“Given the 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,” Bernanke told the Senate Banking Committee in a second day of hearings on Capitol Hill.
Bernanke was the chief witness at a hearing called to examine whether the Fed was justified in providing up to $30 billion to help facilitate the sale of Bear Stearns Cos. to JPMorgan Chase and Co. Bernanke testified on a panel that also included Treasury Undersecretary Robert Steel, Christopher Cox, chairman of the Securities and Exchange Commission, and Timothy Geithner, the head of the Fed’s New York Regional Bank.
Also appearing before the committee were Alan Schwartz, the head of Bear Stearns, and Jamie Dimon, the head of JPMorgan.
“Was this a justified rescue to prevent a systemic collapse of financial markets or a $30 billion taxpayer bailout for a Wall Street firm while people on Main Street struggle to pay their mortgages?” Senate Banking Committee Chairman Christopher Dodd asked at the beginning of the hearing.
Bernanke said that if Bear Stearns had been allowed to fail, it would have led to a “chaotic unwinding” of Bear Stearns investments held by individuals and other financial institutions, according to the Associated Press.
“Moreover, the adverse impact of a default would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability,” Bernanke said.
As part of an unusual deal announced over the weekend of March 15-16, the Fed initially agreed to take $30 billion in securities off the books of Bear Stearns to facilitate the acquisition of the firm by JPMorgan Chase and Co.
Amid stockholder anger over the price of the sale, the share price was boosted from around $2 a share 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 risk to $29 billion.
Schwartz told the lawmakers that Bear Stearns was brought down by “unfounded” market rumors, which created what was essentially a “run on the bank” as Bear Stearns creditors began demanding payment out of fears the company was about to collapse, the AP reported.
“Facing the dire choice of bankruptcy or a forced sale under exigent circumstances, we salvaged what we could to avoid wiping out our shareholders, bondholders and 14,000 employees,” Schwartz told the panel.