[Senate Hearing 110-974]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 110-974

                          FINANCIAL REGULATORS



                               before the

                              COMMITTEE ON
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION




                        THURSDAY, APRIL 3, 2008


  Printed for the use of the Committee on Banking, Housing, and Urban 

      Available at: http: //www.access.gpo.gov /congress /senate /

                          FINANCIAL REGULATORS



                               before the

                              COMMITTEE ON
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION




                        THURSDAY, APRIL 3, 2008


  Printed for the use of the Committee on Banking, Housing, and Urban 

      Available at: http: //www.access.gpo.gov /congress /senate /

50-394                    WASHINGTON : 2010
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
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               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  ELIZABETH DOLE, North Carolina
ROBERT P. CASEY, Pennsylvania        MEL MARTINEZ, Florida
JON TESTER, Montana                  BOB CORKER, Tennessee

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel

                      Amy S. Friend, Chief Counsel
               Roger M. Hollingsworth, Professional Staff
                       Dean V. Shahinian, Counsel
          Julie Y. Chon, International Economic Policy Adviser
                  Drew Colbert, Legislative Assistant
                Brian Filipowich, Legislative Assistant

                    Mark Osterle, Republican Counsel
          Peggy R. Kuhn, Republican Senior Financial Economist
         Brandon Barford, Republican Professional Staff Member
                    Jim Johnson, Republican Counsel
                    Andrew Olmem, Republican Counsel

                       Dawn Ratliff, Chief Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor

                            C O N T E N T S


                        THURSDAY, APRIL 3, 2008


Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     3
    Senator Johnson..............................................     4
        Prepared statement.......................................    94
    Senator Bennett..............................................     5
    Senator Reed.................................................     5
    Senator Allard...............................................     6
    Senator Schumer..............................................     6
    Senator Bunning..............................................     7
    Senator Carper...............................................     7
    Senator Dole.................................................     8
    Senator Menendez.............................................     8
    Senator Tester...............................................     9
    Senator Corker...............................................     9
    Senator Crapo................................................     9


Ben S. Bernanke, Chairman, Board of Governors of the Federal 
  Reserve System.................................................    10
    Prepared statement...........................................    95
    Response to written questions of:
        Chairman Dodd............................................   163
        Senator Shelby...........................................   163
        Senator Bunning..........................................   185
Christopher Cox, Chairman, Securities and Exchange Commission....    12
    Prepared statement...........................................    99
    Response to written questions of:
        Chairman Dodd............................................   186
        Senator Shelby...........................................   189
        Senator Bunning..........................................   195
Robert Steel, Under Secretary of Treasury for Domestic Finance, 
  Department of the Treasury.....................................    15
    Prepared statement...........................................   103
    Response to written questions of:
        Chairman Dodd............................................   199
        Senator Shelby...........................................   199
        Senator Bunning..........................................   199
Timothy F. Geithner, President, Federal Reserve Bank of New York.    17
    Prepared statement...........................................   105
    Response to written questions of:
        Chairman Dodd............................................   200
        Senator Shelby...........................................   200
        Senator Bunning..........................................   202
James Dimon, Chairman and Chief Executive Officer, JPMorgan Chase    71
    Prepared statement...........................................   154
Alan D. Schwartz, President and Chief Executive Officer, The Bear 
  Stearns Companies, Inc.........................................    75
    Prepared statement...........................................   159

                          FINANCIAL REGULATORS


                        THURSDAY, APRIL 3, 2008

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:10 a.m., in room SD-G50, Dirksen 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.


    Chairman Dodd. Good morning. The Committee will please come 
to order.
    Again, let me thank all of our witnesses and my colleagues 
and those of you gathered here this morning. We are not in our 
traditional hearing room, and the size of the crowd in the room 
is evidence of the reason why. So we thank all of you this 
morning to participate one way or another in this gathering.
    Today the Committee will carefully consider recent actions 
taken by our Federal financial regulators in response to the 
ongoing turmoil in our markets and our economy. Much of our 
focus today will center on the period of 96 hours, mostly over 
the weekend of March 15th and 16th. During this momentous 4-day 
period, the Federal Reserve, the Federal Reserve Bank of New 
York, and the Treasury Department took dramatic and 
unprecedented action to stabilize our markets to infuse them 
with liquidity and to prevent additional financial firms from 
being swept under the riptide of panic that threatened to have 
taken hold of our markets.
    Among those actions was the decision by these entities to 
support the acquisition of Bear Stearns by JPMorgan Chase. As 
part of the acquisition, the Federal Reserve Bank of New York, 
with the support and approval of the Federal Reserve Board of 
Governors and the Treasury Department, committed some $30 
billion in taxpayer money to help facilitate the sale of the 
distressed company to JPMorgan Chase. And as part of its 
broader efforts to provide stability to the markets, the Fed's 
Board of Governors made a historic decision to allow primary 
dealers, firms which include investment banks, to access 
billions of dollars of liquidity on a daily basis.
    The stunning fall of Bear Stearns, a Wall Street giant and 
America's fifth largest investment bank, was matched only by 
the swift and sweeping response to its collapse put together by 
the New York Fed and the Federal Reserve Board of Governors, 
which, with the support of the Treasury, exercised powers in 
some instances that had not been used since the Great 
Depression, and in others were unprecedented in nature.
    There can be no doubt that these actions taken in order to 
calm financial markets that appeared to be teetering on the 
brink of panic have set off a firestorm of debate. They also 
raise a number of important questions that warrant our 
consideration. Was this a justified rescue to prevent a 
systemic collapse of financial markets or a $30 billion 
taxpayer bailout, as some have called it, for a Wall Street 
firm while people on Main Street struggle to pay their 
    What was the role of the Federal Reserve, the Treasury, the 
New York Fed, and the SEC in helping to facilitate a range and 
set the terms, including the price of the original and amended 
merger agreement between JPMorgan Chase and Bear Stearns?
    While hindsight is invariably 20/20, it bears asking if 
Bear Stearns would have survived if the Fed had opened the 
discount window to investment banks earlier. And what led to 
the sudden reversal on a policy that the Vice Chairman of the 
Fed had openly rejected in response to a question that I asked 
him before this very Committee only 2 weeks earlier?
    What was the role of the SEC, the primary regulator of Bear 
Stearns, during this critical 96 hours and in the weeks of 
market turmoil leading up to that weekend of merger 
negotiations? And why were they seemingly unaware of the 
potential for market rumors to cause investors to suddenly stop 
doing business with Bear Stearns until it was too late.
    These questions, the series of events leading up to Bear 
Stearns' rescue, the response by financial regulators, and the 
implications of those actions will be discussed and debated for 
years to come. It would be an overstatement to suggest that 
what occurred during those fatal 96 hours may have 
fundamentally altered our financial market landscape and our 
system of financial market regulation.
    Given these considerations and the highly unusual and 
unprecedented actions taken by the Federal Reserve Board of 
Governors, the Federal Reserve Bank of New York, and the 
support of the Department of the Treasury, I believe it is 
appropriate, indeed essential, that this Committee, the Banking 
Committee, exercise its oversight and investigatory functions 
to examine the authority, economic justification, and the 
public policy implications of these extraordinary recent 
actions by our Nation's Federal financial regulators.
    As such, the Committee has convened today's hearing, the 
first congressional analysis with all relevant parties to this 
issue, to hear the testimony of the public and private 
principals involved in this unprecedented series of events, and 
to provide Committee Members and the American taxpayer with a 
full, public, and thoughtful airing of these issues and their 
implications. With $30 billion on the line, the public 
deserves, of course, nothing less.
    I want to thank all of the witnesses and my Committee 
Members as well for their participation here this morning. We 
look forward to the testimony of our witnesses.
    Let me just say as well here that I want the witnesses to 
know, and others, that as a bottom-line consideration, I happen 
to believe that this was the right decision, considering 
everything that was on the table in the closing hours on that 
Sunday; that the alternative--and I do not think this is 
hyperbole--could have been devastating, both at home and around 
the world, for that matter. So I do not question that ultimate 
decision, but I think it is appropriate that we look at the 
rationale leading up to it, why decisions were made and not 
made earlier and later during the process, what was a part of 
that negotiation. Were there alternatives? Is this a model for 
the future? If so, what are the implications? What did the 
taxpayer get back from the $30 billion that we are putting on 
the line, or the $29 billion here?
    Those are the kinds of questions I think all of us are 
interested in pursuing, and many, many more. But on the bottom-
line issue, at least to this Member, I think fundamentally the 
decision was the right one in the final analysis. But I think 
it is appropriate we look at what else went on here to 
determine the wisdom of this step and what the implications 
    With that, let me turn to my colleague from Alabama, 
Senator Shelby.


    Senator Shelby. Thank you, Mr. Chairman. Thank you for 
calling today's hearing.
    The collapse of Bear Stearns and the unprecedented 
regulatory response led by the Federal Reserve call for a 
thorough examination of this Committee, so I commend you, Mr. 
Chairman, for bringing this Committee together today.
    In deciding to commit $29 billion to help finance JPMorgan 
Chase's takeover of Bear Stearns, the Fed has set a new 
precedent on the type of response that the Federal Government 
may provide during financial panics. It may be that the Fed's 
actions were warranted by the unique financial conditions 
prevailing in our markets. However, such policy decisions must 
be fully considered by this Committee. After all, the ultimate 
responsibility for financial regulations rests with this 
Committee and the Congress.
    In examining the events of the past few weeks, we must 
certainly be mindful that regulators and market participants 
had to make prompt decisions using available tools in the midst 
of a financial storm. This will not be the last time that we 
face financial upheavals in our history. However, I think it 
would be unwise if we did not take this opportunity this 
morning to thoroughly examine what transpired, including how 
Bear Stearns was regulated, what caused its collapse, whether 
any other institutions face similar risk, and if there are any 
shortcomings in our regulatory structure.
    Two aspects of the Fed's response deserve particular 
    First, for the first time since the Great Depression, the 
Fed has funded a bailout of an investment bank. Previously, 
assistance by the Fed had been extended to only FDIC-insured 
depository institutions. But by extending the Federal safety 
net to an institution not supported by an explicit Federal 
guarantee, the Fed's actions may create expectations that any 
major financial institution experiencing difficulties might be 
eligible for a Federal bailout. I think we must guard against 
creating a moral hazard that encourages firms to take excessive 
risks based on the expectations that they will reap all the 
profits while the Federal Government stands ready to cover any 
losses if they fail.
    A second point of concern is the legal authority for the 
Fed's actions. The financial assistance extended by the Federal 
Reserve was provided under the Federal Reserve's emergency 
lending authority, which allows the Fed to lend to any entity, 
not just banks, in, and I quote, ``unusual and exigent 
circumstances'' with the approval of five members of the Board 
of Governors. This unilateral regulatory authority is in sharp 
contrast to the regulatory scheme set forth under FDICIA for 
bank failures involving systemic risks, which includes roles 
for the FDIC, the Fed, the Treasury Secretary, and the 
President of the United States.
    The Fed's recent actions may have been warranted. 
Nonetheless, the Committee here today needs to address whether 
the Fed or any set of policymakers should have such broad 
emergency authority going forward. And if the evolution of our 
markets leads to the Federal safety net being extended to non-
banks, attention should be given here, I believe, to ensure 
that the proper decisionmaking process is here and safeguards 
are in place.
    I look forward to exploring these and other issues with our 
witnesses today, and I appreciate again, Mr. Chairman, you 
calling the hearing.
    Chairman Dodd. Thank you very much, Senator Shelby.
    Let me just say for the purposes of the Committee Members, 
as you know, we have also got a major bill on the floor dealing 
with the housing issue, so this is going to create somewhat of 
an awkward moment or two here and there as we go back and 
forth. What I would like to do, if I could at the outset--and 
we want to get to our witnesses, but I also know that all of my 
colleagues have some feelings about this matter, and so I am 
going to take a step here and ask any Member that would like to 
make an opening brief comment on this matter to be able to do 
so before we get to our witnesses. And then we will hear from 
the witnesses themselves and set up a question period as well.
    But let me ask if anyone would like to be heard. I will 
begin with Senator Johnson, if he has any brief comments. Or 
anyone else who would like to be heard at the outset here, I 
would like to give you that opportunity to be heard. Senator 


    Senator Johnson. Thank you, Chairman Dodd, for holding this 
hearing today.
    There appears to be little consensus on the effects of the 
recent Fed action in the purchase of Bear Stearns. There has 
been criticism voiced from a large network of people. I have 
received letters from my constituents with concerns that it is 
a bailout of the big bank that creates a moral hazard. Others 
wonder if it is appropriate to offer help to Wall Street firms 
while insisting on market discipline for troubled homeowners.
    There has also been applause for the situation from some 
quarters. The U.S. markets responded favorably. Other 
investment banks poised to be in trouble saw their stock rise. 
Foreign governments applauded this as a positive move for 
global markets, and other analysts suggested that the Fed 
actions averted what could very well have been a modern-day run 
on the bank.
    The reality of the situation is probably somewhere near the 
    I thank you, Chairman Dodd, and I submit my whole statement 
for the record.
    Chairman Dodd. All statements, by the way, of Members and 
any supporting data and information they would like to have 
included will be included in the record during the entire 
    Senator Bennett.


    Senator Bennett. Thank you, Mr. Chairman. I agree with the 
position you and the Ranking Member have taken. The only thing 
I would quibble with in your statement is when you said, 
``Hindsight is always 20/20.'' At this point hindsight has not 
yet reached that level of accuracy because we are viewing these 
events through the lenses of previously strongly held 
ideological positions. And it is important for us to have this 
hearing so that we can perhaps move away from some of those 
strongly held ideological positions and find out what really 
    So I endorse what you have had to say and thank you for 
calling the hearing.
    Chairman Dodd. I will so modify my opening statement to 
reduce the 20/20.
    Senator Reed.


    Senator Reed. Well, thank you very much, Mr. Chairman, and 
the dramatic intervention by the Federal Reserve with regard to 
Bear Stearns raises significant questions.
    What are the consequences of this implicit guarantee on 
these institutions by the Federal Reserve and financial 
markets? What regulatory authority should be exercised over 
these institutions? What are the steps being taken to minimize 
taxpayer exposure? And what are the steps being taken to ensure 
that there is improved risk management both by the financial 
institutions and regulators alike going forward?
    I think all of these questions begin with a careful 
analysis of what has happened, a sober and highly detailed 
analysis of the actions of the agency, not just their 
authorities, but also how they implemented their authorities, 
how they cooperated and communicated with other regulatory 
agencies. It is not finger pointing. It is the kind of after-
action report that is owed to the American public since you are 
using their resources to stabilize this market.
    We have, I think, an obligation to encourage you--in fact, 
more than encourage you--to conduct this sober, no-holds-barred 
analysis of what happened, because the bottom line is to 
prevent a repetition and to strengthen our markets. I think the 
greatest competitive factor in our financial markets is the 
confidence that Americans and the world have that these markets 
are well regulated and transparent. And if there is any 
question about the regulatory sufficiency or transparency, that 
makes us less competitive in the marketplace, and it does not 
help us, it does not help the taxpayers that are supporting 
these efforts.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator Reed.
    Senator Allard.


    Senator Allard. Thank you, Mr. Chairman. I am anxious to 
hear from the witnesses and get into the question period.
    Chairman Dodd. Thank you.
    Senator Schumer.


    Senator Schumer. Thank you for holding this hearing, Mr. 
Chairman. I appreciate it. You can see by the fact that this 
room is full that the economy has moved front and center when 
even the behind-the-scenes moves of regulators and institutions 
gets the attention it does.
    My questions fall into three areas: the before, the after, 
and the who. I think everyone agrees that the Fed had no choice 
and the actions had to be done. But the question is first the 
before. How long before this happened should the regulators 
have known what happened? Bear Stearns had trouble. Two of 
their hedge funds went under due to mortgages in the summer. 
Where were the regulators? Was someone asleep at the switch, or 
is it that our regulatory structure does not work? The SEC has 
jurisdiction over Bear Stearns, but mainly looks at investor 
protection and disclosure. The Fed has responsibility for 
safety and soundness of the system, but no jurisdiction over 
investment banks. I think that things fall between the cracks.
    The after: What are we going to do now? How are we guarding 
against the future Bear Stearns? And what rules are set in 
place so that things are done in a fair way? The response to 
Bear Stearns was necessary but ad hoc. If the Fed is going to 
be a stabilizer of last resort, it would be best if the 
stabilizing efforts were by the book instead of on the fly.
    And, finally, the who: Everyone agrees that Bear Stearns 
was staring into the abyss. What about homeowners who are also 
staring into the abyss? It is true that a large institution 
creates systemic risk problems. An individual homeowner does 
not. As an aggregate, homeowners certainly do. Thousands and 
thousands and thousands of foreclosures create as much systemic 
risk as one investment bank. And I worry that as quickly as the 
Federal Government moved to save Bear Stearns from complete 
failure, it has moved at a snail's pace, if at all, to save 
homeowners from foreclosures where the same types of moral 
hazard like as not existed.
    So I thank you for this hearing, Mr. Chairman. It is 
necessary. It is the beginning of a long road we have to face 
so that our system of regulation catches up to the financial 
system that is on the ground today.
    Chairman Dodd. Thank you, Senator Schumer.
    Senator Bunning.


