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Federal Reserve Chairman Ben Bernanke defended the agency's rescue of Bear Stearns in a Senate hearing Thursday, saying the move was necessary to prevent further impact on the general economy. Financial experts weigh the Fed's response to recent economic turmoil.
Next, more scrutiny of the Federal Reserve and its role in the Bear Stearns deal. Jeffrey Brown begins our coverage with this report.
Last month's sale of ailing Wall Street giant Bear Stearns, facilitated in large part by the Federal Reserve, was again the center of attention on Capitol Hill today.
Officials spoke in front of the Senate Banking Committee. For Fed Chairman Ben Bernanke, it was a second straight day on the Hill to defend and explain his actions.
BEN BERNANKE, Federal Reserve chairman: I realize it's not an easy sell sometimes, but the truth is that the benefits of our actions were not Bear Stearns and were not even principally Wall Street. It was Main Street.
We were concerned about other institutions. We were concerned about a variety of markets in which Bear Stearns participated. We were concerned about the thousands of counterparties whose positions would have become uncertain.
So we were — if you want to say we bailed out the market in general, I guess that's true, but we felt that was necessary in the interest of the American economy.
Bernanke was joined today by Christopher Cox, who chairs the Securities and Exchange Commission, Undersecretary of the Treasury Robert Steel, and Timothy Geithner, president of the Federal Reserve Bank of New York.
All three were involved in the Bear Stearns deal and were questioned in detail about the events after March 13th, when officials from the nation's fifth-largest investment bank told federal regulators they were facing imminent bankruptcy.
The witnesses explained what happened during the round-the-clock negotiations that followed. Republican Senator Richard Shelby of Alabama.
SEN. RICHARD SHELBY (R), Alabama: Who first proposed using taxpayer funds to help finance JPMorgan Chase, its acquisition of Bear Stearns?
ROBERT STEEL, undersecretary of the Treasury: Late Saturday evening or early Sunday morning, it was proposed by one of the principals, JPMorgan, to President Geithner, that, so as to move forward, that this would be a condition that they seemed to be appropriate, seemed to be appropriate to them. And they proposed — so to answer your question specifically, proposed by JPMorgan Chase to President Geithner.
SEN. CHUCK SCHUMER (D), New York: Could a reasonable regulator have known and been ahead of the curve here? Should someone have called Bear in and said, "You need more capital, you need to reduce your exposure to mortgages"?
TIMOTHY GEITHNER, president, Federal Reserve Bank of New York: Very hard to know. I want to underscore — I'll say very quickly, these things can happen incredibly quickly in markets like this.
What the world is going through and has gone through in the last nine months are truly extraordinary, described by many as the worst in 50 years, worst in a generation. So it's very important to underscore that, because it's easy to look back and say, "But doesn't it look obvious?" And I think that's somewhat unfair to the people…
The hearing also addressed what could be done to prevent another Bear Stearns. Geithner argued Washington must increase its regulation of Wall Street.
We put in place almost a century ago a set of protections to reduce the risk to the economy that comes from runs on banks, but the system has changed a lot since then, and those protections do not extend to a set of institutions who are also vulnerable to liquidity pressures who also play a very important role in the economy.
And we've been trying to adapt our system to compensate for that change, but we're going to have to think through very carefully a set of other changes in the future to get ourselves a better balance.
A new Treasury Department proposal would give the Fed more power to monitor investment banks and others, but just how much clout the Fed would have is still to be determined.
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