Senators Examine Bear Stearns Intervention as Reason for Reform
BANKING
New London Day and Norwalk Hour
Erin Kutz
Boston University Washington News Service
April 3, 2008
WASHINGTON –The federal intervention in fronting $30 billion to save nearly bankrupt investment bank Bear Stearns was defended on Capitol Hill Thursday by administration officials, but senators wanted to know how things went so wrong and what they indicate for reforms in financial oversight and regulation.
The federal action toward Bear Stearns has previously drawn criticism as representing willingness to help the most powerful with little assistance to Americans in foreclosure, a point not ignored in the hearing.
But committee members revealed a deeper complexity to the issue, with some expressing concern that the decision doesn’t merely represent a divide between the weak and the strong but offers evidence as well about financial regulatory inadequacies that could allow a market to be so weak that the collapse of one institution would have such a sweeping effect.
“How do we let the system become so fragile that it cannot tolerate one failure?” asked Sen. Jim Bunning (R-Ky.) at a hearing of the Senate Banking, Housing and Urban Affairs Committee. He called the rescue of Bear Stearns an act of socialism.
Robert Steel, the undersecretary of the treasury for domestic finance, defended the Bear Stearns rescue as a buffer to catastrophe in the broader economy, saying that a plunge in credit would affect average Americans in addition to Wall Street giants.
“When our financial system is under stress, all Americans bear the consequences,” he said.
Committee chairman Christopher Dodd (D-Conn.) indicated support for the federal intervention but questioned whether it could have been done sooner.
“As a bottom-line consideration I believe this was the right decision considering everything that was on the table,” he said. “I don’t question that ultimate decision, but I think it’s important we look at the rationale leading up to it.”
Dodd and other committee members challenged the time taken before the government stepped in and whether it was known earlier that Bear Stearns was in such grave danger.
Bear Stearns CEO Alan Schwartz said the firm did not appear to be at a significant risk until the public lost confidence in it at the beginning of the week of March 10 because of rumors swirling about amidst the credit crisis.
“Because of the rumors and conjecture, customers, counterparties and lenders began exercising caution in their dealings with us—and during the latter part of the week outright refused to do business with Bear Stearns,” Schwartz said.
“I want to emphasize that the impetus for the run on Bear Stearns was in the first instance the result of a lack of confidence, not a lack of capital or liquidity,” he added.
Sen. Charles Schumer (D-N.Y.) pointed to the Bear Stearns crisis as indicative of the inability of the Securities Exchange Commission and the Federal Reserve to properly oversee financial markets.
“Was someone asleep at the switch or is it that our regulatory structure doesn’t work?” Schumer asked.
Sen. Robert Bennett (R-Utah) expressed concern that lawyers for other financial institutions would jump on the Bear Stearns rescue and argue that their clients require the same solution in the face of turmoil.
Federal Reserve Chairman Ben Bernanke rejected the description of the Bear Stearns intervention as a bailout, saying, “It’s not a situation a firm would choose to endure.”
The near-collapse of Bear Stearns attested to the gravity of the economy’s problems, said Timothy Geithner, president of the Federal Reserve Bank of New York, noting that in a healthier overall market, the government would be likelier to let the investment bank’s problems resolve themselves.
Dodd pointed to the epidemic of sub-prime lending as the source of the problem and urged action to prevent another Bear Stearns situation. He said Congress is in for a long road in developing solutions, and not merely to prevent a catastrophe on Wall Street. Solutions to the housing problems must be found, he said, because most Americans don’t rely on investing in stocks but in the equity from their homes that they hope to use as safety net for the rest of their lives.
This week the committee acted swiftly to develop housing stimulus legislation that would provide money to communities with high rates of foreclosure, increase counseling for homeowners at risk and provide tax incentives for those who purchase homes on the brink of foreclosure.
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