    Senator Bunning. Thank you, Mr. Chairman. I will be brief.
    First of all, I want to know, the first question: How big 
do you have to be to be too big to fail? That is the question I 
ask first.
    I am very troubled by the failure of Bear Stearns, and I do 
not like the idea of the Fed getting involved in a bailout of 
that company. But before making a final judgment, I want to 
hear from our witnesses why they thought it was necessary to 
stop the invisible hand of the market from delivering 
discipline. That is socialism. At least that is what I was 
taught. And I would imagine everybody at that table was taught 
the same thing. It must not happen again.
    I am also troubled that the regulators who were supposed to 
be watching the types of mortgages being written did not do 
their job. Neither did the regulators who were supposed to make 
sure one firm did not become exposed to too much risk.
    Other questions need to be asked. Does anyone else think 
they will get Fed intervention if they get into trouble? Who 
let our financial system become so fragile that one failure 
jeopardizes the health of the entire system?
    I am sure many other questions will come up as well. I look 
forward to the hearing and will follow up during the 
    Chairman Dodd. Thank you, Senator Bunning.
    Senator Carper.


    Senator Carper. Thank you, Mr. Chairman. Mr. Chairman, 
thanks for pulling this together. I just want to say--just 
start off by thanking you and Senator Shelby for the leadership 
you have provided in recent days and weeks to try to make sure 
that our action here in the U.S. Senate matches the action on 
the part of the Federal Reserve and on the part of the Treasury 
and others to try to restore confidence in our markets, to 
restore liquidity as well.
    We will be taking up when we leave here today--the Chairman 
and Senator Shelby will be leading a debate, accepting 
amendments, debating amendments, as to what our 
responsibilities are to follow up on the actions that you take. 
And I agree with Senator Dodd. At the end of the day, I think, 
Chairman Bernanke, what the Fed has done will probably pass 
muster, and we will end up thanking you for that.
    I am going to ask you, when it comes time for me to ask 
questions, I am going to be asking you to give us your advice, 
your informed advice on the package that we are about to 
consider, that we are going to debate. And we are taking on 
ourselves the ability to criticize or comment on what you have 
done, and I would welcome you to do the same in terms of what 
we expect to do later today and maybe through tomorrow and next 
    The other questions I am going to ask--and a bunch of my 
colleagues have already indicated, telegraphed their pictures, 
I will telegraph mine as well, in terms of looking and 
reflecting on the steps you have taken. But among the questions 
I want to ask, Chairman Bernanke, are: Why did the Fed take the 
action that you have done? How did the Fed actually intervene? 
Just sort of give us a glimpse behind the curtain as to how you 
actually intervened. What are the probable repercussions of the 
action? What are the possible repercussions if you had not 
chosen to act? Could this intervention be seen as a model of 
what to do or not to do in the future? And if it is maybe the 
latter, what steps should be taken to reduce the likelihood 
that similar interventions will not be needed in the future?
    Those are the kinds of questions that I will be throwing 
your way, but one of the first questions I will ask is: What 
advice would you have for us as we take up our legislative 
actions on the floor?
    Thank you very much, Mr. Chairman.
    Chairman Dodd. Thank you very much.
    Senator Dole.


    Senator Dole. Thank you, Mr. Chairman. I am also anxious to 
hear from the witnesses and get into the question period.
    Chairman Dodd. Thank you very much.
    Senator Menendez.


    Senator Menendez. Thank you, Mr. Chairman. I appreciate you 
calling this hearing, and certainly no one questions the 
necessity of having acted to stop the Bear Stearns crisis. We 
can only imagine what would have happened to our broader 
economy at the end of the day. But the catch about this deal is 
that much of it is riding on faith, as I see it, and our faith 
cannot be blind, which means it is time to pull back the 
curtains and examine the details.
    If we do not learn from the chain of events that led to 
Bear's demise, then we are doomed to see a repeat in the 
future. I hope the answers we will hear today will provide 
insight into some key questions, including how we ended up 
blindsided by the sudden tanking of a firm as large as this one 
on Wall Street; how the specifics of this unprecedented deal 
were hammered out. What are the consequences of sticking 
taxpayers with a $29 billion loan that could fail? And, last, 
how do we continue to look at struggling homeowners in the eye 
when we pull out all the stops to help a sinking ship on Wall 
Street but homeowners are still adrift at sea, drowning in 
    The Bear Stearns crisis reared its head, and it was solved 
in a matter of days. The foreclosure crisis has been going on 
for a year with no end in sight. And both pose, I think, 
significant if not equal threats to our economy.
    So I look forward to getting to the bottom of exactly how 
the decision to rescue Bear Stearns came about and why their 
crisis is so different from the crisis still raging in 
neighborhoods across the country.
    Thank you.
    Chairman Dodd. Thank you very much.
    Senator Martinez.
    Senator Martinez. I will pass.
    Chairman Dodd. You pass on that.
    Senator Tester.


    Senator Tester. Thank you, Mr. Chairman. Welcome, Committee 
Members. You have got a lot of questions to answer, and I 
appreciate you being here. This is a big issue.
    You know, I had a hearing the day after this merger was 
announced. I had a forum on financial investments. The first 
question from the crowd did not go to the experts. It went to 
me. And the question was: ``Why $30 billion? Why was it 
invested? I am homeowner. I am in trouble. How come nobody 
steps up to the plate to help me?'' Many of the same questions 
that were asked here.
    I guess if I was to add to this list of questions, Have we 
set precedents? Is this going to be the policy from now on? Is 
this the direction we are headed, and is the right direction to 
be heading in?
    With that, Mr. Chairman, I just want to thank you for the 
hearing, and I do have many questions, more than that, when my 
time comes.
    Thank you.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Corker.


    Senator Corker. Mr. Chairman, I do not have an opening 
statement, and I hope that--you all have shown tremendous 
leadership, especially over the last few days. I hope we can 
move toward the leader and the Ranking Member only making 
opening comments in the future somehow so we could get to the 
witnesses, but I have been greatly illuminated and look forward 
to certainly hearing our witnesses.
    Chairman Dodd. We are glad you have a chair at the table 
and not in the closet back there as well.
    Chairman Dodd. We have all been in that seat at one point 
or another.
    Senator Bayh.
    Senator Bayh. I will wait.
    Chairman Dodd. Senator Crapo.


    Senator Crapo. Thank you, Mr. Chairman. I will be brief as 
well. I believe that the Members of the panel who have spoken 
already have already raised a number of critical issues. I 
think there is one more that we need to pay attention to as we 
look at this situation.
    The Congress is--or the Senate literally today is looking 
at issues relating to the housing market and the mortgage 
industry, and we are going to today in this hearing be looking 
very closely at what happened with the Bear Stearns situation 
and how the Fed and the Treasury and the SEC responded there.
    I think as we look at these issues and as the hearing moves 
forward, we also need to look at our competitiveness, frankly, 
in capital markets and whether we need to look at an entirely 
new restructuring of how we regulate our financial markets in 
this country. This issue has also been raised recently by 
Secretary Paulson, and many others have raised it before he 
    So I believe that what we are looking at in today's hearing 
clearly brings forward the question of how is our regulatory 
structure in the United States set up and how should it be set 
up as we look forward to moving into this next century, and how 
can we make ourselves as competitive as possible in today's 
global economy.
    With that, Mr. Chairman, I will stop.
    Chairman Dodd. Thank you. Thank you very much, Senator. 
And, again, I want to thank our witnesses for being here. We 
have, of course, the Chairman of the Federal Reserve Ben 
Bernanke; the Honorable Christopher Cox, the Chairman of the 
Securities and Exchange Commission; the Honorable Robert Steel, 
who is the Under Secretary for Domestic Finance at Treasury; 
and Tim Geithner, who is the President of the Federal Reserve 
Bank of New York. And we thank all four of you once again for 
being here.
    Chairman Bernanke, you have spent quite a bit of time in 
Congress these last few days. I suggested in private before the 
hearing that we might find an office up here for the Chairman, 
he has been here so often over the last number of days.
    We are grateful to you, all of you, for being here, as well 
as our other witnesses who are here in the second panel. We 
will begin with you, Mr. Chairman, and I would like you to take 
5 or 6 minutes. I do not want to hold you to any specific time, 
but if you would try and keep it in that framework. And also 
any other information you think that would be valuable for the 
Committee to have, we will, of course, agree to accept that 
testimony, as well as the documentation.
    With that, welcome to the Committee.


    Mr. Bernanke. Mr. Chairman, I do want to thank you for this 
hearing, which I think is absolutely appropriate and necessary, 
and we welcome your oversight.
    Chairman Dodd----
    Senator Bunning. Mr. Chairman, would you pull that mike 
closer? Thank you.
    Mr. Bernanke. How is that?
    Senator Bunning. That is great.
    Mr. Bernanke. Chairman Dodd, Senator Shelby, and other 
Members of the Committee, I appreciate this opportunity to 
discuss the economic and financial context and the actions the 
Federal Reserve has taken to stabilize financial markets and 
the economy.
    Although the situation has recently improved somewhat, 
financial markets remain under considerable stress. Pressures 
in short-term bank funding markets, which had abated somewhat 
beginning late last year, have increased once again. Many 
lenders have been reluctant to provide credit to 
counterparties, especially leveraged investors, and increased 
the amount of collateral they required to back short-term 
security financing agreements. To meet those demands, investors 
have reduced their leverage and liquidated holdings of 
securities, putting further downward pressure on security 
prices. Credit availability has also been restricted because 
some large financial institutions, including some commercial 
and investment banks and the government-sponsored enterprises, 
have reported substantial losses and writedowns, reducing the 
capital they have to support new lending. Some key 
securitization markets, including those for nonconforming 
mortgages, continue to function poorly, if at all.
    These developments in financial markets--which themselves 
reflect, in part, greater concerns about housing and the 
economic outlook more generally--have weighed on real economic 
activity. Notably, in the housing market, sales of both new and 
existing homes have generally continued weak, partly as a 
result of the reduced availability of mortgage credit, and home 
prices have continued to fall. Private payroll employment fell 
substantially in February, after 2 months of smaller job 
losses, with job cuts in construction and closely related 
industries accounting for a significant share of the decline. 
But the demand for labor has also moderated recently in other 
industries. Overall, the near-term economic outlook has 
weakened relative to the projections released by the Federal 
Open Market Committee at the end of January. Inflation has also 
been a source of concern. We expect inflation to moderate in 
coming quarters, but it will be necessary to continue to 
monitor inflation developments carefully.
    Well-functioning financial markets are essential for the 
efficacy of monetary policy and, indeed, for economic growth 
and stability. Consistent with its role as the Nation's central 
bank, the Federal Reserve has taken a number of steps in recent 
weeks to improve market liquidity and market functioning. These 
actions include reducing the cost and increasing the allowable 
term of discount window credit to commercial banks; increasing 
the size of our Term Auction Facility, through which credit is 
auctioned to depository institutions; initiating a Term 
Securities Lending Facility, which allows primary dealers to 
swap less liquid mortgage backed securities for more liquid 
Treasury securities; and creating the Primary Dealer Credit 
Facility, which is similar to the discount window but 
accessible to primary dealers. Although these facilities 
operate through depository institutions and primary dealers, 
they are designed to support the broader financial markets and 
the economy by facilitating the provision of liquidity by those 
institutions to their customers and counterparties. With 
respect to monetary policy, at its March meeting the FOMC 
reduced its target for the Federal funds rate by 75 basis 
points to 2\1/4\ percent.
    It was in this context of intensifying financial and 
economic strains that, on March 13th, Bear Stearns advised the 
Federal Reserve and other Government agencies that its 
liquidity position had significantly deteriorated and that it 
would have to file for bankruptcy the next day unless 
alternative sources of funds became available.
    This news raised difficult questions of public policy. 
Normally, the market sorts out which companies survive and 
which fail, and that is as it should be. However, the issues 
raised here extended well beyond the fate of one company. Our 
financial system is extremely complex and interconnected, and 
Bear Stearns participated extensively in a range of critical 
markets. The sudden failure of Bear Stearns likely would have 
led to a chaotic unwinding of positions in those markets and 
could have severely shaken confidence. The company's failure 
could also have cast doubt on the financial positions of some 
of Bear Stearns' thousands of counterparties and perhaps of 
companies with similar businesses. 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. Moreover, and very 
importantly, the adverse impact of a default would not have 
been confined to the financial system but would have been felt 
broadly in the real economy through its effects on asset values 
and credit availability.
    To prevent a disorderly failure of Bear Stearns and the 
unpredictable but likely severe consequences for market 
functioning and the broader economy, the Federal Reserve, in 
close consultation with the Treasury Department, agreed to 
provide funding to Bear Stearns through JPMorgan Chase. Over 
the following weekend, JPMorgan Chase agreed to purchase Bear 
Stearns and assumed Bear's financial obligations.
    The purpose of our action, as with our other recent 
actions--including our provision of liquidity to financial 
firms and our reductions in the federal funds rate target--was, 
as best as possible, to improve the functioning of financial 
markets and to limit any adverse effects of financial turmoil 
on the broader economy. We will remain focused on those 
    Clearly, the U.S. economy is going through a very difficult 
period. But among the great strengths of our economy is its 
ability to adapt and to respond to diverse challenges. Much 
necessary economic and financial adjustment has already taken 
place, and monetary and fiscal policies are in train that 
should support a return to growth in the second half of this 
year and next year. I remain confident in our economy's long-
term prospects.
    Thank you, and I would be pleased to take your questions.
    Chairman Dodd. Thank you very much.
    Chairman Cox.


    Mr. Cox. Thank you, Chairman Dodd, Senator Shelby, and 
members of the Committee, for inviting me to testify today on 
behalf of the Securities and Exchange Commission about recent 
events in the financial markets, and in particular the merger 
agreement between JPMorgan and Bear Stearns.
    The recent actions by the Federal Reserve, as Chairman 
Bernanke has just described, are unprecedented and of 
unquestioned significance. They include not only the extension 
of guarantees and credit in connection with JPMorgan's 
acquisition of Bear Stearns, but also the opening of the 
discount window to every one of the major investment banks.
    What happened to Bear Stearns during the week of March 10th 
was likewise unprecedented. For the first time, a major 
investment bank that was well-capitalized and apparently fully 
liquid experienced a crisis of confidence that denied it not 
only unsecured financing, but even short-term secured 
financing. And even when the collateral consisted of Treasuries 
and agency securities which had a market value in excess of the 
funds to be borrowed.
    Counterparties would not provide securities lending 
services and clearing services. Prime brokerage clients moved 
their cash balances elsewhere. These decisions, in turn, 
influenced others to also reduce their exposure to Bear.
    Over the weekend of March 15th and 16th, Bear Stearns faced 
a choice between filing for bankruptcy on Monday morning, or 
concluding an acquisition agreement with a larger partner.
    In the cauldron of these events, the actions that the 
Federal Reserve took--in particular extending access to the 
discount window, not only to Bear Stearns but to the other 
major investment banks--were addressed to preventing future 
occurrences of the run-on-the-bank phenomenon that Bear 
endured. It remains, however, for regulators and Congress to 
consider what other steps, if any, are necessary to harmonize 
this significant new safeguard with other aspects of the 
existing legislative and regulatory structure.
    The SEC, of course, does not have the function of extending 
credit or liquidity facilities to investment banks or to any 
regulated entity. Instead, through our consolidated supervised 
entities program, the Commission exercises oversight of the 
financial and operational condition of Bear Stearns, Goldman 
Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley at 
both the holding company and the regulated entity levels. Our 
oversight of the CSEs includes monitoring for firm-wide 
financial and other risks that might threaten the regulated 
entities within the CSEs, especially the U.S. regulated broker-
dealers and their customers.
    In particular, the SEC requires that firms maintain an 
overall Basel capital ratio at the consolidated holding company 
level of not less than the Federal Reserve's 10 percent well-
capitalized standard for bank holding companies.
    At all times during the week of March 10th through 17th, up 
to and including the time of its agreement to be acquired by 
JPMorgan, Bear Stearns had a capital cushion well above what is 
required to meet the Basel standards. Specifically, even at the 
time of its sale, Bear Stearns' consolidated capital and its 
broker-dealers' net capital exceeded relevant supervisory 
    Even prior to the experience with Bear Stearns, the SEC's 
supervision of investment bank holding companies has always 
recognized that capital is not synonymous with liquidity. A 
firm can be highly capitalized while also having liquidity 
problems. So in addition to a healthy capital cushion, the firm 
needs sufficient liquid assets in the form of cash and high 
quality instruments such as U.S. Treasury securities that can 
be used as collateral for loans in times of stress.
    For this reason, the CSE requirements are designed to 
ensure that an investment bank holding company can meet all of 
its cash needs even in the face of a complete cutoff of 
unsecured financing that lasts for a full year. In these ways, 
the CSE supervisory model has focused on the importance of both 
capital and liquidity.
    What neither the CSE regulatory approach, nor any existing 
regulatory model, has taken into account is the possibility 
that secured funding, even if it is backed by high quality 
collateral such as U.S. Treasury and Agency securities, could 
become unavailable. The existing models for both commercial and 
investment banks are premised on the expectancy that secured 
financing would be available in any market environment, albeit 
perhaps on less favorable terms than normal.
    For this reason, the inability of Bear Stearns to borrow 
against even high quality collateral on March 13th and 14th was 
an unprecedented occurrence. And that is what has prompted the 
Fed's action to open the discount window to investment banks.
    Beyond this obviously powerful step that the Fed has taken, 
the Bear Stearns' experience has challenged the measurement of 
liquidity in every regulatory approach, not only here in the 
United States but around the world. It was in this connection 
that I conveyed to the Basel Committee my strong support for 
extending their capital adequacy standards to deal with 
liquidity risk of the kind that materialized for Bear Stearns.
    The Fed's other important decision, to provide funding to 
Bear Stearns through JPMorgan, was made because--as you have 
heard Chairman Bernanke testify--Bear's extensive participation 
in a range of critical markets meant that a chaotic unwinding 
of its positions not only could have cast doubt on the 
stability of thousands of the firm's counterparties, but also 
created additional pressures well beyond the financial system 
through the real economy. These are considerations of systemic 
risk that extend far beyond the SEC's mandate to protect 
investors, ensure orderly securities markets, and promote 
capital formation through such means as the CSE program.
    But it is important to observe nonetheless that the SEC's 
statutory and regulatory framework, including not only our 
broker-dealer net capital regime but also the protection 
provided to investors through SIPC, and the requirement that 
SEC-regulated broker-dealers segregate customer funds and fully 
paid securities from those of the firm, worked in this case to 
achieve the purpose for which it was designed.
    Despite the run on the bank to which Bear Stearns was 
subjected, its customers were fully protected. At no time 
during the week of March 10th through 17th, up to and including 
the date of the agreement with JPMorgan, were any of Bear 
Stearns' broker-dealer customers at risk of losing their cash 
or their securities.
    The question has been asked what might have happened if, 
notwithstanding the Fed's action, the transaction with JPMorgan 
had not been agreed to before Monday, March 17th? 
Unfortunately, unlike a laboratory in which conditions can be 
held constant and variables changed while the experiment is 
repeated, in the social science of the market the selection of 
one course of action forever forecloses all other approaches 
that might have been taken.
    But there is one thing we know to a certainty. With or 
without JPMorgan's acquisition of Bear and with or without a 
bankruptcy, Bear Stearns' customers are and would have been 
fully protected from any loss of cash or securities.
    Beyond demonstrating the importance of short-term liquidity 
in the form of available sources of secured funding, the Bear 
Stearns' experience has highlighted the statutory supervisory 
gap in this area. In 1991, when Congress enacted the Federal 
Deposit Insurance Improvement Act, it recognized the importance 
of having a framework for considering the resolution of 
financial difficulties experienced by commercial banks, but not 
unfortunately by investment banks.
    FDICIA, together with the Federal Deposit Insurance Act, 
reflect Congress' conviction that it is best not to improvise 
the principles that will guide Federal intervention in 
financial institutions. That is a point that is equally valid 
not only for depository institutions but other systemically 
important institutions, as well.
    Now, as always, the SEC is working closely with our 
regulatory counterparts to ensure that our regulatory actions 
contribute to orderly and liquid markets. These recent events 
have amply demonstrated that the SEC's mission to protect 
investors, maintain orderly markets, and promote capital 
formation is more important now than ever it has been.
    Thank you again, Mr. Chairman, for the opportunity to 
discuss these important issues and I look forward to taking 
your questions.
    Chairman Dodd. Thank you very much, Chairman Cox.
    Secretary Steel.


