US senators worry about taxpayer exposure to Bear Stearns
by Justin Cole
53 minutes ago
WASHINGTON (AFP) - US senators expressed concern Thursday that billions of dollars in taxpayer funds has been put on the line to back the emergency takeover of troubled investment bank Bear Stearns.
Republican Senator Jim Bunning branded the move an act of "socialism," as the Senate Banking Committee held a hearing into Bear Stearns' takeover by banking giant JPMorgan Chase.
JPMorgan Chase agreed to take over Bear Stearns for just over one billion dollars last month in a deal backed by the US central bank which stumped up 29 billion dollars to support the transaction in exchange for collateral from Bear Stearns.
The Federal Reserve's backing of the deal was unprecedented and has triggered several congressional investigations into its role as a widespread credit crunch continues to bruise Wall Street.
"What it looks like if I had to frame this to people is that we've socialized risk and privatized reward," the panel's Democratic chairman, Senator Christopher Dodd, said.
Lawmakers voiced worries that the taxpayer-supported bailout would encourage financial firms to speculate more aggressively, and expect government aid if they get into difficulties.
"The Fed has set a new precedent. Such policy decisions must be fully considered by this committee," said Republican Senator Richard Shelby.
Other senators were adamant that taxpayer money should not be put at such risk.
"That is socialism. And it must not happen again," Bunning said in a hearing room packed with besuited bankers and lawyers and several colorful demonstrators protesting the costs of the Iraq war.
Bear Stearns weathered a near meltdown in March as it struggled to absorb mortgage-related investment losses of almost two billion dollars and other banks ceased doing business with it.
Rival banks are also enduring mounting losses in the billions of dollars due to soured mortgage investments triggered by one of the worst US housing market slumps in decades.
Bear Stearns' management encouraged JPMorgan to takeover their firm and a deal was brokered on March 16. The Fed granted its approval the same day.
Fed chairman Ben Bernanke, called before Congress to answer lawmakers' concerns, defended the central bank's response and said a Bear Stearns collapse would have sent shock waves through the global financial system.
"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," he said.
Bernanke was supported by the president of the Federal Reserve Bank of New York, Timothy Geithner, and Treasury undersecretary Robert Steel, both of whom also defended the involvement of authorities.
America's top central banker, reiterating comments from a hearing a day earlier, said the Fed did not bail out Bear Stearns and stressed that "shareholders certainly lost a huge amount."
Bunning and other lawmakers said Fed officials should have realized that complicated mortgage investments could have sunk even one of the country's biggest investment banks like Bear Stearns.
Geithner said the government could make money from the deal if the value of the distressed assets the Fed is holding as collateral for its 29 billion dollars in financing rises in value.
"There is risk in this transaction, there's no doubt about it," he also conceded.
Part of the collateral held by the Fed consists of mortgage-backed securities which have plunged in value in recent months.
The central bank has appointed financial firm BlackRock to manage the investments pledged as collateral.
The chief executive of JPMorgan Chase, Jamie Dimon, told Congress his bank would not have agreed to buy Bear Stearns without the Fed stepping in to support the deal.
"We got involved in this matter because we were asked to help prevent a Bear Stearns collapse that had the potential to cause serious damage to the financial system," Dimon said.