West Palm Beach (HedgeCo.Net) – “Who let our financial system become so fragile that one failure jeopardizes the health of the entire system?”
That was the question that republican Senator Jim Bunning asked at a hearing yesterday to determine whether or not the Fed was justified in providing up to $30 billion to facilitate the purchase of Bear Stearns by JP Morgan.
“Given the exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain,” Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee.
Democrats on the Committee were anxious to find out whether or not the Bush administration had put any inside pressures on the Fed to close the deal and facilitate the sale. They also pondered why large investment banks were getting such preferential treatment when millions of Americans are defaulting on their mortgages and in danger of losing their homes.
“Was this a justified rescue to prevent a systemic collapse of financial markets or a $30 billion taxpayer bailout for a Wall Street firm while people on Main Street struggle to pay their mortgages?” Senate Banking Committee chairman Chris Dodd asked.
Dodd plans on delving deeper into the weekend of March 15-16, when the Fed worked a never before seen weekend shift to “stabilize our markets, to infuse them with liquidity and to prevent additional firms from being swept under the riptide of panic that threatened to have taken hold.”
Bernanke went on to say that Bears failure would lead to a “chaotic unwinding” of Bear Stearns investments held by many individuals and other financial institutions. Furthermore, it would have been felt in the economy through the effects on asset values and credit availability.
Treasure Undersecretary Robert Steel defended Bernanke and the Fed’s decision saying that “the failure of a firm that was connected to so many corners of our market would have caused financial disruptions beyond Wall Street.”
Steel and Bernanke testified on a panel that also included chairman of the SEC Christopher Cox and Timothy Geithner, head of the Fed’s New York Regional Bank.
Geithner also agreed with the Fed’s action stating that they“have helped avert substantial damage to the economy, and they have brought a measure of tentative calm to global financial markets.” Saying that capital markets are “substantially impaired,” Geithner recommended that policymakers “act forcefully” to combat the crisis.
Bernanke does not consider the purchase of Bear Stearns as a bailout, nor does he think the Fed will lose money. Bear’s $30 billion portfolio has been handed over to BlackRock to manage.
Julie Scuderi
Senior Editor for HedgeCo.Net
Email: [email protected]
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