    Mr. Steel. Thank you. Chairman Dodd, Ranking Member Shelby, 
members of the Committee, good morning. I very much appreciate 
the opportunity to appear before you today to represent 
Secretary Paulson and the United States Treasury Department, 
and to join the independent regulators leading the Board of 
Governors of the Federal Reserve System, the Securities and 
Exchange Commission, the Federal Reserve Bank of New York. As 
you know, Secretary Paulson is on a long-scheduled trip to 
China today.
    You invited Treasury here today to discuss the ongoing 
challenges in our credit markets, and specifically, the 
agreement between JPMorgan Chase and Company and the Bear 
Stearns Companies, Inc.
    The Treasury Department continues to closely monitor the 
global capital markets and the past several months have 
presented to us many important issues and situations to 
evaluate and to address. As Secretary Paulson stated earlier 
this week, a strong financial system is vitally important, not 
only for Wall Street, not only for the bankers, but for all 
Americans. When our markets work, people throughout our economy 
benefit. Americans seeking to buy a car, a home, families 
borrowing to pay for college, innovators borrowing on the 
strength of a good idea for a new product or technology, and 
business financing investments that create new jobs. When our 
financial system is under stress, all Americans bear the 
    Mr. Chairman, as you have appropriately noted in your 
letter to Secretary Paulson, ``It is important to maintain 
liquidity, stability, and investor confidence in the markets.''
    The recent events in the credit and mortgage markets are of 
considerable interest to this Committee, other Members of 
Congress, and most importantly, all of the citizens of this 
country. For several months, our financial markets have gone 
through a period of turbulence followed by periods of 
improvement. A great deal of deleveraging is occurring, which 
has created liquidity challenges for financial institutions and 
thereby compromised our credit markets' ability to be an engine 
of economic growth.
    It took a long time to build up the excesses in our markets 
and we are now working through all of the varied consequences. 
Market participants are adjusting, making disclosures, raising 
capital, and repricing assets. We have continued to engage with 
our fellow regulators and market participants so that 
collectively we work through these challenges to limit the 
spillover effects to our economy and make our markets even 
stronger in the future.
    During times of market stress, certain issues may hold the 
potential to spill over to the broader markets and cause harm 
to the American economy. This was the case, in our view, with 
the events surrounding the funding capability of Bear Stearns 
between March 13th, 2008 and March 24th. The funding condition 
of Bear Stearns had deteriorated rapidly and by March 13th, 
2008 had reached such a critical stage that the company would 
have faced a bankruptcy filing on March 14th, 2008 absent an 
extraordinary infusion of liquidity.
    During this period, regulators were continually 
communicating with one another, working collaboratively, and 
keeping each other apprised of the changing circumstances. The 
focus was not on the specific institution but on the more 
important strategic concern of the implications of a 
bankruptcy. The failure of a firm at that time that was so 
connected to so many corners of our markets would have caused 
financial disruptions beyond Wall Street.
    We weighed the multiple risks, such as the potential 
disruption to counterparties, other financial institutions, the 
markets, and the market infrastructure. These risks warranted a 
careful review and thorough considerations of potential 
implications and responses.
    Our role at the Treasury Department was to support the 
independent regulators and their efforts with private parties 
as credit markets were operating under considerable stress and 
we believed that certain prudent actions could help to mitigate 
systemic risk, enhance liquidity, facilitate more orderly 
markets, and minimize the risk to the taxpayers.
    The Treasury Department supports the actions taken by the 
Federal Reserve Bank of New York and the Federal Reserve. We 
believe the agreements reached were necessary and appropriate 
to maintain stability in our financial system during this 
critical time.
    Obviously, each independent regulator had to make its own 
individual assessment and determination as to what actions it 
would or would not take. While the Treasury Department was not 
a party to any agreements, we have a great deal of respect for 
the leadership of each regulator and appreciate their efforts 
during this extraordinary time.
    Upon assessing the Bear Stearns situation, the Federal 
Reserve decided to take the very important and consequential 
action of authorizing the Federal Reserve Bank of New York to 
institute a temporary program for providing liquidity to 
primary dealers. Recent market turmoil has required the Federal 
reserve to adjust some of the mechanisms by which it provides 
liquidity to the financial system. Its response, in the face of 
new challenges, deserves praise.
    At the Treasury Department, we will continue to monitor 
market developments. We remain focused on the issues 
surrounding recent developments, including the important 
responsibility of safeguarding Government funds.
    Recent events underscore the need for strong market 
discipline, prudent regulatory policies, and robust risk 
management. The Treasury Department and our colleagues, 
comprising the President's Working Group on Financial Markets, 
are addressing the current and strategic challenges and doing 
all that we can to ensure high quality, competitive, and 
orderly capital markets. We seek to strengthen market 
discipline, mitigate systemic risk, enhance investor confidence 
and market stability, as well as facilitate stable economic 
    Thank you, and I look forward to your questions, sir.
    Chairman Dodd. Thank you very much, Mr. Secretary.
    Chairman Geithner.

