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Fed Chief: No Choice But to Rescue Bear Stearns

The Federal Reserve's unprecedented actions to prevent the collapse of Bear Stearns were taken to preserve the "integrity and viability of the American financial system" and did not represent any kind of bailout, Fed Chairman Ben Bernanke said.

Bear Stearns
Jin Lee
Bear Stearns

Bernanke told a congressional panel that 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, forcing the central bank to make the difficult choice of deciding whether to allow the nation's fifth largest investment bank to collapse or provide assistance.

"Given the current 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 Joint Economic Committee.

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 for an original price of around $2 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 the remaining $29 billion in securities.

While U.S. taxpayers ultimately could be at risk if the Fed cannot sell the securities for the $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 not bail out Bear Stearns. Bear Stearns' shareholders took a very significant loss," Bernanke said in response to questions from the committee. "I don't think any company is interested in repeating the experience of Bear Stearns."

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.

"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.

Asked if he thought there were other financial institutions that could be in as much danger of collapse as Bear Stearns, Bernanke said he did not expect a repeat episode but added that "the future is uncertain."

Of the Bear Stearns rescue, Bernanke said, "I hope this is a rare event, and I hope it's not something that we ever have to do again."

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 that 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 Thursday, Bernanke and officials from the New York Fed, Treasury Department and Securities and Exchange Commission, along with officials from Bear Stearns and JP Morgan, are scheduled to testify before the Senate Banking Committee.