Federal Reserve Chairman Ben Bernanke on Wednesday defended the central bank’s unprecedented intervention to save investment bank Bear Stearns from bankruptcy, rejecting Democratic claims that the Bush administration stands ready to throw a lifeline to Wall Street but not to ordinary homeowners suffering from the housing bust.
there’s sort of a false dichotomy here,” Bernanke testified before the Joint Economic Committee. “We did not bail out Bear Stearns. Bear Stearns’s shareholders took a very significant loss. An 85-year-old company lost its
independence and became acquired by another firm.”
He argued that the public’s best interests were foremost in his mind when he moved to save the bank from collapse. “That’s why we took that action, and I believe that was the benefit of that action — not to help individual Wall Street people.”
The hearing marked Bernanke’s first public remarks since the Fed facilitated a fire sale of the faltering investment bank to rival JP Morgan Chase over the weekend of March 15 by agreeing to back $29 billion worth of Bear Stearns’s assets that were mostly tied to mortgages. The Fed also decided that weekend to open its discount window — which has traditionally provided short-term funding only to deposit-holding institutions — to investment banks as well.
Aside from one exchange in which Sen. Edward Kennedy (D-Mass.) angrily grilled Bernanke over the need to boost funds to states to ease their financial problems, the lawmakers maintained a civil tone throughout and did not appear to second-guess the Fed’s action.
But Democratic lawmakers repeatedly probed Bernanke on whether the move justified bolder steps by the federal government to help homeowners at risk of foreclosure.
“If we’re going to be a federal backstop
to the financial institutions, should not we also be there as a financial backstop to these people that are losing their homes?” asked Rep. Carolyn Maloney (D-N.Y.), who heads the House Financial Services Committee’s sub-panel on financial institutions.
Meanwhile, Sen. Sam Brownback (R-Kan.) echoed the concerns of some conservatives in Congress that the Fed’s move has recklessly exposed taxpayers and may prompt other private firms to believe the government will bail them out should their investments sour.
“I am concerned when the taxpayer’s money becomes the ‘skin in the game’ to rescue supposedly sophisticated investment and commercial banks from their own poor decision-making,” he said in prepared remarks.
Bernanke did not rule out stepping in again to prop up another institution to remove a threat to the financial system, but he said he hoped he would not have to do so. Extending a $30 billion credit line to smooth the sale of Bear Stearns “was an extraordinary thing to do,” he said. “I thought about it
long and hard. I would hope not to ever do it again.”
The Senate Banking Committee on Thursday will hear testimony on the sale of Bear Stearns from the key players who negotiated it, including Bernanke; Timothy Geithner, the president of the New York Federal Reserve; and the chief executives of Bear Stearns and JP Morgan Chase, Alan D. Schwartz and James Dimon. Treasury Undersecretary Robert Steel and Securities and Exchange Commission Chairman Chris Cox will also testify.
Bernanke gave a bleaker assessment of the economy than he has in recent appearances on Capitol Hill. The Fed has so far predicted that the U.S. would escape a recession, but on Wednesday Bernanke said that the economy might contract in the first half of this year.
Bernanke told lawmakers that he believed the housing market was the “center of the problem” threatening the economy and that Congress should be “looking at housing.” But he did not depart from the administration’s position that only limited action by Congress is needed — specifically, legislation to modernize the Federal Housing Administration and to strengthen oversight of mortgage giants Fannie Mae and Freddie Mac .
Pressed by Sen. Charles SchumerChuck SchumerDemocratic frustration with Sinema rises Schumer endorses democratic socialist India Walton in Buffalo mayor's race Guns Down America's leader says Biden 'has simply not done enough' on gun control MORE (D-N.Y.), the joint panel’s chairman, on whether taxpayer dollars should be steered to help homeowners, Bernanke retorted that such matters were under “Congress’s sphere of influence, not the Fed’s.”
He said the Fed would not take a position on a Democratic measure pending in the Senate to allow troubled homeowners to trim their mortgage debts in bankruptcy.
Meanwhile, Maloney questioned Bernanke about a blueprint for a sweeping overhaul of financial market regulation that the Treasury unveiled on Monday. The plan would grant huge new powers to the Fed, making it a sort of super-regulator entrusted with ensuring the stability of the financial system.
The Fed chairman did not criticize the proposed new role, but said he would be “very worried” if the central bank were given such broad responsibility without the commensurate power or authority to fulfill the new mission.