                        BANK OF NEW YORK

    Mr. Geithner. Thank you, Mr. Chairman, Senator Shelby, 
members of the Committee. Thanks for giving me the chance to be 
here today.
    These are exceptional times. We have taken some very 
consequential actions. They deserve and require very careful 
analysis and reflection and oversight. And you are right to 
begin that process now.
    I have submitted a very extensive written testimony 
describing in detail the events that began that evening of, I 
think, March 13th. But I just want to limit my opening remarks 
to three things.
    One is I want to explain why we did what we did. I want to 
talk a little bit about the policy challenges ahead and 
continuing risks to the economy in this financial crisis. And I 
want to set out some broad objectives for how we think about 
the future.
    Three weeks ago, on March 13th, we learned from the SEC 
that Bear Stearns was facing imminent bankruptcy. This 
presented us with some extraordinarily difficult policy 
judgments. Bear Stearns occupies, occupied, a central position 
in the very complex and intricate relationships that 
characterize our financial system. And as important as that, it 
reached the brink of insolvency at an exceptionally fragile 
time in global financial markets.
    In our judgment, an abrupt and disorderly unwinding of Bear 
Stearns would have posed systemic risks to the financial system 
and magnified the downside risk to economic growth in the 
United States. A failure to act would have added to the risk 
that Americans would face lower incomes, lower home values, 
higher borrowing costs for housing, education, other living 
expenses, lower retirement savings, and rising unemployment.
    We acted to avert that risk in the classic tradition of 
lenders of last resort, with the authority provided by the 
Congress. We chose the best option available in the unique 
circumstances that prevailed at that time.
    The Federal Reserve has to strike a very careful balance 
between actions to contain risk to the broader economy and 
actions that might amplify the risk of future financial crises 
by insulating investors from the consequences of imprudence.
    In this context, though, let me just emphasize two things. 
A failure to act would have imposed significant damage on those 
households, on those companies, on those financial institutions 
that had been comparatively prudent. And in this particular 
case, no owner or executive or director of a financial 
institution can look at the outcome for Bear Stearns and choose 
to see their firm managed in such a way as to court a similar 
    The financial arrangement we reached to help avert defaults 
was authorized by the Chairman of the Board of Governors, and 
supported by the Secretary of the Treasury. It is very 
carefully designed to provide a number of important protections 
to reduce the risk of any loss. First, our loans are backed by 
a substantial pool of collateral that will be professionally 
managed. Second, JPMorgan Chase agreed to absorb the first $1 
billion of any loss that might occur in connection with this 
arrangement. And third, our long-term horizon for holding the 
collateral will enable assets to be managed in an orderly 
fashion to minimize the risk of any loss and minimize any 
disruption to markets.
    The risk in this arrangement--and there are risks in this 
arrangement--are modest in comparison to the substantial losses 
to the economy that could have accompanied Bear's insolvency.
    I believe the actions taken by the Federal Reserve on a 
number of fronts in recent months have reduced some of the 
risks to the economy that is inherent in this adjustment 
underway in financial markets. By reducing the probability of a 
systemic financial crisis, the actions taken by the Fed on and 
after March 14th have helped avert substantial damage to the 
economy and they have brought a measure of tentative calm to 
global financial markets.
    Relative to the conditions that existed on March 14th, risk 
premiums have narrowed, foreign exchange markets are somewhat 
more stable, energy and commodity prices are somewhat lower, 
perceptions of risk in the financial system have somewhat 
diminished, and the flight to quality is less pronounced.
    Nevertheless, and I want to emphasize nevertheless, 
liquidity conditions in markets are still substantially 
impaired and the process of deleveraging remains underway. 
Financial market participants are still extraordinarily 
cautious about assuming risk. And this will intensify, continue 
to intensify, the headwinds facing the U.S. in the global 
    The causes of this crisis took a long time to build up and 
they will take some time to work through. And in this context, 
it is important to underscore the fact that policymakers and 
financial market participants are going to need to continue to 
act proactively, with actions that are proportionate to the 
challenges ahead.
    Let me just highlight three important areas for continued 
focus on the policy front. First, it is very important that 
financial institutions continue to improve the quality of 
disclosure. And even the strongest institutions face compelling 
incentives to raise new equity capital so that they can take 
advantage of the opportunities ahead.
    Second, alongside the broad policy actions, both monetary 
policy and fiscal policy, that are already in place to contain 
the downside risk to the economy, it is very important to 
strengthen the capacity of the major government sponsored 
enterprises, the Federal Home Loan Bank system, the Federal 
Housing Administration, so that they can provide finance to the 
mortgage market and help reduce the risk of avoidable 
    Third, the Federal Reserve, working closely with other 
major central banks, will continue to provide liquidity to 
markets to help facilitate the process of financial repair.
    Looking forward, and it is important to look forward, even 
as we work to contain the risks in this financial crisis, we 
need to begin to design a comprehensive set of reforms to the 
financial system. In addition to the very important objective 
of putting in place a stronger set of protections for 
consumers, the overwhelming imperative of reform must be to put 
in place a stronger framework for financial stability, both in 
the United States and, I think, globally.
    And our objective should be to create a system that 
preserves the unique strength of our markets in providing 
individuals and companies with innovative ways to access 
capital and credit, but with a greater capacity to withstand 
stress. And this is going to require significant changes to 
regulatory policy and to the regulatory framework. And I think 
the focus has to be on changing the incentives all financial 
market participants face in managing risk and exposure to 
adverse outcomes.
    In my view, and this is my personal view, there are a set 
of important objectives and principles that should guide this 
effort. I am just going to list five quickly, before I 
    First, we need to ensure there is a stronger set of shock 
absorbers in terms of capital and liquidity in those 
institutions, both banks and a limited number of the largest 
investment banks, institutions that are critical to market 
functioning. And they need to be under a stronger form of 
consolidated supervision than exists today.
    Second, we need to streamline and simplify our excessively 
complex and segmented regulatory framework to reduce the 
opportunity it creates for regulatory arbitrage, not just in 
the mortgage market but more broadly.
    Third, we need to make the financial infrastructure more 
robust, particularly in the derivatives and repo markets, so 
that the system can better withstand the effects of default by 
a major participant.
    Fourth, we need to redesign the set of liquidity facilities 
that we maintain in normal times--we, at the Federal Reserve, 
maintain in normal times--and in extremis, both in the United 
States and across the other major central banks. And these 
changes, as many of you have recognized, need to come with a 
stronger set of requirements for the management of liquidity 
risk by financial institutions that have access to central bank 
    And fifth, we need to make sure that the Federal Reserve 
has the mix of authority and responsibility that is necessary 
to enable it to respond with adequate speed and force to 
systemic risk to financial stability.
    Our system has many strengths, but to be direct about it, I 
think we have suffered a very damaging blow to confidence and 
the credibility of our financial system. One of the great 
strengths of our system, though, is the speed with which we 
adapt to change.
    My colleagues at the Federal Reserve and I look forward to 
working with this Committee, with the Congress, and with the 
executive branch to try to think through the very important 
task of how to put in place a stronger system for the future.
    I just want to express, in closing, my admiration and 
appreciation to the officers and staff of the Federal Reserve 
Bank of New York and the Federal Reserve system. They have 
performed with great skill and care under extreme pressure.
    I also want to thank Chairman Bernanke, Secretary Paulson, 
Chairman Cox, and Bob Steel, among many other colleagues in the 
Fed and the supervisory community for really exceptional 
leadership in a difficult time.
    Thanks again for giving me the chance to appear today.
    Chairman Dodd. Thank you very much, President Geithner.
    Just a couple of quick points, if I can.
    First of all, I just want to express once again to the 
witnesses, I realize this was an extraordinary case in calling 
this hearing, but with the exception of one witness we got 
statements very late last evening. Again, I want to make this 
appeal to people. You have got to let us know--my colleagues 
here want to be able to read these statements, they want to 
develop questions. We need to get these statements in a more 
timely fashion under the rules of the Committee.
    I would be remiss if I did not bring it up again. I do not 
want to keep repeating it every hearing we go. So again, I 
understand the timing of this Committee may have put some 
additional pressures and I know others of you had to testify in 
other hearings prior to this. But I want to make that case.
    Second, what I would like to do here, why don't I try 7 
minutes. That is not a lot of time, but there are a lot of 
members here and I want to make sure everybody gets a chance to 
raise questions. I am not going to bang down the gavel at 
seven, but try and keep that in mind as you develop your 
questions on the Committee.
    I will begin, if I can, with a question for the Federal 
regulators here. I guess going back, I was thinking this 
morning, there was the question raised by Howard Baker years 
ago, what did you know, and when did you know it? The kind of a 
question that comes to mind when you look at this situation, 
talking about the 96 hours. And what did our regulators know 
and when did you know it, in terms of our response to the 
situation with Bear Stearns.
    Specifically, there have been some reports in the press 
about the details of this negotiation. The Wall Street Journal 
reported, and I quote them, it says ``This was no normal 
negotiation. Instead of two parties, there were three, the 
third being the Federal Government. It is unclear what the 
explicit requests were made by the Fed or the Treasury.''
    So I will begin with you, Chairman Bernanke, and also ask 
Secretary Steel what, if any, interjections were there over 
stock price of Bear Stearns? Specifically again, there are just 
reports, and I want to share them with you, that they would 
make an offer. That JPMorgan Chase would make an offer of $4 a 
share. Subsequently it was conveyed to JPMorgan Chase by 
someone in the Federal Government that the offer sounded too 
high in terms of rewarding Bear Stearns' stockholders, given 
the taxpayer funding that was involved.
    Therefore, were you or any of your agencies aware at any 
point that there was an offer of $4 a share made from JPMorgan 
Chase? And second, did you or anyone in your agency provide 
feedback to JPMorgan or Bear Stearns on the value of that 
offer, in particular? And then last, given the specifics of the 
situation, depending upon your answer, do you think it would be 
improper or is it improper for any high-ranking Government 
official to have given advice to the CEOs of companies 
regarding what the appropriate stock price should be in 
circumstances like this?
    Mr. Bernanke. Mr. Chairman, the Federal Reserve's interest 
in this negotiation was that Bear Stearns be assumed by a 
strong firm so that its obligations would be met. I would 
emphasize, in fact, that we were very careful to make sure that 
there were multiple opportunities for different firms to talk 
to Bear Stearns over that short period of time.
    We had no interest or no concern about the stock price that 
was evaluated. That was a secondary issue, as far as we were 
concerned. We wanted to see Bear Stearns' liabilities assumed 
in some way.
    Chairman Dodd. So there was no interjection on the part of 
the Fed at all in this area?
    Mr. Bernanke. Not to my knowledge.
    Chairman Dodd. Secretary Steel.
    Mr. Steel. Well sir, the Secretary of the Treasury and 
other members of Treasury were active participants during this 
96 hours, as you describe. There were lots of discussions back 
and forth. Also, in any combination of this type, there are 
multiple terms and conditions.
    I think the perspective of Treasury was really twofold. 
One, was the idea that Chairman Bernanke suggested, that a 
combination into safe hands would be constructive for the 
overall marketplace. And No. 2, since there were Federal funds 
or the Government's money involved, that that be taken into 
account, and Secretary Paulson offered perspective on that.
    There was a view that the price should not be very high or 
should be toward the low end and that it should be, given the 
Government's involvement, that was the perspective.
    But regards to the specifics, the actual deal was 
negotiated or the transaction was negotiated between the 
Federal Reserve Bank of New York and the two parties.
    Chairman Dodd. President Geithner, can you shed any light 
on this at all, on these rumors that are going around about 
Federal agencies recommending a lower price rather than one 
that was being offered?
    Mr. Geithner. Let me just echo what the Chairman and Bob 
Steel said. Two objectives, very important for us. One was 
there be an agreement reached that would avert the risk of 
default because of the consequences for the economy as a whole.
    The second was that the outcome, to the extent possible, 
not add to the inherent moral hazard risk in this kind of 
    From my perspective, the outcome reached that evening and 
the subsequent agreement reached a week later, are fully 
consistent with those two objectives.
    Would there have been some outcomes that would have been 
not consistent with other objectives? Possibly, but we were not 
presented with those outcomes.
    Chairman Dodd. The point I want to get at here is whether 
or not our Federal agencies at all, including Treasury in this 
case here, Secretary Steel, where one offer was made and the 
Treasury recommended a lower--that a lower price be offered. 
Was there any such intervention directly by the Treasury?
    Mr. Steel. I cannot confirm that, sir. Secretary Paulson 
and Treasury were active participants. But in the end, the 
actual offer made and accepted was between the Federal Reserve 
Bank of New York and the participants. As I said, there was a 
perspective, as President Geithner suggested, that the outcome, 
with all the different terms and conditions, would be 
consistent with communicating and making clear moral hazard to 
the least degree possible. And I think that is consistent with 
how President Geithner and I describe it.
    Chairman Dodd. I understand the motivation behind it. The 
question is whether--I guess I maybe should ask the first 
question. What would be your reaction to the question, 
generally speaking, as to the propriety in this sort of 
circumstance of the Treasury intervening with a specific 
request that a certain price be offered where this kind of a 
transaction is going forward?
    Mr. Steel. I think that the Treasury was actively involved 
and provided a perspective. The final terms and conditions were 
settled by the Federal Reserve Bank of New York. It was our 
perspective, as I said, that moral hazard wanted to be 
protected as much as possible. And so therefore a lower price 
was more appropriate. And there were lots of terms and 
    The appropriateness, from my perspective, is that when 
there is Federal money involved, as originally $30 billion and 
then $29 billion, then there is a point of view that should be 
offered to the principals, which in this case the Federal 
Reserve Bank of New York, as to our perspective.
    Chairman Dodd. Well, all right. Let me move on. I do not 
want to dwell on it, but that is a question I am sure others 
may pursue as well because it is a matter of concern.
    I want to go back to the issue of the discount window, if I 
could, Mr. Chairman, with you. As I mentioned in my opening 
statement, in a hearing before this Committee a week or two 
earlier than the events of March 13th and 14th, we had in fact 
a panel of regulators before us. And I raised the issue as to 
whether or not opening up the discount window to broker-dealers 
would be a--how wise that would be. It was not just the Vice 
Chairman of the Fed but, in fact, every regulator at the panel 
that day rejected the idea. Obviously, people changed their 
minds, apparently, over the next 10 days or 12 days.
    The question I have for you is, one, what happened in that 
10 days that caused the Fed to change its mind? Second, if you 
had changed your mind, why didn't you change your mind on 
Thursday night instead of Sunday night? And if you had changed 
your mind on Thursday night instead of Sunday night, could Bear 
Stearns have been saved, since Bear Stearns was not insolvent, 
it was a liquidity issue. And if opening up that discount 
window would have provided additional liquidity, could all of 
this been avoided?
    Mr. Bernanke. Mr. Chairman, it was a very substantial step 
to do what we did, to open up the discount window. And we did 
not take it lightly, as Vice Chairman Kohn indicated. We had, 
in fact, earlier that week, on the Tuesday we had instituted 
the Term Securities Lending Facility which was, in fact, open 
to primary dealers. It was a source of liquidity and did 
provide reassurance. The market responded very well to that. 
But it was not available during that week.
    It was precisely the set of conditions that we saw during 
the week and that led to the Bear Stearns' situation that 
caused us to reconsider our previously held position that it 
would take a very high bar to open up the discount window. We 
made the decision to do so on Sunday. At the time we did it, we 
did not know whether the Bear Stearns' deal would be 
consummated or not and we wanted to be prepared, in case it was 
not consummated, that we would need to have this facility in 
order to protect what we imagined would be pressure on the 
other dealers subsequently to that.
    Whether opening it up earlier would have helped or not is 
very difficult to say. Perhaps President Geithner can add to 
this, but Bear Stearns was losing customers and counterparties 
very quickly. They were downgraded on Friday. We did lend them 
money, of course, to keep them into the weekend. But it is not 
at all obvious to me that it would have been sufficient to 
prevent their bankruptcy.
    Chairman Dodd. Before I turn to President Geithner on this 
question, I want to ask you as well, as you pointed out and 
others have, we are in the midst of considering legislation on 
the floor dealing with the housing issue. And I have raised 
this issue. Obviously, there are some serious regulatory 
questions being raised now as a result of opening up the 
discount window and expanding that opportunity.
    Do you feel you have enough statutory authority to impose 
regulations on broker-dealers? Or do you need additional 
authority that we ought to be providing you? And since we are 
on the floor dealing with a related matter, it seems to me it 
is an important question to get to Senator Shelby and I and 
others who would be interested in knowing whether or not we 
ought to respond, rather than leaving this door open 
potentially with exposure that could cost us dearly.
    Mr. Bernanke. Mr. Chairman, for now we are working very 
effectively with the SEC and with the firms. We have the 
information we need. We believe that the lending we are doing 
to the primary dealers is being done safely and soundly, so 
there is not an immediate emergency there.
    However, since our lending authority is only for 
emergencies, we will have to take this window back. We will 
have to close it when conditions normalize. So questions that 
Congress will want to consider over time: Should we make this a 
regular facility in the future? If so, presumably we will want 
to think through the prudential regulation of the investment 
banks to make sure that they are indeed safe and sound, 
adequately safe and sound to receive this particular privilege. 
And we would also need to think, I believe, about--the question 
was raised about FDICIA. Do we need additional thinking on the 
appropriate set of circumstances, the appropriate sequencing 
under which an investment bank in trouble would be reorganized, 
assisted, and so on?
    So I think there are some very weighty issues, but let me 
just emphasize for the time being that we are effectively 
lending to investment banks. We are working very closely and 
carefully with the SEC and with the firms, and we do not feel 
that we are in any way lending improperly or unsafely at this 
    Chairman Dodd. Let me ask the rest of you here the earlier 
question I asked about whether or not, had this Sunday night 
decision been made on Thursday or earlier--and others had 
raised it earlier. This was not some new idea. People had been 
talking about it, and it had been pretty widely rejected by the 
regulatory community at large. But, President Geithner, what is 
your reaction to that? What do you think might have happened on 
Thursday night had the decision been made to open that up? 
Would Bear Stearns have been in a different position?
    Mr. Geithner. Very hard to know. Let me just make two 
    In some sense, we had--you can think about that question by 
thinking about what actually happened on Friday. So Friday 
morning, we took the exceptional step with extreme reluctance, 
with the support of the Board of Governors and the Treasury, to 
structure a way to get them to the weekend so that we could buy 
some time to explore whether there was a possible solution that 
would have them acquired and guaranteed.
    Chairman Dodd. Let me ask you something quickly on that 
point. I have read the written statement of Alan Schwartz. I am 
under the impression he thought that he got 28 days, not a day 
