (Commission Chairman, Financial Crisis Inquiry): One of the biggest questions that Americans have is, how do we break this cycle? What is the single most important thing that should've been done, and can be done in the future, to break the cycle - the single most important policy action that we can take?

Mr. BEN BERNANKE (Chairman, Federal Reserve): There has to be a credible way to let firms fail, in fact, require that they fail.

KEITH: And Fed Chairman Bernanke said the regulatory overhaul, recently signed by the president, aims to do just that. He said the new rules don't even allow the government to give direct aid to firms, like the Fed and Treasury did during the crisis. Instead, regulators would have to step in and wind the firms down in an orderly fashion.

Mr. BERNANKE: Now, let me just be clear: This is not going to be easy to implement because these are large, complex firms with multinational presence.

ANGELIDES: And significant power.

Mr. BERNANKE: And significant power. But it's a very important step to take away the discretion.

KEITH: The FDIC will be the agency charged with winding firms down. And it's had plenty of practice, with more than a hundred bank failures just this year. Chairwoman Sheila Bair, who testified after Bernanke, said the FDIC plans to have a framework out for resolving very large, systemically important firms in the near future.

Ms. SHEILA BAIR (Chairwoman, Federal Deposit Insurance Corporation): We do think it will be a system that will work better than bankruptcy, and certainly is a much better alternative to bailouts.

KEITH: Once the market comes to understand that big banks really can fail, Bair and Bernanke both expect that these large firms will start getting smaller.

Mr. BERNANKE: My projection is that even without direct intervention by the government, that over time we're going to see some breakups and some reduction in size and complexity of some of these firms as they respond to the incentives created by market pressures - and by regulatory pressures as well.

KEITH: As the hearing wore on, it became clear the commissioners remained unconvinced that too big to fail is truly history. Today's hearing also gave commissioners a chance to ask Chairman Bernanke tough questions about why Lehman Brothers was allowed to fail while other firms were saved. Chairman Bernanke...

Mr. BERNANKE: I never, at any time, wavered in my view that we should do absolutely everything possible to prevent the failure of Lehman.

KEITH: But Bernanke said in the final days, the Fed couldn't lend the firm money because Lehman didn't have enough collateral. And he said even if the government had given Lehman money, it probably would have failed anyway.

Mr. BERNANKE: There was never any discussion which says, here's how we can save Lehman, should we do it or not? We never had a discussion like that. The discussion was: There is no way.

KEITH: This was the commission's final hearing in Washington. Its report is due out in December.

Tamara Keith, NPR News, Washington.

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