WASHINGTON — Federal Reserve Chairman Ben Bernanke and the Bush administration on Thursday defended the decision to rescue Bear Stearns amid questions by lawmakers about why the government was helping Wall Street investment houses but not people on Main Street.
Bernanke and Treasury Department Undersecretary Robert Steel said the consequences to the U.S. economy and financial system would have been far more serious had the government allowed the nation’s fifth-largest investment house to go bankrupt.
“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 told the Senate Banking Committee.
The panel conducted a five-hour hearing as lawmakers sought to understand decisions made on the hectic weekend of March 14-15 after Bear Stearns informed the Fed it was on the verge of having to file for bankruptcy protection.
The investment house was purchased by JPMorgan Chase & Co. with assistance from the Fed in the form of a loan backed by $30 billion of Bear Stearns assets. JPMorgan has agreed to absorb the first $1 billion of losses if the value of the assets declines, but taxpayers are at risk for the remaining $29 billion.
Bear Stearns, with a stock price around $150 per share a year ago, was sold for $10 a share, becoming the biggest victim of a severe credit crisis that hit financial markets in August.
That crisis, which was triggered by a prolonged housing slump and cascading mortgage defaults, has made it harder for consumers and businesses to get loans and helped push the country to the brink of a recession.
Democrats on the Senate Banking Committee questioned why the Fed was willing to put such a large amount of money at risk to protect Wall Street while as many as 3 million homeowners are facing the risk of defaulting on their mortgages with the administration balking at greater efforts to help them.
