Bernanke Faces Scrutiny in Congress Over Bear Stearns Buyout Craig Torres
Bloomberg
Wednesday, April 2, 2008
[align=left] Federal Reserve Chairman Ben S. Bernanke has pushed aside central-banking tradition, scooping up $29 billion of assets from Bear Stearns Cos. and backstopping bond dealers. Congress wants to know where he draws the line. [/align]
Bernanke testifies before two congressional panels today and tomorrow. The hearings mark his first trips to Capitol Hill since the Fed's March 16 intervention to avert the bankruptcy of Bear, an extension of credit to a non-bank corporation that was unprecedented since the Great Depression.
While lawmakers praise the central bank and the Treasury Department for staving off a U.S. financial collapse, they question the propriety of subsidies to Wall Street risk-takers as hundreds of thousands of Americans lose their homes to foreclosure.
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``We want to know about precedent,'' said Senator Charles Grassley of Iowa, the senior Republican on the Senate Finance Committee. If the central bank is prepared to repeat the Bear Stearns example, ``it sends a very dangerous signal,'' he said in an interview with Bloomberg Television yesterday.
``People are willing to take chances if they think that the federal government is going to step in and bail them out all the time,'' Grassley added.
Bernanke, 54, will address the economy at the Joint Economic Committee today at 9:30 a.m. He appears tomorrow at the Senate Banking Committee to discuss markets and the Fed's role in JPMorgan Chase & Co.'s purchase of Bear Stearns.
Ditching Tradition
As credit markets seized up, the Fed gave all 20 primary dealers in U.S. government bonds the same access to discount- window loans. Until then, those loans had been reserved for banks. The central bank now auctions as much as $100 billion in funds to lenders a month, and has cut the cost on direct loans to just a quarter-point above the overnight rate between banks.
Lawmakers have welcomed the interest-rate reductions, including 2 percentage points of cuts since the year began, the fastest easing of monetary policy in two decades. The benchmark rate is now 2.25 percent, down from 5.25 percent in September.
At the same time, legislators have begun scrutinizing the central bank's aid to Bear Stearns, which was the biggest underwriter of mortgage-backed bonds. The market for the securities was throttled by a surge in delinquencies on subprime loans, or credit given to people with poor or incomplete credit histories. Foreclosures jumped when interest rates on the loans climbed after an initial period of lower rates.
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