Congress Growls at Bear's $10-a-Share Deal
Updated from 2:42 p.m. EDT
Top financial regulators and CEOs convened on Capitol Hill Thursday to defend the controversial deal brokered by the
Federal Reserve
last month to prevent the bankruptcy of
Bear Stearns
( BSC).
In an often contentious hearing before the Senate Banking Committee, Fed Chairman Ben Bernanke, Securities and Exchange Commission Chairman Christopher Cox, Bear CEO Alan Schwartz and
JPMorgan Chase
(JPM) - Get Report
CEO Jamie Dimon told lawmakers that stepping in and arranging the sale of Bear Stearns -- with help from the central bank -- was necessary to prevent a larger systematic collapse of the U.S. 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," Bernanke said in his testimony.
Some senators, however, expressed skepticism of the reasons the Fed so aggressively stepped in to prevent the complete collapse of Wall Street's fifth largest bank, when the government has taken a more hands off approach to the increasing amount of homeowners facing foreclosure.
"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?" asked Sen. Chris Dodd (D.-Conn.), chairman of the committee.
JPMorgan CEO Dimon said Bear Stearns' failure could have been "disastrous" and dismissed the idea that the fallout would have been limited to just a few Wall Street firms. He said, however, his bank's portfolio had no exposure to Bear Stearns in the days leading up to its collapse and could have survived.
"If Bear Stearns went bankrupt, we probably would have lost money, but we would have been in fine shape," said Dimon.
Bear CEO Schwartz took responsibility for his firm's collapse but he said even with the benefit of hindsight, he could not think of anything he could have done to prevent the panic that quickly eroded the bank's liquidity position.
Schwartz also said that based on trading activity he observed in financial markets in the days surrounding Bear's collapse, he suspects there was market manipulation on the part of traders that led to the firm's demise.
Bear Stearns informed officials at the Fed on March 13 that its liquidity position was eroding and it would have to file for bankruptcy.
The Fed responded by agreeing to backstop nearly $30 billion of Bear's riskiest mortgage-related securities and orchestrating a swift acquisition of the bank by JPMorgan for a stunning $2 a share. JPMorgan later boosted its offer to $10 a share.
Bernanke told lawmakers that the Fed has ten years to sell the mortgage-backed securities it took from Bear as collateral in exchange for emergency funding into the market. He noted that several parties evaluating those securities have predicted the Fed will recoup their full value over time with interest, averting costs to taxpayers.
Several senators expressed skepticism of that view.
"Nobody seems to really have any idea how much these securities are worth," said Sen. Robert Menendez (D.-NJ).
Bernanke and Cox appeared as a witness in a committee hearing along with Treasury Undersecretary Robert Steel and Timothy Geithner, the head of the New York Fed.
Geithner echoed Bernanke's defense of the Fed's actions.
"It is important to recognize that had we not acted we would in effect have penalized those individuals, companies, and financial institutions that had behaved more prudently, but would have suffered significant damage from the effects of default by a major institution," said Geithner.
He noted that Bear's shareholders suffered heavy losses as a result of the events, and other investment banks have every incentive to avoid such a situation, despite the Fed's actions.
Acknowledging that taxpayers shouldered some risk on behalf of Bear Stearns, Geithner said "the risks are modest in comparison to the substantial damage to the economy and economic well-being that potentially would have accompanied Bear's insolvency."
The New York Fed hired
BlackRock
(BLK) - Get Report
to manage the $30 billion portfolio of securities the Fed obtained from Bear Stearns.
A public outcry followed the Fed's assistance in JPMorgan's bargain bin purchase.
"We did not set or negotiate the price," Geithner told lawmakers.
Know What You Own
: BSC operates in the financial services industry, and some of the other stocks in its field include
Goldman Sachs
(GS) - Get Report
,
Morgan Stanley
(MS) - Get Report
,
Merrill Lynch
( MER),
Bank of America
(BAC) - Get Report
and
Lehman Brothers
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