or 2 days.
    Mr. Geithner. Well, if you look carefully at the statement 
that was made, the language said ``up to 28 days.'' But I think 
I can answer your question if you will let me just continue 
this one thing.
    So we took that extraordinary step to buy time to get to 
the weekend, and as you can hear from Alan later on, you can 
see--if you ask about the details of what happened over the 
course of that day, you can see a little bit about the scale of 
the loss of confidence, because the dynamics that Chairman Cox 
described accelerated over the course of the day. And the 
number of customers and counterparties that sought to withdraw 
funds, the actions by rating agencies on some Bear paper, 
accelerated that dynamic, despite the access to liquidity and 
despite the hope that that might buy some time. So I think that 
does raise a lot of questions about whether this very 
exceptional, temporary, carefully designed access to liquidity 
we provided would have been sufficient.
    One other point. The way the Federal Reserve Act is 
designed and the way we think about the discount window for 
banks is we only allow sound institutions to borrow against 
collateral in that context. And I can only speak personally for 
this, but I would think--I would have been very uncomfortable 
lending to Bear given what we knew at that time if you could 
walk back the clock and think about what had happened if that 
facility had been in place before.
    But, again, as everybody has emphasized, both these 
facilities--the one the Chairman described was announced that 
Tuesday, and the subsequent facility announced Sunday night--
these were exceptionally consequential acts, taken with extreme 
reluctance and care, because of the substantial consequences it 
would have for moral hazard in the financial system going 
forward. And I do not believe it would have been appropriate 
for us to take that action Sunday night if we had not been 
faced with the dynamics that were precipitated by and 
accelerated by the looming prospect of a Bear default.
    Chairman Dodd. I have gone over my time, and I apologize to 
my colleagues.
    Senator Shelby.
    Senator Shelby. Thank you, Chairman Dodd.
    Chairman Cox, the Securities and Exchange Commission is the 
primary regulator of Bear Stearns. Under the Commission's 
Consolidated Supervised Entities Program, which you mentioned, 
the SEC oversees certain investment banks, including Bear 
Stearns, at the holding company level, focusing on the 
financial condition of the entire company. Some people think 
that the SEC missed the boat here, was asleep. You mentioned 
earlier the difference between capital and liquidity, which is 
a big thing.
    When did the SEC first discover that Bear Stearns was 
experiencing severe liquidity problems? And after learning of 
Bear Stearns' problems, what steps did the Securities and 
Exchange Commission take to address the situation? And did you 
work with the Federal Reserve or anybody else in doing this? 
And what impact did those actions or inactions by the SEC have 
on protecting investors?
    We all know that we had some warning about Bear Stearns 
earlier as far as capital. There are some other firms that got 
some capital problems and are out seeking capital to shore 
themselves up. But let's go back to the SEC. Where was the SEC 
on this? And were they on your kind of watchlist, if you want 
to call it that? And if not, why not?
    Mr. Cox. They were, going back to the summer of 2007, 
because of the troubles of their two hedge funds. And while 
some thought back in the summer of 2007 that because they did 
not, those hedge funds, pose direct risk to the holding 
company--they were separate--that that should not be of 
material importance to an analysis of the Bear Stearns holding 
company. The fact that for practical or commercial reasons Bear 
decided to support one of those funds caused us to take a view 
that we had to look at even outside the holding company at 
Bear. The SEC at that time began to monitor both capital and 
liquidity at Bear on a daily basis.
    Fast forward to January of this year. As of January 31st, 
the capital and liquidity at Bear were still above regulatory 
thresholds and adequate for those purposes. The liquidity pool 
was $8.4 billion----
    Senator Shelby. Is that the last time you examined them?
    Mr. Cox. No, this is now--I am speaking----
    Senator Shelby. January 31st.
    Mr. Cox. January 31st, $8.4 billion on that date. The 
liquidity pool grew from January 31st to the first week in 
March to $21 billion. So substantial additional liquidity was 
being added, in part because of the pressure that the SEC as 
their supervisor was placing on them.
    In 1 day--take us now to this week of March 10th. In 1 day, 
Thursday, March 13th, liquidity at Bear Stearns fell from $12.4 
billion to $2 billion----
    Senator Shelby. Why?
    Mr. Cox [continuing]. And that is because of what we have 
heard discussed here this morning: the complete evaporation of 
confidence, the refusal of counterparties to deal with Bear.
    Senator Shelby. Was there kind of a run on the place or 
refusal to do business or what?
    Mr. Cox. Even though we are not accustomed to using that 
term in the investment banking sphere--that is a well-known 
notion with depository institutions--the analogy is nearly 
    Now, to go to the rest of your question, our coordination 
with the New York Federal Reserve, that was regular and 
increasing since August of 2007 in the form of visits to their 
offices in New York, regular conference calls, many e-mails and 
so on. During that time we also worked together on a major 
project led by the New York Fed, the paper produced under the 
auspices of the senior supervisor group addressed to these 
    The week of Monday, March 10th, the SEC and the New York 
Fed spoke by phone numerous times. Beginning on Monday, the Fed 
provided us with extremely helpful information regarding market 
rumors that they were hearing from a variety of market sources. 
We shared with them what we were hearing and provided 
information on Bear Stearns' operations and their finances. We 
met in their offices in New York on Wednesday and discussed 
Bear Stearns as well as the situation of other banks and 
securities firms. That, of course, takes us to the 96-hour 
period that everyone has already focused on.
    Senator Shelby. Is there a gap in the regulation process 
here between, say, the Federal Reserve's interest here, the 
SEC's mandate, and so forth? Is there a gap there that 
something fell through the cracks? Or is it just something that 
is just already so fast, like the liquidity was gone?
    Mr. Cox. Well, I think the speed with which this happened 
is truly the distinguishing feature. But there are significant 
differences between the charter and the mission of the SEC, on 
the one hand, and the Fed on the other.
    Senator Shelby. Absolutely.
    Mr. Cox. It is very important--and the Treasury, I should 
add, because the Fed is focused on safety and soundness and the 
financial system. Treasury is concerned even beyond that with 
systemic risk as it might pass over into the real economy and 
affect things beyond the financial system. The SEC is focused 
very particularly, first, under statute as it applies to these 
broker-dealers, the investment banks, on their regulated 
activities and on their customers and the protection of their 
cash and their securities. We are also focused on orderliness 
of markets and so on, but within the context of the securities 
markets themselves.
    So there is overlap between the SEC and the Fed's systemic 
concerns, and certainly where we leave off, they pick up, and 
where the Fed leaves off, the Treasury picks up.
    Senator Shelby. Chairman Bernanke, are there some 
comparisons between what happened at Bear Stearns and what 
happened with the British bank Northern Rock? I know they are 
different. Was there a liquidity problem there, too, and that 
caused the bank to fail and the British Government to have to 
step in or what?
    Mr. Bernanke. There was a similarity. I agree with Chairman 
Cox that there was a remarkable falling off of liquidity, 
essentially a run on Bear Stearns----
    Senator Shelby. A run on Bear Stearns.
    Mr. Bernanke. That was analogous in some ways to what 
happened to Northern Rock, although, of course, all the details 
are quite different.
    Senator Shelby. Secretary Steel, who first proposed using 
taxpayer funds to help finance JPMorgan Chase's acquisition of 
Bear Stearns? Secretary Paulson? Yourself? The Fed? Mr. Dimon? 
Or who?
    Mr. Steel. I will provide my perspective, Senator, and I 
can be confirmed by others. But I believe that as the 
negotiations proceeded through the weekend with the Federal 
Reserve Bank of New York, with the direct principals, that as 
we wore into the weekend and people took time, and there are 
various terms to every transaction, that late Saturday evening 
or early Sunday morning it was proposed by one of the 
principals, JPMorgan, to President Geithner that so as to move 
forward, that this would be a condition that seemed to be 
appropriate to them. So answer your question specifically, 
proposed by JPMorgan Chase to President Geithner.
    Senator Shelby. And what kind of security, if any, did the 
Fed get for this $29 billion?
    Mr. Steel. Yes, sir----
    Senator Shelby. Would you explain that? And what are the 
chances of loss there?
    Mr. Steel. Well, it is, as I said--excuse me.
    Senator Shelby. Go ahead.
    Mr. Steel. As I said earlier, I think that from the 
Treasury's perspective, there were two concerns throughout all 
of this process: No. 1 was the effect on the markets and the 
marketplace and the stability of markets; and No. 2 was the 
stewardship that we share--that we were sharing with others 
with regard to U.S. taxpayers' funds. And the transaction as 
developed was $30 billion, approximately, of collateral, all 
investment grade securities, all of them current in interest 
and principal. And those securities were transferred as the 
collateral for the $30 billion loan.
    Senator Shelby. What are the chances that this could happen 
again, either in an investment bank or one of our large banks? 
I know you are watching them. We see them, a lot of the banks, 
trying to secure more capital and, of course, they are going to 
have--as Chairman Cox said, they need liquidity with capital. 
What are the chances there? And where are we today?
    Mr. Steel. Well, I think our perspective is that this whole 
situation took a very long time to build up, and it will take a 
good while to work through.
    Having said that, we think we are making progress. We can 
cite increases in liquidity, as President Geithner said, and 
things seem to be doing better. And there are signs of 
improvement, and where I think the actions of the Federal 
Reserve Board have been constructive to that end, we are doing 
our best to be vigilant and to monitor the situation. And a cry 
that Secretary Paulson has made all along has been for 
financial institutions who believe they will be needing capital 
to be on their front foot with regard to raising capital. From 
our perspective, this is really about transparency, liquidity, 
and capital--the trifecta of issues that will bring confidence 
back to the market. People understand the assets. People begin 
to price them and transactions occur, and institutions have the 
strong capital position they need to work through the specific 
    Senator Shelby. But the Treasury and the Fed and the FDIC, 
all the regulators, they have got to have some deep concern 
about some of our big banks, commercial banks, and some of the 
investment banks. You are not telling us that you have supreme 
confidence that there is not going to be another problem? You 
cannot say that, can you?
    Mr. Steel. No, sir, I cannot. And so I think our goal is 
to--as I said, I think this is about--and about 2\1/2\ weeks 
ago my colleagues at this table, as members of the President's 
Working Group, issued a report to focus on what we have learned 
to date and what we can begin to do straightaway to make things 
better. And I really think the three aspects are as I 
    Senator Shelby. But we cannot send the signal out to the 
marketplace that if you take the risk and you are too big to 
fail, the Fed is going to come running, and the Treasury is 
going to back it, and the taxpayer is going to be on the hook, 
can we?
    Mr. Steel. No, sir. Basically, my testimony made clear that 
this was not a specific situation about an organization. This 
was a decision made with regard to the markets itself, and 
people should not draw a conclusion from this that there is a 
message about a specific institution. This was an unusual time, 
as all my colleagues have said, and a specific decision was 
made with regard to market protection and to the effect on the 
potential real economy. That was the nature of the decision.
    Senator Shelby. If this is not a wakeup call to the Fed and 
to Treasury and everybody else, as far as some of our banks and 
the risks they take, I do not know what it would take, do you?
    Mr. Steel. Sir.
    Senator Shelby. Thank you.
    Chairman Dodd. Senator Johnson.
    Senator Johnson. Chairman Bernanke, on March 18th, the 
Federal Reserve decreased the interest rate by another three-
quarters of a percent. This is the sixth scheduled emergency 
cut in as many months. Are these cuts helping the economy or 
will there be any need for further cuts?
    Mr. Bernanke. Well, Senator, we do believe that these cuts 
are justified by the slowdown in the economy. We believe they 
are helping. The cuts in the federal funds rate both lower safe 
interest rates, Treasury rates, and they contribute to a 
reduction in spreads, which helps to offset--and it is true 
that many, some rates at least, have not dropped very much 
since we have begun cutting the federal funds rate, but I think 
we have offset what might otherwise have been increases in the 
cost of capital. So I believe we have helped to offset the 
credit crunch to some extent, and, therefore, I think this is 
    I would also point out, first, that we have been using our 
liquidity measures, which have also helped to reduce spreads to 
some extent, and I think they have been positive; and, second, 
that the effects of monetary policy are felt over a period of 
time, and we expect to see further positive effects of these 
policies going forward.
    Obviously, further actions will have to depend on how the 
economy evolves, and we are looking, of course, at both sides 
of our mandate--growth and inflation.
    Senator Johnson. Are you concerned about inflation?
    Mr. Bernanke. Of course we are concerned about inflation. 
Inflation has been too high. Over the last year, it has been 
about 3.5 percent instead of about a little over 2 percent in 
the previous year. The primary reason for the high inflation is 
rapid increases in prices of globally traded commodities, 
including crude oil and food, among others.
    It is our expectation, which is consistent with prices seen 
in futures markets, that these prices will moderate during the 
coming year and that, therefore, overall inflation will tend to 
slow. However, we are aware of the uncertainties involved with 
that, and we are obviously going to be watching the situation 
very carefully.
    Senator Johnson. Did the Federal Reserve place any 
conditions on JPMorgan Chase and Bear Stearns when it extended 
the $29 billion line of credit?
    Mr. Bernanke. We did that as part of an overall 
negotiation, the point of which was to try to facilitate the 
acquisition of Bear Stearns and the guarantee of its 
liabilities by JPMorgan Chase. As President Geithner has 
discussed, we have substantial protections. They include $30 
billion of collateral as marked to market on March 14th; $1 
billion first loss position by JPMorgan; professional 
investment advice from an advisory company; and the luxury of 
being able to dispose of these assets over a period of time, 
not, therefore, have to sell them quickly into an illiquid 
    Senator Johnson. Chairman Cox, is the SEC adequately 
equipped to determine a holding company's liquidity risk? Did 
the crisis at Bear Stearns bring to light any weaknesses in the 
Consolidated Supervised Entities Program?
    Mr. Cox. Senator, there is absolutely no question we have 
learned much more than any of us would like in the caldron of 
this experience. The liquidity measures that were thought to be 
adequate were designed for a scenario in which all of the 
firm's unsecured funding evaporates, and evaporates for a 
period of a full year. The capital floor and the liquidity 
floor, more to the point, that is required of firms to meet 
that standard was more than met by Bear Stearns, and yet as we 
described here earlier this morning, they ran through over $10 
billion in liquidity in a day. So it is absolutely important 
for us no longer to believe that that works. We have already, 
with all of the firms that we supervise, gone back to work with 
them to make sure that there is the kind of liquidity that is 
needed to function in this stress scenario. And I have 
communicated directly with the Basel Committee of Banking 
Supervisors, who are preparing to take up this subject, to 
encourage them because, of course, these standards for capital 
that are used here in the United States in the commercial 
banking sector and the investment banking sector are also used 
around the world. They are considering addressing directly this 
liquidity issue, and I think it would be very wise for them to 
do so.
    Senator Johnson. Chairman Bernanke, do you expect the Fed 
to facilitate market arrangements like the JPMorgan Chase 
purchase of Bear Stearns for other financial institutions? Does 
this create a moral hazard for taxpayers?
    Mr. Bernanke. We do not expect to have to do this, but we 
are obviously going to be watching and monitoring the markets 
very carefully, and institutions. I think this was a very 
unusual situation. In particular, things happened very quickly 
and left a very little time window. In most cases, when firms, 
banks, have problems, they have a considerable amount of time 
to take preemptive actions in terms of raising capital, finding 
a partner, and taking other measures to avoid these problems.
    I would like to make a comment on the idea that we bailed 
out Bear Stearns. As President Geithner pointed out, Bear 
Stearns did not fare very well in this operation. The 
shareholders took very severe losses. The company lost its 
independence. Many employees obviously are concerned about 
their jobs. I do not think it is a situation that any firm 
would willingly choose to endure.
    What we had in mind here was the protection of the 
financial system and the protection of the American economy. 
And I believe that if the American people understand that we 
were trying to protect the economy and not to protect anybody 
on Wall Street, they would better appreciate why we took the 
actions we did.
    Senator Johnson. Thank you, Mr. Bernanke. No further 
    Chairman Dodd. Thank you, Senator Johnson.
    Let me just say as well, I know there are a lot of 
questions people would like to ask. We are going to leave the 
record open as well, if you do not feel as though you have had 
all your questions asked, to submit some from Committee Members 
in writing, and we would ask you to respond as quickly as you 
could to some of them.
    Senator Bennett.
    Senator Bennett. Thank you very much, Mr. Chairman, and 
thanks to the panel. This has been very illuminating.
    You used a phrase in the Federal Reserve Act, Chairman 
Bernanke and President Geithner, that says you can do this ``in 
unusual and exigent circumstances.'' And I think this 
qualifies, very clearly as unusual and exigent circumstances. 
But that is clearly not what the framers of the Federal Reserve 
Act had in mind in 1913. We live in a very, very different 
world than we did in 1913 when the Fed was created, and one of 
the questions that I have as I look at this is whether or not 
the members of the legal profession who are paying very close 
attention to all of this--because they have great potential for 
a great deal of income sorting all of this out--are going to 
look at this event and say, well, this becomes the new standard 
for an unusual and exigent circumstance and start to demand on 
behalf of their clients that, well, while you did it that 
circumstance, here is a similar circumstance, and you have a 
requirement, therefore, to do it again.
    And the circumstance that is very different now than it was 
in 1913, of course, is the existence of derivatives--the 
creation of hedge funds, people who use computers to slice and 
dice various financial instruments and discover things that the 
normal human being cannot discover without the ability of 
computers to help them.
    Looking ahead to all of this, what do we see in the 
possibility of future circumstances not just here but 
worldwide? You made, I think, the appropriate point, Chairman 
Bernanke. This was not a bailout of Bear Stearns. And you did 
not have the Bear Stearns shareholders in mind. Indeed, the 
Bear Stearns shareholders are very upset, I think, about what 
has happened. But I like the phrase that comes from a 
specialist who looked at this. He said, ``Twenty years ago, the 
Fed would have let Bear Stearns go bust. Today, it is too 
interlinked to fail.'' Not ``too big to fail.'' ``Too 
interlinked to fail.'' And that, again, is the world of 
derivatives, the world of hedge funds, the world that we all 
come together in.
    I do not care who specifically responds because you are all 
very knowledgeable in this area. But give me a response to this 
future possibility, looking back on what I think we all agree 
is a truly seminal, historic, and maybe pivotal event in the 
way this international market is going to be dealt with from 
now on. Anybody want to look into his crystal ball and help me 
out on this.
    Mr. Bernanke. Senator, if I just might reply quickly, we 
have a very high bar for unusual and exigent, so this is twice 
in 75 years that we have used this, that we have applied this 
power. In thinking about it, we thought not only about the 
interconnectedness of Bear Stearns and the issues we have 
raised, but also about the situation in the financial markets 
more generally. If the financial markets had been in a robust 
and healthy condition, we might have taken a very different 
view of the situation. But given the weakness and the fragility 
of many markets, we thought the combination was indeed unusual 
and exigent.
    We will certainly be very diligent in resisting calls to 
use this power in other less exigent situations. As I indicated 
earlier, I do think this does raise important questions of 
regulatory design. The world has changed a lot since the 1930s 
when many of our regulations were put in place, and it will be 
a challenge for all of us and the Congress to think through how 
we might adapt to the way the world has changed, the way the 
institutions have changed, the way the instruments have 
changed, the way the markets have changed over 75 years.
