WASHINGTON - Federal Reserve Board Chairman Ben Bernanke strongly defended the central bank's rescue of Bear Stearns Cos. to skeptical lawmakers Wednesday and refused to rule out similar actions in the future.
A dozen members of the Joint Economic Committee spent nearly three hours picking apart the Fed's backstopping of Bear, probing why the $29 billion arrangement was designed so quickly and whether it exposed taxpayers to significant risk. Bernanke insisted that a full-blown collapse of the investment bank would have been a large shock to the broader economy.
"Normally, the market sorts out which companies survive and which fail, as it should be," he said. "However, the issues raised here extended well beyond the fate of one company. ... Given the current 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."
His testimony served as a snapshot of his appearance scheduled today before the Senate Banking Committee, which has also called top officials of the Federal Reserve Bank of New York, the Securities and Exchange Commission, and the Treasury Department. The chief executives of Bear and its planned new owner, JPMorgan Chase & Co., will also testify.
But Bernanke was sitting alone before lawmakers Wednesday and took umbrage at suggestions that the central bank bailed out Bear, which was on the verge of a bankruptcy filing when it approached regulators.
"We did not bail out Bear Stearns," he said. "Bear Stearns shareholders took a very deep loss. An 85-year-old company lost its independence."
Bernanke was also pressed on whether the Fed may have to act similarly with other investment banks, and he acknowledged it is a possibility.
"I hope this is a rare event," he said. "I hope this is something we never have to do again, but we have to watch the markets and do what we can to ensure financial stability."
He tried to reassure the lawmakers that the Fed was not opening itself - and taxpayers - to undue risk through the rescue. He said the New York Fed hired an investment adviser to conduct an independent evaluation of Bear's assets and also said the central bank has installed examiners in the investment banks borrowing from the discount window.
"Since we've begun lending to dealers, we've put examiners on the ground in those firms and established off-site teams that coordinate with them," he said.
Still, Bernanke spent much of the day playing defense against charges that the Fed is choosing to help Wall Street over homeowners. But the Fed chief countered that the central bank arranged the Bear rescue with the public in mind. "I hope I don't convey a lack of sympathy," he said at one point. "Everything we do we do to improve the welfare of the average American."
(c) 2008 Money Management Executive and SourceMedia, Inc. All Rights Reserved.