WASHINGTON — The administration defended its role in the bailout of Wall Street investment bank Bear Stearns before the Senate Committee on Banking, Housing and Urban Affairs, saying that it was necessary to avert a greater breakdown in the financial market.
Timothy Geithner, president of the Federal Reserve Bank of New York; Christopher Cox, head of the Securities and Exchange Commission; and Treasury Under Secretary Robert Steel faced tough questions from Senators Charles Schumer (D-N.Y.) and Christopher Dodd (D-Conn.) on how the buyout was structured and priced and if signs of trouble signs were seen too late. "Was someone asleep at the switch?" asked Schumer.
The senators wanted to know whether organizing the buyout of Bear Stearns by JPMorgan Chase last month set a precedent for taxpayer-backed bailouts of financial companies. The witnesses demurred, describing the action as unusual but necessary. "How do we guard against a future Bear Stearns?" asked Schumer. "It is a long road until our system of regulation catches up with our financial system."
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"The alternatives could have been devastating," said Dodd. "But were there alternatives?" he asked, wondering if the bailout might have been avoided if the Fed had opened its discount window sooner. Geithner responded bluntly that he would not have approved of that because the Fed "only lends to sound institutions and lending freely to Bear would not have been a prudent act." Alan Schwartz, CEO of Bear, rejected that notion. "It is my strong belief that if the window had been open to all banks we would not be in the situation we are in now," he said.
Discussion centered around the losses that Bear Stearns took, amounting to $10 billion, in the days just before the sale took place on March 16, and how the sale price was reached. Federal Reserve Board Chairman Ben Bernanke said the Fed had no hand in the pricing, but Steel testified that Treasury Secretary Henry Paulson stipulated the price be low because the sale was backed by $30 billion of taxpayer money.
"It was our perspective that moral hazard be protected as much as possible, and so, therefore, a lower price was more appropriate, and there were lots of terms and conditions," said Steel. The original deal called for JPMorgan to pay $2 a share, backed up by the Fed's $30 billion loan; it was later upped to $10 per share. The Fed received collateralized mortgage obligations in return.
The lightening speed of the collapse and subsequent swift action to avoid Bear declaring bankruptcy was also noted, as was the sale of stock by Bear executives. "This must have triggered bells and whistles. Was there a reaction?" Dodd asked Cox. Cox said an investigation was underway at the SEC and enforcement action would soon follow.
Speaking before the Joint Economic Committee of Congress on April 2, Bernanke for the first time admitted the country could fall into a recession. Clobbered by a housing crisis, a credit crunch, big job layoffs and a lack of confidence, he said, "A recession is possible. Our estimates are that we're slightly growing at the moment, but we think that there's a chance that for the first half as a whole there might be a slight contraction."
Claiming that the economy can withstand powerful blows, he said, "we are fighting against the wind. At least offsetting significantly the headwinds coming from these financial factors. I'm not yet ready to say whether or not the U.S. economy will face such a situation." Trying to be upbeat, Bernanke said he expected economic growth to pick up later this year.
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