    Senator Bennett. Anyone else want to comment on this?
    Mr. Geithner. Yes, sir. I just echo your formulation. What 
was unique about this is not just Bear Stearns' role in this 
interconnected, intricate, complex financial system where we 
have such a large stock of outstanding derivatives, with repo 
markets as large, but was the circumstances prevailing in 
markets at the time. It is the combination of those two things 
that made it so exceptionally risky for the U.S. economy.
    But I would just echo something many of you have said, I 
think, which is that the most important thing for us to do is 
try to figure out how to make the system in the future less 
vulnerable to these circumstances and make it strong enough to 
be able to withstand the failure of a major institution even in 
fragile conditions like these. That is a very hard thing to do, 
requires a very careful set of judgments about regulation and 
market discipline. But I think that is the dominant policy 
challenge we face.
    Senator Bennett. And we have the proposal from Secretary 
Paulson before us as a Congress. We will look at it very 
    Mr. Steel, you summarized it, I think, the best when you 
talked about the need for transparency, capital, and 
liquidity--all of which are leading to the one thing that is 
essential here, and that is confidence. If we do not have 
confidence in our ability to get our checks cashed, we produce 
a run on the bank in the old model. Here, the international 
system did not have confidence that there was anybody on the 
other side of the deal if they were to cash in some of their 
derivatives, and Bear Stearns stood in the middle of the deal 
as the bank that would provide that confidence. So if Bear 
Stearns goes down, that is, if the middle broker goes down, and 
neither side has confidence that the paper they hold can be 
redeemed, then the whole worldwide thing melts down. And I 
think we need to keep that foremost in our minds in all of our 
    All of the details are fine. All of the details are more 
than fine. They are absolutely necessary. But the ultimate goal 
to which we must constantly pay appropriate homage is 
confidence that the system is going to work. And if I 
understand what you have said here today, you were afraid that 
that confidence was going to go out the window, and the whole 
world losing confidence could ultimately come crashing down.
    So for all of us, Mr. Chairman, this is, I think--the 
ultimate goal is to see whatever we do, either you in your 
regulatory actions or we in our policy actions, keep focus on 
maintaining international confidence in the system of worldwide 
    Thank you.
    Chairman Dodd. Thank you, Senator Bennett. I underscore the 
point, and I have been using it over and over again.
    Let me just say, I should have responded quickly to 
President Geithner's comments earlier. This Committee's 
intention is at the appropriate time to take a long look at 
these various proposals regarding the reform measures to 
reflect the 21st century world we are in, very different than 
when a lot of these institutions were created, and that have 
been amended over the years. So I welcome Secretary Paulson's 
ideas in all of this.
    I just want to quickly say, however, that the timing of all 
of this--I mean, clearly we need to get to that, but I want to 
make sure we are concentrating our attention on the crisis at 
hand. And the crisis at hand is at its center a foreclosure 
crisis. There is the contamination effect here. We need to 
concentrate on that. But I do not want by that statement to 
reflect any lack of interest in the broader subject matter, 
which is an appropriate one. But I do not want to digress or 
divert attention from the issue at hand. And so we will get to 
that question, and this Committee will, and conduct a series of 
hearings--I have talked to Senator Shelby about this already; 
we will plan on that--to outline all of these ideas and 
consider it thoughtfully and carefully.
    Obviously, nothing will happen this year. We all know that. 
It is going to take a new administration coming in. But 
certainly we can set the table on these issues, and my 
intention is in this Committee to try and do exactly that.
    Senator Reed?
    Senator Reed. Well, thank you very much, Mr. Chairman, and 
thank you, gentlemen, not only for your testimony today but for 
steering through a crisis which could have had catastrophic 
consequences. That is an achievement in itself. As we go 
forward, though, I think as I said initially, we have got to 
look carefully at what was done. And let me raise a question 
that was also raised by Chairman Dodd, that is, the discount 
window facility.
    Listening to Chairman Cox's analysis of the Bear Stearns 
situation, it seemed to me the biggest failing was the lack of 
access to secured funding. And yet the discount window facility 
would have given that secured funding. But, President Geithner, 
as the point on this effort, you indicated that you would not 
have extended that facility to Bear Stearns because it was, in 
your words, ``not a sound institution.'' That was a criteria--
you were applying criteria.
    Can you tell us why it was not a sound institution? And 
should the SEC have been aware of those shortcomings?
    Mr. Geithner. Let me just say this as carefully as I can. I 
was expressing my personal view. It is very hard to look back 
and know. But all of these facilities, in all these facilities, 
as you think--as you would expect, I think, we need to be very 
confident that we are lending to sound, prudent institutions 
that are designed to respond to liquidity problems, and it is 
very hard to know, looking back, whether, given the way they 
are designed, they would have been powerful enough to help Bear 
navigate some of these challenges. And I just want to say that 
it is not obvious to me--just my personal view--that lending 
freely in the context of the accelerating pressures on Bear 
would have been a prudent act by the Fed.
    Senator Reed. Was that your conclusion--I know it is a 
difficult one to make, and it is inherently subjective because 
you have to weigh many factors. Was that a function of 
management, a function of the balance sheet, a function of 
market conditions beyond their responsibility? And, again, 
should the regulator, primary regulator, the SEC, have been 
aware of these faults that you at least recognized, or 
potential faults?
    Mr. Geithner. Again, very exceptional conditions we are 
facing in markets, and everybody is rediscovering and 
rethinking through what they think is adequate liquidity. And 
any institution in these markets is discovering that if you 
lose your unsecured, you may lose your secured. And independent 
of the concerns that have been--we have been seeing throughout 
the last 9 months about the strength of individual 
institutions, we have seen a substantial withdrawal in the 
willingness of markets to finance a range of different types of 
collateral. So one thing that is unique about this is the 
extent to which secured financing markets also became 
    And a very important point Chairman Cox made several times 
is--and Chairman Bernanke--that in these markets, these things 
can happen incredibly quickly. Just incredibly quickly. What 
you see in this context is a combination of two things. One is 
these very powerful forces across all markets, impairing 
liquidity for everybody. And you have a set of institutions 
that were--some relatively more exposed to those risks, some 
relatively less exposed. And with great respect to the people 
and management employees of that institution, they were in a 
position where they were more exposed to those risks.
    Senator Reed. Let me follow up on another line of 
questioning that the Chairman raised, and that is the price, 
the initial stock price. You indicated--and Mr. Steel and 
others--that there was no deliberate message from any Federal 
official about the price. But did you, since I recall when I 
was a young lawyer, went to closings, and there would be lots 
of rules but the one rule was the Golden Rule: The person with 
the gold made the rules.
    You had all that, Mr. Geithner. Did you suggest a certain 
range that you would not allow or any indication that your 
agreement to the financing, taking the collateral and giving 
JPMorgan the $30 billion was a function of a price that was, in 
your view, appropriate?
    Mr. Geithner. We did not set or negotiate the price.
    Senator Reed. Did you suggest, if a price was raised, that 
it was excessive or a deal would not close? Or did you in 
general indicate to them that--and as I think you indicated in 
your comments, the real issue of moral hazard, that you could 
have said without stating a specific price that the price has 
to reflect a steep discount from book value; otherwise, moral 
hazard. Is that something you communicated?
    Mr. Geithner. Well, just to repeat again, those two 
objectives--finding a solution that would avert default in ways 
that would make the system stronger, not weaker; not create 
adverse incentives for future risk taking that would be a 
problem for the system--were at the center of the judgments we 
made. But I just want to underscore, both the agreement reached 
between Bear and JPMorgan on that initial Sunday night, which I 
think was the 16th, and the agreement reached a week later 
were--just to speak for myself--in my judgment fully consistent 
with those objectives.
    Senator Reed. Chairman Cox, one of the points you raised 
was this unusual and very rapid runoff of liquidity. Does that 
suggest to you market activity which is more than unusual that 
might be manipulative?
    Mr. Cox. Senator, we do not know the answer to that, but, 
of course, the Securities and Exchange Commission investigates 
market manipulation and----
    Senator Reed. Are you conducting an investigation now?
    Mr. Cox. I am constrained, as you know, by the general 
rules of discussion about civil law enforcement matters that 
have not yet been filed in any court, so I cannot confirm or 
deny the existence of any particular matter under 
investigation. But suffice to say that the Securities and 
Exchange Commission takes very seriously its responsibility to 
investigate allegations of these kinds, and there have been 
ample allegations made in this context.
    Senator Reed. Thank you, Mr. Chairman.
    Chairman Bernanke, you indicated that this was not a 
bailout of Bear Stearns, and at $2, raised to roughly $10, 
there is some persuasive force in your argument. But was it a 
bailout of the surviving investment banks? Because with, I 
think, the context of your discussions, your real fear was that 
Bear could say, ``Oh, but that had to be the line of defense,'' 
that the others, if they fail, will be catastrophic, and that, 
in fact, your action was very calculated and conscious to prop 
up when remaining investment banks.
    Mr. Bernanke. We were concerned about other institutions. 
We were concerned about a variety of markets in which Bear 
Stearns participated. We were concerned about the thousands of 
counterparties whose positions would have become uncertain. So 
we were--if you want to say we bailed out the market in 
general, I guess that is true. But we felt that was necessary 
in the interest of the American economy.
    Senator Reed. I do not dispute you. I think that is the 
role you had to assume. But I think--and many people, 
homeowners that are looking at action that helps, you know, the 
markets, helps them indirectly. But I think to say this was a 
routine action that was not designed to save some institution 
or prevent them from going into distress is not the most 
accurate characterization. That is my point.
    A final point, Chairman Bernanke. You have got about $30 
billion of collateral, and some comments have been made that 
you feel comfortable because it is highly rated. But a lot of 
highly rated collateral these days is being subject to 
questions about that.
    Your comments on the quality of this collateral, will 
eventually the taxpayers be on the hook for a significant 
amount of that collateral?
    Mr. Bernanke. Senator, as was mentioned, it is all 
investment grade or current performing assets. The prices at 
which we are booking them in terms of collateral are not the 
face value but, rather, the prices to which Bear Stearns marked 
those assets on March 14th. Therefore, they reflected current 
market conditions, and they reflected, in addition, the 
difficult liquidity situation that exists.
    We do not know for sure what will transpire, but we have 
engaged an independent investment advisory firm, who gives us 
reasonable comfort that if we can sell these assets over a 
period of time, we will recover principal and interest for the 
American taxpayer. And certainly under no circumstances are the 
risks to the taxpayer remotely close to $30 billion. There may 
be some risk, but it is nothing close to the full amount. We do 
have collateral, and I would say a good bit of it is very 
highly rated.
    Senator Reed. Thank you.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator, and we may come back to 
a couple of the questions that Senator Reed has properly raised 
here, I think, as well.
    Let me turn to Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    We have had downturns in the economy and periods when it 
has been rather prosperous, and at times they have involved the 
banking institutions because of the amount of lending that goes 
on in our economy to keep it going. And the thing that comes up 
to me, when you take a lot of these instruments, like what we 
have here, and you securitize them, you have got a big volume 
of assets that are going in there.
    How do you go about keeping track of those investments? And 
how do you reach a point where you know that that becomes a 
very risky security? And do we have the tools in place to make 
those evaluations from the regulatory standpoint? Or do we just 
rely on the common approach that, you know, if you get a 
greater return, there is greater risk, and you ought to be 
smart enough to balance your portfolio so you do not have that?
    So I would like to have some discussion on how you arrive 
at the creditworthiness of those assets that make up a total 
security value. And I will open it up to anyone on the panel if 
they want to address that question or that issue.
    Mr. Bernanke. Are you referring to the collateral?
    Senator Allard. Yes.
    Mr. Bernanke. I would perhaps turn to President Geithner. 
The investment firm, again, is doing its own evaluation, has 
done an evaluation. The Bear Stearns marks I expect were based, 
to the extent available, on market prices as available. To the 
extent where market prices are not available, then the marks 
are developed by a combination of market information and 
various models that try to anticipate what the cash flows would 
be for these various securities.
    I do not know the specifics of the individual securities 
and how they were marked.
    Senator Allard. Yes. Mr. Geithner.
    Mr. Geithner. Senator, I think you are raising a question 
that is at the center of this financial crisis in the sense 
that we have been through a period with extraordinarily rapid 
innovation at a time where the world was growing, defaults were 
very low, and a lot of leverage built up. And, therefore, it 
was hard for anybody to know with confidence what the risk was 
in a lot of those positions, how they would fare in a more 
adverse world. And in a sense, you could say that is the 
dominant lesson of financial crises, and people are learning 
that lesson again.
    And Chairman Cox referred to this comprehensive review of 
risk management practices, weaknesses and strengths across the 
major institutions, and I would say that the central lesson 
from that review was the difficulty in thinking through how 
much risk you might face in the extreme event and how best to 
manage that risk, how much capital to hold against that risk, 
how to make sure that your risk management structure, your 
compensation incentives protected you from that risk 
adequately. And because the future is inherently uncertain, it 
takes experience with crises to learn more about how those 
positions are going to respond. And I think that is also, I 
mean, just another example of why this has been so powerful and 
difficult to manage even for a set of very smart, competent 
    Senator Allard. Any other comments? Yes.
    Mr. Steel. I guess, Senator, I would concur with President 
Geithner that I think your question leads us in a way back into 
all the root causes of the situation we face.
    Senator Allard. Correct.
    Mr. Steel. And I am sure that is where you were taking us. 
I would concur--agree with the observations by Chairman 
Bernanke and President Geithner, and I think that when the 
President's Working Group began their first efforts to try to 
see what we have learned, that focus on transparency, better 
risk management, and that all aspects--all of the actors in 
this have to do a better job. And it is not--but it includes 
credit rating agencies, issuers, investors, securitizers. 
Everyone has to be focused more on these issues, and greater 
transparency is really key, and people need to understand what 
they are buying and selling is at the root of the issue. And 
hopefully we have some ideas that can focus us in on this so 
that things can be improved and lessons learned from the stress 
that we have been through.
    Chairman Dodd. Could I just interrupt one second, Senator? 
I would like to maybe ask Chairman Bernanke, maybe it would be 
helpful for this if the Fed could provide to the Committee in 
writing the current value of these assets. If we could have 
that available to the Committee, it would be helpful as well 
for us. Whether that is to you, President Geithner, or whoever 
could help us out on that, that would be helpful to the 
    Senator Allard. Yes, and that was my question. What I am 
getting into is do you have any concern about the reliability 
of these ratings as it pertains to credit rating. You know, 
that is a big part of this, it looks to me like, and credit 
ratings can change pretty quickly. Sometimes they are under--
and there is a whole compilation. And do we have the capability 
to say that what we have is pretty reliable?
    Mr. Bernanke. I just want to reiterate that we are relying 
on a well-known expert investment advisory company which 
specializes in exactly these sorts of valuations, and we are 
relying on their opinion.
    Senator Allard. OK. Thank you.
    Now, under the Bear Stearns agreement that was reached, one 
thought that came to me is that the manager--who is going to be 
the manager of the remaining assets, and it was determined that 
Blackstone Group would be that. And so that is a key decision, 
I think, in managing what is left. And how was that decision 
arrived at? And how do you determine what they are--B, or 
whatever would be determined to manage those assets?
    Mr. Geithner. Thank you, Senator. That afternoon of Sunday, 
March 16th, where we were exploring, again, whether there was a 
way to make this work, we did a range of things to try to get 
ourselves as comfortable as we could with the mix of assets 
that we were willing to consider financing.
    Now, the financial system holds typically several hundred 
billion dollars of collateral at the New York Fed against the 
possible need to borrow, and we have a team of people that 
spend their lives thinking about how to value collateral and 
look at that, and we had those people alongside us as we looked 
at this portfolio. We established a set of very important 
conditions described by the Chairman for what we would accept 
in the portfolio. And we structured it, again, very carefully, 
very, very carefully to minimize the risk of future loss.
    But as part of that, we made the judgment, I made the 
judgment, that we should have a world-class advisor sitting 
there with us, and in that period of time, very little time. We 
made the best judgment we could about what firm would have the 
mix of expertise, knowledge, experience, and independence that 
could best provide that judgment. I think they met that test.
    I do not think there were any better options available at 
that moment, and I think we are in a much better position now, 
certainly than we were in the afternoon and going forward, to 
have them at our side as we thought through those judgments. 
And as the Chairman said and emphasized, part of the agreement 
we worked out to limit risk to the taxpayer was to have them be 
in a position to help manage these assets over time.
    Mr. Steel. If I could just make a correction, sir?
    Senator Allard. Yes.
    Mr. Steel. In your question, the correct name is BlackRock.
    Senator Allard. Oh, was it BlackRock?
    Mr. Steel. BlackRock, not Blackstone.
    Senator Allard. Well, whoever, yes. I appreciate that. 
Thank you. That was an error that we had on my notes, and I 
apologize for that. But just the same, I think the question 
    Mr. Chairman, I see that my time has expired. Thank you.
    Chairman Dodd. Thank you very much.
    Senator Schumer.
    Senator Schumer. Well, thank you, Mr. Chairman. I hope next 
time you do not need to bring in Black Boulder instead of 
BlackRock or Blackstone.
    When Chairman Bernanke came before us yesterday at the 
Joint Economic Committee, I asked him when did he know that 
Bear Stearns was in such serious trouble that they might go 
under if nothing happened, and he said 24 hours before. Is that 
true of you, Chairman Cox? Did you just know--did you just have 
any idea that they would go under only 24 hours or so before?
    Mr. Cox. Well, as I described earlier, the liquidity pool, 
which had been $8.4 billion on the 31st of January, actually 
grew in the first week of March to $21 billion. But in 1 day, 
on Thursday, March 13th----
    Senator Schumer. So is the answer yes?
    Mr. Cox [continuing]. It dropped by $10 billion.
    Senator Schumer. So is the answer yes? You did not know 
until 24 hours before.
    Mr. Cox. Well, we knew of the drop in the liquidity pool. 
On the other hand, we had been focused, as had the New York Fed 
working with us on these issues for some time, but this 
precipitous drop occurred----
    Senator Schumer. OK. I have limited time. I got a simple 
yes or no from Chairman Bernanke. Did you have an idea that 
they could go under almost immediately more than 24 hours 
before it happened?
    Mr. Cox. The drop occurred on the 13th of March.
    Senator Schumer. How about you, sir?
    Mr. Steel. No, sir.
    Senator Schumer. No. How about you, Mr. Geithner?
    Mr. Geithner. No.
    Senator Schumer. OK. Thank you.
    Now the question I have is: Should you have known? And it 
relates to the future, not the past. Was it simply regulatory 
mish-mash, if you will, that, in other words, safety and 
soundness is lodged with Chairman Bernanke, oversight of the 
SEC with Chairman Cox. We did have signs that Bear had some 
trouble, obviously, with its hedge funds, et cetera. And as I 
said, similar places--not similar places, but places that had a 
lot of mortgage exposure, that had higher capital, even though 
