Congress Grills Execs on Bear Bailout

April 3, 2008— -- WASHINGTON (AP) — The unprecedented actions to prevent the collapse of Bear Stearns were taken to preserve the viability of the U.S. financial system and do not represent any kind of federal bailout, Federal Reserve Chairman Ben Bernanke says.

Bernanke said Wednesday that even though the central bank is on the hook for $29 billion in the fire sale of Bear Stearns, the nation's fifth-largest investment bank, to JP Morgan Chase & Co., the Fed may end up making money.

The issue of whether the central bank has exposed taxpayers to a possible bailout and how Bear Stearns could tumble so quickly to near insolvency were to be explored Thursday with Senate testimony from Bernanke as well as officials from the Treasury Department, the Securities and Exchange Commission and the Fed's New York regional bank.

"When $30 billion of taxpayer money is placed at risk, it is our paramount responsibility to ensure that these actions were necessary and judicious," said Sen. Christopher Dodd, chairman of the Senate Banking Committee.

In addition, the panel was to hear from the heads of Bear Stearns Cos. and JP Morgan. Bear Stearns is the most high-profile victim of a severe credit crunch that began in August and has forced some of America's largest financial institutions to declares billions of dollars in losses because of bad investments, many in the area of subprime mortgages.

Many economists believe all the credit and housing problems have pushed the country into a recession. Bernanke, testifying before the congressional Joint Economic Committee on Wednesday, raised the prospect of a recession for the first time since the current slowdown began. He said it was possible that the overall economy may not grow at all during the first half of this year. However, he continued to predict that growth will resume in the second half of 2008.

Dodd's panel planned to question administration officials over how much pressure was placed on the Fed to put up the money for the Bear Stearns sale.

SEC Chairman Christopher Cox was expected to be asked whether his agency, which is the primary regulator of investment houses like Bear Stearns, missed warning signs that could have averted the meltdown, which roiled financial markets around the globe.

Bear Stearns was one of five major Wall Street banks whose cash positions and balance sheets were monitored closely by SEC examiners after the mortgage crisis erupted last year.

"The fate of Bear Stearns was the result of a lack of confidence, not a lack of capital," Cox said in a March 20 letter to international banking regulators.

In his testimony Wednesday, Bernanke said the Fed and other government agencies were informed on March 13 that without help Bear Stearns would have to file for bankruptcy the next day.

He said that "the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain."

As part of marathon negotiations over the weekend of March 15-16, the Fed originally agreed to take $30 billion in securities off the books of Bear Stearns to facilitate the acquisition of the firm by JP Morgan Chase & Co. for an original price of around $2 a share. A year ago, Bear Stearns was trading at around $150 a share.

After an uproar over the terms of the sale, the share price was boosted to around $10 and JP Morgan agreed to assume the risks for the first $1 billion in losses that might occur, lowering the Fed's potential risk to $29 billion.

Bernanke said he did not believe the central bank would lose money on the deal and could in fact make money. He said he did not consider the transaction a bailout because of the losses sustained by Bear Stearns shareholders.

"We did what we did because we felt it was necessary to preserve the integrity and viability of the American financial system, which in turn is critical for the health of the economy," Bernanke said.

The Fed's regional bank in New York hired BlackRock Financial Management Inc. to manage the $30 billion portfolio of securities the Fed obtained from Bear Stearns. Bernanke said BlackRock was "reasonably confident that we will be able to recover the full amount if we dispose of these assets on a measured basis, rather than sell them all at once."

On the Net:

• Federal Reserve: http://www.federalreserve.gov•