Bear Stearns could not be allowed to collapse because it would have shattered confidence in financial markets and caused lasting damage to the economy, top government regulators said on Thursday in defending the rescue of the fifth-largest US investment bank.
At a US Senate Banking Committee hearing to explore the bank's downfall last month, federal officials, including Federal Reserve Chairman Ben Bernanke, rejected the notion that they had in effect bailed out Bear. The Federal Reserve committed $29 billion in taxpayer money to back assets as part of an agreement for J.P. Morgan Chase & Co to buy the stricken investment bank.
Bear's rescue, orchestrated by the Federal Reserve in close consultation with the Treasury Department, sparked heated debate on whether the government had improperly risked public funds to salvage a Wall Street firm.
Regulators faced tough questioning from members of Congress over whether they had set a dangerous precedent by coming to the aid of a bank that had made risky investment decisions.
"Was this a justified rescue to prevent a systemic collapse of financial markets or a $30 billion taxpayer bailout, as some have called it, for a Wall Street firm while people on Main Street struggle to pay their mortgages?" asked Senator Christopher Dodd, the Connecticut Democrat who chairs the committee. "What we had in mind here was the protection of the American financial system and the protection of the American economy," Bernanke said.
The hearing comes as lawmakers grapple with how to modernise a patchwork of banking regulations, many of which date back to the Great Depression or even earlier. Critics contend that poor regulatory oversight was at least partly to blame for the subprime mortgage mess that quickly exploded into a global financial crisis.
Christopher Cox, chairman of the Securities and Exchange Commission, said the securities regulator could not have foreseen Bear's sudden cash crisis. Bernanke said on Wednesday that Bear had notified the Fed and other regulators on March 13 that it would have to file for bankruptcy the next day unless it could secure financing. He repeated on Thursday that the Fed thought it must act immediately or risk serious damage not only to global financial markets, but also the broader economy.
On March 14, the Fed and J.P. Morgan announced emergency financing. Two days later, J.P. Morgan agreed to buy Bear for just $2 per share - well below the $60 where it had traded the previous week. The offer has since been raised to $10 a share.
Treasury Under-secretary for Domestic Finance Robert Steel echoed Bernanke's comments, noting that the government's focus was "not on this specific institution, but on the more strategic concern of the implications of a bankruptcy.
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