this was a liquidity crisis, higher capital seemed to be a 
cushion against a liquidity run starting.
    So the question, I guess I will ask you, Mr. Geithner: 
Could a reasonable regulator have known and been ahead of the 
curve here? Could someone have called Bear in and said, ``You 
need more capital. You need to reduce your exposure to 
    Mr. Geithner. Very hard to know. I want to underscore--I 
will say it very quickly. These things can happen incredibly 
quickly in markets like this. What the world is going through 
and has gone through the last 9 months are truly extraordinary, 
described by many as the worst in 50 years, worst in a 
generation. So it is very important to underscore that because 
it is easy to look back and say, ``But doesn't it look 
obvious?'' And I think that is probably somewhat unfair to the 
people at----
    Senator Schumer. Mr. Undersecretary, do you agree with 
    Mr. Steel. Yes, sir.
    Senator Schumer. OK. And how about you, Chairman Bernanke?
    Mr. Bernanke. Yes, I do.
    Senator Schumer. OK. So clearly, then, something is wrong 
with our regulatory structure unless we just think we should do 
these things on an ad hoc basis. And so I would like to just 
talk about going forward to prevent the next Bear Stearns 
because our credit markets are still not the confidence--
confidence equals credit. Confidence is not all there. For all 
we know, in some other--no one would have thought mortgages 
would be the place where we would start doubting credit. It 
should be a simple cut-and-dried thing. And if it happened in 
mortgages, it could happen in some of these far more 
complicated instruments, perhaps.
    So my question is: What have we done to avoid this from 
happening in the future, that the next warning signal, if, God 
forbid, it happens in any of these places, would go off sooner 
and we would not have to rush in at the last minute but could 
make corrections before that? Do you have any tools to do that 
other than the emergency power lodged in the Fed? And what new 
tools do we need? Could you, again, Mr. Geithner, tell us what 
is being done now after Bear Stearns that is different than 
before that might avoid this from happening again if there were 
another liquidity run on a company?
    Mr. Geithner. First, we have at the SEC's invitation a team 
of people in these institutions, the major investment banks, 
looking carefully at their funding and how they are managing 
their funding, how they are going to position themselves to be 
stronger to withstand these kind of pressures.
    Second, the Federal Reserve has put in place a very 
powerful set of liquidity facilities to help mitigate the risks 
that these things intensify going forward.
    Third, we have been working very actively, alongside the 
Treasury and others, to try to make sure that institutions take 
steps to strengthen their capital positions so they are better 
positioned to manage through this crisis.
    Those are very important steps. I think we need to look 
ahead, though, because those will not be enough, and we have to 
think about--I mean, they will not be enough for the future.
    Senator Schumer. Right. So there you need a change in 
regulatory structure, which we have talked about.
    Mr. Geithner. I believe you do. I think you need to look 
comprehensively at a broad range of aspects of regulatory 
policy and structure.
    Senator Schumer. Right. Because if we do not, it is my 
judgment--tell me what you think. If we do not change the 
regulatory structure, given the inter-party risk you have 
talked about, the quick moving of huge amounts of money, we are 
going to be subject to these problems sooner or later somewhere 
or other that we have not--that we might have been able to 
prevent if we had a better regulatory structure. Is that fair 
to say?
    Mr. Geithner. Yes.
    Senator Schumer. Do you agree with that, Secretary Steel?
    Mr. Steel. Yes, sir.
    Senator Schumer. You, too, Chairman?
    Mr. Bernanke. It is partly structure, and it is partly 
practice. Obviously, we have to, you know, understand better 
how to deal with these risks and how to evaluate those risks, 
as well as, you know, change the organization chart.
    Senator Schumer. But right now, in an advisory way, Mr. 
Geithner, you are looking at firms and seeing their capital and 
seeing their exposure and giving them more early--more advice, 
I guess is how I would put it, as to being careful. And are 
they following you? I do not want to ask any specific names. 
That would be very bad. But----
    Mr. Geithner. We are doing everything sensible to----
    Senator Schumer. And are they following your advice? Your 
pause worries me.
    Mr. Geithner. No. I am just trying to be careful. I would 
say that we are doing everything we can sensibly to encourage 
them to take steps that would put them in a stronger position, 
and I think there is a lot of focus and attention across those 
institutions in doing just that. No one is more worried about 
them than they are in some sense, and as I said, you cannot 
look at what happened over that weekend and look at the outcome 
for that institution and take any comfort from it.
    Senator Schumer. Correct. And, you know, right now they may 
be careful, but all of these steps mean they reduce their 
profits and the pressure on immediate profit and immediate 
increase in share value will be back very soon if it is not 
    What do you have to say about this, Mr. Secretary?
    Mr. Steel. I think that you are on the right point, and 
earlier I said I think there are three aspects to this: 
transparency, liquidity, and capital. The Secretary and all of 
us at Treasury have tried to be very strong on the idea of 
capital increase so that firms have the right balance sheet. 
You know, there are two ways this happens. One is that firms 
can de-lever to improve their financial position or their 
capital cushion, or the other is--and that has an unattractive 
effect vis-a-vis contracting credit.
    Senator Schumer. Right, and----
    Mr. Steel. Our preference is that institutions raise more 
capital so as to avoid the pro-cyclical effect of contraction. 
And we have been adamant and will continue to be so. 
Unfortunately, I cannot tell you that there is a red light/
green light, issue done. I think it is a progression, and we 
will continue to be vigilant on this point.
    Senator Schumer. Just one final question. Capital and 
liquidity are related in some degree.
    Mr. Steel. Absolutely.
    Senator Schumer. And Mr. Geithner said yes, too.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    It is not unusual that Chairman Bernanke and I disagree on 
certain things, but I would like for him to answer me this 
question: Would Bear Stearns' stockholders have fared better in 
bankruptcy than they did at $2 or $10 a share in what you call 
not a bailout?
    Mr. Bernanke. It is hard to know. And, besides, the 
bankruptcy, they would have been facing probably a much worse 
financial market condition as well. So I am--you know, the 
shareholders certainly lost a huge amount relative to what they 
had thought they owned earlier that week. Whether they would 
have come out with zero or two or four, I don't know.
    Senator Bunning. But the fact is that they are trading on 
the New York Stock Exchange for over $10 a share today. Is that 
    Mr. Bernanke. I believe so, yes.
    Senator Bunning. If anybody can answer this question, I 
would like it. How did we get to the point that the failure of 
one firm can bring us to the edge of collapse, our whole 
financial markets? We know the Fed and others did not do their 
job in regulating lending practices and supervising the risk 
banks were taking on. But how do you let the entire financial 
system become so fragile that it cannot tolerate one failure?
    Mr. Bernanke. Well, one response, Senator, is that this has 
been a long time in the making. There was a substantial credit 
boom that peaked last summer. That credit boom, which was 
driven by international factors, which I could go into, if you 
would like, involved a substantial increase in risk taking; a 
lot of financial innovations, some of which turned out not to 
work so well; deterioration in underwriting standards; and 
essentially a letting down of the guard.
    Supervisors made many efforts to address these problems. We 
were not successful, obviously, in preventing the excesses. 
Starting in August, triggered by but not, I would say, 
fundamentally caused by the subprime crisis, there was a sudden 
rethinking of the amount of risk that people were willing to 
take. There was a major retrenchment in the markets.
    Now, in contrast to last year when investors were willing 
to lend against quite risky assets, now even the safest assets 
find difficulty in getting financed. And so financial 
conditions have become much more fragile, much more uncertain. 
There is a great deal of distrust of counterparties, of the 
valuation of assets, and a very strong aversion to taking risk, 
of even liquidity risk, as opposed to credit risk.
    As I mentioned earlier, under more robust conditions, under 
more normal conditions, we might have come to a very different 
decision with respect to Bear Stearns. We felt that given the 
context, given the fact that financial conditions are already 
creating a slowdown in our economy, that the risk was too 
    Senator Bunning. Anybody else have a different opinion?
    Mr. Geithner. Well, I do not have a different opinion, 
Senator, but let me just underscore. In a market-oriented 
financial system, where people are free to fail, make mistakes, 
lose money----
    Senator Bunning. I thought so.
    Mr. Geithner [continuing]. Make imprudent choices, any 
system designed that way is inherently vulnerable to the risk 
that a sharp loss of confidence in economic activity induces a 
dynamic like we are experiencing now. This happens rarely, but 
it does happen. It happens across all different types of 
financial systems over time.
    But you are exactly right, and I think it is the critical 
objective for policy. The challenge for policy is to try to 
make the system strong enough so that it can withstand the 
failure of even large institutions. But no system in a 
situation this fragile economically is going to be able to 
withstand such a failure easily, meaning withstand the risk of 
default that easily, in conditions this fragile.
    What produced this is a very complicated mix of factors. I 
do not think anybody understands it yet. But we have to spend a 
lot of time and effort trying to figure out how to get a better 
handle on this set of stuff. And there are a lot of people that 
are going to be part of that because it is very important that 
we try to figure out a way to make the system less vulnerable 
to this in the future.
    Senator Bunning. There were an awful lot of red flags, not 
just in the last 6 weeks, not just in the last month, but a 
year or two before, that we were having some problems in our 
mortgage markets, that we were having mortgages made that 
should not be made, that the mortgage brokers were soliciting 
people into mortgages that they could not afford, and finally 
they knew were doomed to failure. Nobody was watching the 
store. So it was eventually going to happen. It just happened 
to be Bear Stearns who got a hold of all these things in one--
well, in 1 week, and the crisis occurred when everybody said, 
``Watch out for Bear Stearns because they are not going to wind 
up this week anywhere but in bankruptcy.''
    I mean, that is what they came and told the Fed. Am I 
wrong? Didn't they come and tell you that they were going to go 
belly up and they asked for help?
    Mr. Geithner. Senator, let me just step back for one 
second. The people at this table and a bunch of other 
supervising regulators took a lot of actions over the last 
several years to try to make the system less vulnerable to this 
kind of event----
    Senator Bunning. I am sorry.
    Mr. Geithner. I want to just----
    Senator Bunning. I am sorry. I have been here too long to 
try to convince me of that.
    Mr. Geithner. Well, I am not trying to convince you, but I 
just want to----
    Senator Bunning. You are not going to be able to convince 
me, because the red flags have been waving long before you 
showed up at that table.
    Mr. Geithner. Should I try to--can I just go through just a 
few important things for the record?
    Senator Bunning. Certainly. Go ahead.
    Mr. Geithner. We did, working with the SEC, the other major 
supervisors of the major institutions around the world, a 
series of very important things, beginning in 2004 in 
particular, focused on exactly the set of risks that are so 
pronounced today. These things focused on strengthening the----
    Senator Bunning. The problems come before 2004. It goes 
back to 2000, 2002, and on down.
    Mr. Geithner. I am not claiming that people were wise and 
all-knowing or that we did everything that could have been 
done. But I just want to underscore the fact that we took a 
series of actions to try to make the system more resilient to 
this kind of stress, and those things have made a lot of 
difference. The system would have been more fragile without 
those things. As the Chairman said, they did not achieve enough 
traction in areas where we would have liked them to achieve 
more. And we are going to be very focused on trying to figure 
out how to deal with those things in the future, but it is 
going to require a very comprehensive effort because we do not 
have the incentives in the system aligned in----
    Senator Bunning. You have talked me out of my time, but the 
biggest problem with that is that I get the last say. And what 
is going to happen if a Merrill or a Lehman or someone like 
that is next?
    Thank you, Mr. Chairman.
    Chairman Dodd. Do you want to respond to that, Senator, or 
do you----
    Senator Bunning. No.
    Chairman Dodd. All right. Senator Carper is not here. Let 
me turn to--who is next? Senator Menendez is not here either. 
Senator Tester.
    Senator Tester. Thank you, Mr. Chairman. Thank God for 
    I want to ask a couple questions here. Chairman Cox, you 
had mentioned some dates in answer to earlier questions about 
the hedge fund in July of 2007 and adequate liquidity as of the 
end of January and then it bounced up as of March 1st. I am 
talking about Bear Stearns' liquidity. And I guess more 
specific the question is: When did you know--and, Chairman 
Bernanke, you are next. When did you know that we were in a 
situation where one of the world's largest investment banks was 
teetering on insolvency? Was that on the 14th? Or did you know 
before that?
    Mr. Cox. Bear Stearns approached the New York Fed on 
Wednesday night to discuss, as I understand it, possible 
accelerated access to something like the Term Lending Facility. 
The following day, on Thursday, there was a precipitous 
decline, a drop of over $10 billion in the liquidity pool of 
Bear Stearns. And by Friday, we were in the midst of these 
discussions, and in particular, the Fed----
    Senator Tester. Sounds good.
    Mr. Cox [continuing]. And the Treasury discussing with 
JPMorgan and Bear Stearns.
    Senator Tester. Thank you.
    Mr. Bernanke.
    Mr. Bernanke. Well, Senator, just to be clear, we are not 
the supervisor of Bear Stearns.
    Senator Tester. Just your perspective. When did you know?
    Mr. Bernanke. We were simply--we are monitoring the 
markets. We received, as was indicated, I think about 24 hours 
in advance, a call that they were anticipating bankruptcy.
    Senator Tester. Chairman Cox, I want to come back to you on 
that issue. Has anyone brought to your attention or do you know 
of the possibility of short selling that helped bring down Bear 
    Mr. Cox. I want to be careful in the way that I respond to 
your question. It is a perfectly appropriate question. It 
deserves a straight up and factual answer. I am a little bit 
constrained because the SEC is in the law enforcement business, 
and I tried delicately to answer that question before.
    The SEC very aggressively pursues insider trading, market 
manipulation, and the kinds of illegal naked short-selling that 
have been very publicly alleged in this case.
    Senator Tester. OK. Thanks. I will interpret that answer 
the way I think everybody else in the room interprets it.
    The question I had goes also back to Mr. Bernanke. It deals 
with the $30 billion that has been talked about a lot here 
today. And I think initially you said it was $30 billion market 
value, and then with another question, I think it was Senator 
Allard, you said it was a model--it was a market to model value 
on it. Who set the value?
    Mr. Bernanke. Bear Stearns.
    Senator Tester. Bear Stearns set the value. You had also 
mentioned, I think--and if it was not you, you can forward this 
question to Chairman Cox--that for the most part, these were 
pretty good collateral.
    Mr. Bernanke. Yes. They were all investment grade and----
    Senator Tester. Why didn't JP Chase take them?
    Mr. Bernanke. I can ask President Geithner to elaborate, 
but they were swallowing a pretty big chunk. They were 
concerned about the implications for their capital, for their 
risk profile, and particularly for the liquidity. One advantage 
that we have over market participants--the Federal Reserve, 
that is--is that we do not have any problem in financing the 
assets, and we could afford to hold them for a period and 
dispose of them in a more orderly way.
    Senator Tester. OK. So it was a liquidity issue, and you 
are nodding your head so you must agree. The reason JP did not 
take them is because it is a liquidity issue for their firm? 
That is what I heard Mr. Bernanke just say. You can say no. You 
can disagree. It does not matter.
    Mr. Geithner. I would just echo what he said, which is that 
you will have a chance to ask JPMorgan this, but Bear is a very 
large and complicated institution, a lot of risk. JPMorgan was 
not prepared to assume the full risk in that, and for reasons 
that I think were very carefully thought through. So to help 
make it happen, we agreed to assume some of that risk.
    Senator Tester. Would it be fair to say that the $30 
billion in collateral we got was probably the least secure?
    Mr. Geithner. No.
    Senator Tester. So it was just an arbitrary one--just an 
arbitrarily cutoff, just you arbitrarily took all the 
investments from A to D, went to the Federal Reserve, and the 
rest? How was it determined?
    Mr. Geithner. Very carefully. It was a negotiation. We set 
a set of parameters for things we would accept and what we 
would not accept. And that is how we got to the outcome we got 
    Senator Tester. You do not have to do it now, but could I 
get a list of those parameters?
    Mr. Geithner. Absolutely.
    Senator Tester. OK.
    Senator Tester. Chairman Cox, or whoever is most applicable 
to answer this question, how much is BlackRock charging for 
managing the $29 billion?
    Mr. Geithner. Senator, we have not yet completed our 
negotiations on the fee. It will be a commercially reasonable 
fee. We will be very careful in setting it so that we are 
getting something--or we are paying something that matches the 
complexity of the responsibilities and the importance to us 
that it get managed in a way to minimize the risk.
    Senator Tester. Well, I will ask this to the next panel, 
but is that typically how things are done? You enter into an 
agreement and set the fees later?
    Mr. Geithner. Almost nothing is typical about the 
arrangement that we reached in this context. And as I said, we 
tried to be very careful to make sure we designed this in a way 
to minimize any risk to the taxpayer, and part of that was 
having them there with us.
    Senator Tester. OK. Senator Bunning brought up some good 
points in his opening statement that talked about how big is 
too big. Senator Bennett talked about it being intertwined. I 
am curious, and I think the bigger you are, the more 
intertwined you are. So I think both points apply.
    The question is: Would the Federal Reserve have agreed to 
this situation if it would have cost $50 billion or $100 
billion? And I know you said it was based on markets, and it 
was said earlier here today that $29 billion--I believe this is 
a quote--not from you guys but from somebody on this panel--$29 
billion, the whole world could have come crashing down if we 
did not do this. Is that accurate? And at what point do you say 
    Mr. Bernanke. Well, Senator, it was a negotiation. We think 
we got a good deal. We did not spend $29 billion. We lent it 
against collateral. We believe we will recover most or all of 
it, probably all of it. It was, again, a very important 
consideration to try to make sure that this failure did not 
occur. And I would reiterate that, you know, the moral hazard 
questions that Senator Bunning appropriately pointed to, I 
think the moral hazard was minimized by the costs borne by Bear 
Stearns. And in the future, I think, however, we should take 
actions to make sure that, you know, these problems don't arise 
    Senator Tester. If another investment bank of similar size 
were in the same situation tomorrow, would you duplicate your 
    Mr. Bernanke. Well, the situation has, I believe, improved 
now, and we have put in place these liquidity facilities, and 
we are monitoring, as SEC is doing, the condition of these 
banks. It was a very unusual situation. Don't expect it to 
happen again. But if any situation arises which threatens the 
integrity of the U.S. financial system, we would have to try to 
address it the best we could.
    Senator Tester. Thank you very much. Seven minutes goes by 
way too fast.
    Thank you.
    Chairman Dodd. Very good questions, Senator. Thank you very 
    Senator Dole.
    Senator Dole. Chairman Cox, in a recent interview with 
Barron's, Laurence Fink, the chief executive of asset manager 
BlackRock, suggested that both hedge funds and the credit 
rating agencies may have played a role in the downfall of Bear 
Stearns, and he further calls on the SEC to investigate.
    Given BlackRock's own involvement in the JPMorgan-Fed deal, 
what do you think of Mr. Fink's appraisal?
    Mr. Cox. When I saw the remarks that he made with respect 
to credit rating agencies, the downgrade that occurred was on 
Friday when I think it perhaps was too late to have a different 
outcome, Thursday having been, as I described, the truly 
cataclysmic day in that week. I do not know whether it is the 
responsibility of a credit rating agency which has its own 
responsibilities, both contractually and legally, to forbear in 
downgrading in the face of that kind of a situation in 
collaboration with regulators, which was the suggestion that 
was made.
    It would be an interesting fact pattern in a different set 
of circumstances, but as I say, it occurred so late on Friday 
of that week that I do not think it was the proximate cause of 
what occurred in this case.
    Senator Dole. Let me ask Chairman Bernanke and Secretary 
Steel: On Tuesday of this week, an article in the Wall Street 
Journal highlighted the market impact of so-called credit 
default swaps and estimated these swaps were written against 
$45 trillion of underlying debt in the first half of 2007.
    Given these credit default swaps were a contributing factor 
regarding the recent troubles at Bear Stearns, as well as the 
concern about whether or not Federal securities laws actually 
apply, what are the Fed and Treasury doing to make sure that 
these financial instruments are better understood and accounted 
    Mr. Bernanke. Senator, first, to the extent that the credit 
default swaps were involved in any market manipulation, to 
which I have no knowledge that is the case, that would 
obviously be an issue for the Securities and Exchange 
Commission to be looking at in the course of their duties. So 
that would not be our particular province.
    We are interested in credit default swaps in a number of 
contexts. First of all, through our regulation of supervised 
institutions, we want to make sure that they understand and 
they properly manage the risks associated with their credit 
default swaps, the counterparty risk, the credit risk and so 
on. And, second, President Geithner of the Federal Reserve Bank 
of New York has led a very substantial effort working with 
private participants, private market participants, to improve 
the clearing and settlement process for credit default swaps to 
eliminate or reduce the risk that uncertainties about who owns 
what that might arise in a period of rapid changes in prices or 
changes in conditions would be an issue. And that, I would want 
to commend President Geithner for his work on that front, and 
we have not seen clearing and settlement issues play a very 
important role at all in any of these recent financial problems 
that we have had.
    Mr. Steel. Senator, I think that Chairman Bernanke has 
pointed to the right issue, and the whole area of the over-the-
counter derivatives market is quite complex. It has grown a 
lot, and it is very, very large and important. When the 
President's Working Group recently issued a report of issues to 
be focused on in the near term, we specifically highlighted the 
area of over-the-counter derivatives as something where 
policies and procedures need to be enhanced, and President 
Geithner has been a lead person on that. And so we think you 
are on exactly the right track, and we are committed to doing 
    Senator Dole. Let me ask one somewhat tangential question, 
Secretary Steel. I have, along with Senators Martinez and Hagel 
and Sununu, been a strong advocate of GSE reform, and our 
legislation would create, as you know, an independent world-
class regulator to oversee the safety and soundness of Fannie 
and Freddie, which earlier this decade had significant 
accounting problems.
    Last month, OFHEO announced that it was lowering the 
capital requirements for both Freddie and Fannie, which comes 
on the heels of the temporary increase of the GSEs' conforming 
loan limits.
    Secretary Steel, in light of this most recent action, is it 
not now all the more urgent that comprehensive GSE reform be 
enacted to ease the turmoil in our credit markets and to 
further ensure that GSEs do not pose more of a systemic risk?
    Mr. Steel. Senator, I think that several of the other 
Senators now, including you, have raised this issue of what 
have we learned about regulation and our regulatory regime in 
general. And I think the importance of clear responsibilities 
and the ability to have the tools to deal with challenging 
times is really the note that everyone is singing to.
    I believe that comprehensive GSE reform is completely on 
key with that issue, and the Treasury would be a strong 
proponent of a comprehensive GSE reform bill.
    Senator Dole. Thank you.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    At that point we turn now to Senator Carper.
    Senator Carper. Thank you, Mr. Chairman. And you all are 
holding up well. Thank you for your patience and for dealing 
with us for all this time.
    I indicated when I made my brief opening statement earlier 
that we were going to be asking you to sort of explain what you 
have done, why you have done it, and what you think the 
implications are, the lessons learned. We are about to 
undertake some actions here in the Senate under the leadership 
of Senators Dodd and Shelby to take up what I call ``the 
housing recovery package.'' The elements of it include--and you 
may have heard some of them, but the elements include FHA 
modernization, trying to bring FHA into the 21st century to 
make it relevant in the lives of a lot of people; providing the 
ability to use the proceeds from mortgage revenue bonds to help 
out in refinancing some subprime mortgages; some extra money 
for community development block grants to enable State and 
local governments to work with distressed housing in some of 
their communities; some extra money for housing counselors to 
try to steer people into Project Hope Now so they can take 
advantage of that. The net operating loss carryback for home 
builders I think goes back about 4 years, and Senator Isakson 
proposed a tax credit to go to people who actually move into a 
home, buy a home that has been foreclosed, and agree to stay 
there for an extended period of time.
    Those are all ideas that are included in the bill. There 
are a few others, but those are the ones that are there.
    Senator Dole has just asked you about GSE regulatory 
reform, and we have debated that this Congress, last Congress, 
and Chairman Dodd has indicated a strong desire to move us to 
that legislation quickly and to get--put in place a strong 
independent regulator for our GSEs, for Fannie and Freddie and 
for the home loan banks. I applaud that and look forward to 
that. That is not part of this package, but my hope is that it 
is something that is going to be acted on real soon, and the 
Chairman has indicated that is his full intent.
    Among the amendments that are going to be offered to the 
bill, this housing recovery bill on the floor--if not today, 
then in the next couple of days--is one that would empower a 
judge in bankruptcy to not only modify the interest parameters 
with respect to a primary home mortgage, much as they can now 
with a second home, but to enable them to not only work down or 
modify the interest parameters of the first mortgage, the 
primary mortgage, but to also work on the principal itself. And 
there are some who think that is a good idea, some who are 
concerned about it.
    I just would ask, since this is something we are likely to 
vote on in the next day or two, I would just ask you what you 
think is good about that proposal, what is not, or is there a 
better option out there for us.
    Mr. Bernanke. Well, Senator, first of all, I think you are 
absolutely right to be focusing on housing. Housing is very 
central to the current situation. It is affecting both the 
broad economy as well as borrowers, lenders, and communities. 
So I compliment you on that focus.
    I think some of the areas that I have advocated and I think 
are productive, one is the FHA modernization, the general idea 
of letting the FHA, which has seen its market share shrink to a 
very small amount, ironically displaced to a large extent by 
subprime lending, to increase its ability, its flexibility, its 
budget in order to both finance more new purchases and also to 
be able to refinance people out of troubled mortgages.
    A second area that I would mention again is--Secretary 
Steel mentioned government-sponsored enterprises. They are 
supposed to be stabilizing the market. To do that, they need 
both good oversight, and they need to raise more capital so 
that they can expand their activities and substitute for the 
weaknesses in the remainder of the housing market.
    I would like to mention counseling, which I believe is a 
very high bang for buck activity. The Federal Reserve at the 
reserve bank level has worked extensively with NeighborWorks 
and other community organizations on counseling activities, and 
I think that is very productive.
    On bankruptcy, I think there are arguments on both sides. 
Some argue that a bankruptcy judge could take a more 
comprehensive view of a borrower's situation and make a better 
overall determination. Opponents note the length of time that 
it might take, the delays that might occur, and argue that it 
would lead eventually to higher costs of borrowing in the 
    The Federal Reserve did not take a position on the earlier 
bankruptcy bill, and we are not taking a position on this one. 
And I think it is a very substantive decision that the Congress 
will have to face on that one.
    Senator Carper. All right. Thank you very much.
    Others, please? Chairman Cox, you may or may not want to 
comment on this. It is your call.
    Mr. Cox. Well, I think as the Chairman of the SEC it is 
difficult for me to comment on this particular piece of 
legislation. As a former Member of the Congress, it is really 
easy, but I think I will forbear in the interest of----
    Senator Carper. I will ask you to keep your current hat on 
rather than put on a new one.
    Secretary Steel.
    Mr. Steel. Senator Carper, thank you for the question. A 
couple of things, and I think that Chairman Bernanke did a good 
job of kind of walking through the issues.
    As you went down the list of all the various components and 
issues, we have not seen the specifics of this, and some of the 
things you alluded to are not part of the bill. But I think our 
position is pretty clear. FHA modernization is important and 
can allow the FHA to do more right away. FHA has been a force 
for good throughout this process. They can do more. 
Modernization is something we support and look forward to 
doing. We can be helpful for that going through.
    I think that also the GSEs, as Senator Dole first raised, 
consistent with prudent operations if something--it is a time 
where they can be stepping in and doing more, and we would 
encourage that. Counseling also.
    I think on the issue of bankruptcy, as you said there are 
arguments on both sides. I think from our perspective, it does 
not seem to be the right tool for the task, that there are lots 
of public policies that suggest that there was a very 
purposeful decision when this was--the process was described 
this way, and that should you allow bankruptcy to be organized 
in the same way with regard to single-family residences, it 
would have a chilling effect. It basically would reduce the 
amount of capital and raise the price of capital. And I think 
that has been the public policy perspective, and I think that 
we need to be very careful to consider anything other than 
    I think the idea that--and also, too, I think something 
that Chairman Dodd said, that we are working now in real time 
and it does not seem to me that when we need a fast solution, 
that heading to the courts is our logical first idea. So I 
think that given those perspectives, that would not be 
something we would view as a key tool.
    Senator Carper. All right. Thank you.
    Mr. Geithner.
    Mr. Geithner. I do not have anything to add.
    Senator Carper. All right. Fair enough. Well, thank you 
very much.
    Chairman Dodd. Thank you very much, Senator.
    Senator Carper. Mr. Chairman, if I could, I know the 
Chairman has been working with, I think, his counterparts, 
Congressman Frank, the Chairman of the House Banking Committee, 
on a different approach that helps to address the situation 
where folks have their mortgages underwater, where the amount 
of money that is owed is significantly worth more than the 
value of the property, the kind of situation where a lot of 
people are thinking--are walking away or thinking about walking 
    Some have suggested that that might be actually a better 
approach than working on the bankruptcy side, and I think that 
is a question that----
    Chairman Dodd. Well, you would like to avoid it if you can. 
Once you are into bankruptcy, you have got another whole set of 
issues. If you can avoid that situation, obviously--and the 
value, I have tried to explain all of this, while there is 
clearly value, obviously, in trying to keep people in their 
homes, all the residual effects of that, the larger value to me 
is that you are establishing a floor. You are getting to the 
bottom of this. And unless you get to the bottom of this, you 
are not going to see capital begin to flow. That to me is the 
greatest asset, potentially, of a plan like this.
    We are spending a lot of time talking about it and getting 
other people's advice and opinion on this, and I am anxious--
and Senator Shelby and I have talked about it. I am not going 
to make it a part of this particular bill we have on the floor 
right now because it is controversial, and I do not want to end 
up having a lot of people vote against something that I think 
they might be inclined to vote for if we can frame it right. So 
we are going to be having some hearings on it, and I am going 
to be soliciting the opinions of many of you here as to how we 
do this.
    But in my view, in the absence of doing that or something 
like that, all we are doing is dealing with the effects of all 
of this rather than dealing with the problem. And the problem 
is to get capital to flow. So that is another--that is what we 
are trying to drive at in all this.
    With that, Senator Martinez.
    Senator Martinez. Thank you, Mr. Chairman.
    I want to pursue a little more on the inquiries that 
Senator Dole raised regarding the Government-sponsored 
enterprises, Fannie Mae and Freddie Mac, and from two aspects:
    No. 1, Mr. Chairman, I would like to know your thoughts on 
whether a failure of one of these enterprises would pose a 
systemic risk to the system. And, obviously, I think I know the 
answer to that, but I would like to be sure I understand your 
position on that.
    Mr. Bernanke. I think it would. It would be sort of two 
options. One would be significant systemic risk or Government 
guarantees. So either way it would be not a good outcome, 
obviously. So for that reason, I certainly support both good 
oversight and that the GSEs should continue to raise capital. 
The recent evidence is that financial firms can raise capital. 
They can do so, and they can do so profitably, given the 
opportunities they have right now in the housing market. So I 
would strongly urge them to do that.
    Senator Martinez. In order to raise capital, would it be 
helpful--do you anticipate that the investor would have a high 
level of confidence and would bring new money into the market 
for mortgages if there was a world-class regulator that would 
give investor confidence at a time like this when there is such 
fragility and where we have seen a huge failure of one of the 
investment banks?
    Mr. Bernanke. I think that is an excellent point, Senator. 
It would assure investors that the GSEs were safe and sound and 
that they had adequate capital to conduct profitable 
    Senator Martinez. Secretary Steel, could I get your 
comments on both of those issues?
    Mr. Steel. I think that the two questions, one, is the 
size, scale, scope of these GSEs, is there the potential for 
systemic risk, the answer is yes, period.
    I think with regard to the second question, I would concur 
with Chairman Bernanke that anyone who would consider investing 
in these entities would have to view the establishment of a 
clear, strong, appropriately empowered regulator as a positive. 
And so, therefore, the answer to the question is yes.
    Senator Martinez. So it seems to me that based on the fact 
that we have seen accounting irregularities in the recent past, 
that they have worked out of, and this is good, with the need 
for them to play an increasing role with higher conforming 
limits, with us empowering them to lend more money by reducing 
their capital requirements, and all of us knowing that OFHEO 
today does not represent that kind of world-class regulator 
that Senator Dole was talking about, then maybe the time is now 
for us to give the investor confidence that is needed as well 
as provide the kind of security to our taxpayers, because make 
no mistake about it, these entities cannot be allowed to fail, 
and there is an implied guarantee of the Federal Government.
    So rather than us be here Monday morning quarterbacking 
sometime down the road, it sure would seem to me to be a good 
idea for the Congress to get about the business of something I 
have been advocating even before I was in the Congress, and 
that is, a world-class regulator. Kind of a long question.
    On the current issue, which is the Bear Stearns situation, 
and I guess this might be to you, Mr. Geithner. One of the 
issues that has concerned me as it relates to the shareholder 
is whether there were other suitors, whether there were options 
available that might have provided a better outcome to the 
shareholders. Could you comment on that?
    Mr. Geithner. Absolutely, and I do say quite a bit about 
this in my written testimony, and, of course, you will have a 
chance to hear later today their perspective on this.
    Bear Stearns began approaching people right away, very 
quickly, and they, of course, had a very strong incentive in 
trying to get as many people as possible looking at ways to 
provide financing. And we encouraged that. It was very 
important to us, too, that we maximize the chance there be an 
outcome that was going to be, you know, good for the system as 
a whole. Ultimately, though, only one institution was willing--
had the ability, the will, willing to move that quickly.
    Was there a better option available at the time? No, I do 
not believe so. And I think everything was done to maximize the 
chance that there would be a set, a range of choices available, 
but I do not believe there was a better option available.
    Senator Martinez. And the governmental entities involved 
did not presume or select JPMorgan in this instance?
    Mr. Geithner. Absolutely not. It was Bear's decision who 
they initially approached, and our interest was only in--and it 
was very important to us that they open up and allow a range of 
institutions to do due diligence, which they did.
    Senator Martinez. Thank you.
    Chairman Cox, a couple of questions more related to the 
shareholders. One has to do with the value of the $2, which I 
know there was a financial advisor that provided an opinion of 
fairness at the $2 level. I guess when the transaction was up 
significantly, it raises in my mind the question of whether, in 
fact, the financial advisor's advice was appropriate, adequate, 
or was it just a better deal when it became $10, the $2 value. 
Do you have any concern from the shareholder standpoint about 
the appropriateness of the financial advisor's role in this 
    Mr. Cox. Well, the Commission's concern is that the 
shareholders get all of the information that they need to 
evaluate that for themselves. There are many things about this 
transaction that are unusual and that have broken the mold, but 
one thing that is not different is that this is ultimately a 
transaction between JPMorgan Chase and Bear Stearns. There is a 
merger. There is going to be a proxy. There are going to be 
shareholder votes and so on. And all of those decisions have to 
be understood and approved by shareholders. The SEC has never 
in its history intervened to determine the price of a 
transaction, and we would not in this case.
    Senator Martinez. Will there be a shareholder vote in this 
    Mr. Cox. Now, if you are getting into the terms of the 
transaction and the what-ifs, I think I might better yield to 
the people that are directly involved in it.
    Senator Martinez. Fair enough. Maybe we can get----
    Mr. Cox. I mean other witnesses as well as the next panel, 
    Senator Martinez. Mr. Geithner.
    Mr. Geithner. I do not think I am the one in the best 
position to talk about the way forward in terms of the legal 
issues around consummating this agreement. But I think you will 
have the opportunity later today to have them----
    Senator Martinez. Maybe I should pursue the question later.
    Mr. Cox. I will say that just as a generic matter--and 
under the terms of the merger agreement, which is not unusual 
in this respect--there is to be a shareholder vote.
    Senator Martinez. But is it not a stock exchange?
    Mr. Cox. It must be approved. It is a stock-for-stock 
transaction, must be approved by the shareholders.
    Senator Martinez. OK. Good enough. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Bernanke, I am trying to get a sense here of the 
risk for the taxpayers, and I heard some or was informed of 
some of your answers to Senator Reed before. You know, a letter 
from the Treasury indicates that these are largely mortgage-
based securities and related hedge investments.
    Now, I have heard this panel testify in your opening 
statements that, you know, in essence, what happened here was a 
lack of confidence. Well, a lack of confidence happens because 
of underpinnings. I would hate to believe that simply the rumor 
mill can bring down one of the largest investment banks in the 
Nation, because then we are really in trouble.
    So there had to be some underpinnings of what created that 
lack of confidence, and that is what I am concerned about, is 
what is the confidence that we have in where the taxpayers are 
out there on liability.
    Now, I know that you said that you are reasonably 
comfortable that the risks are not remotely close to the full 
amount. Well, what are they remotely close to? Because we have 
seen reports that Bear Stearns was leveraged 30 to 1, in some 
cases 100 to 1. I mean, what--we have heard other financial 
institutions say that they, in fact, cannot truly verify the 
full value of their securities.
    So if we do not have a valuation of these securities, how 
are we so confident--I know that the first billion of loss goes 
to JPMorgan, but they would not get involved with this 
transaction unless the Fed came forth. That is still $29 
billion. So what is the response to where the risks lie here 
for the taxpayers as a whole?
    Mr. Bernanke. Well, Senator, first of all, Bear's overall 
condition or its leverage is irrelevant here because we are 
only looking at a set of assets. These were assets, as 
President Geithner mentioned, that we negotiated to get. They 
are not in any way the residual or the worst assets or anything 
like that. They are representative assets.
    Senator Menendez. Are they worth $29 billion?
    Mr. Bernanke. We have several sources of information. We 
have Bear's own marks. But, in addition to that, we have the 
valuation of our own experts. As President Geithner mentioned, 
we do value assets for the purpose of lending at the discount 
window. And we have the advice of a well-respected, independent 
advisory firm that takes the view that if we sell these assets 
over time--and we have allowed ourselves up to 10 years, 
although we can sell them any time we would like--and, 
therefore, avoid the need to sell into a distressed market, 
that we will recover the full amount, and that, in addition, if 
we are fortunate, we may turn a profit beyond that. But I think 
we have a very good chance of recovering the full amount.
    Senator Menendez. If that is true, why did JPMorgan say 
they would never have gotten involved in this but for your 
    Mr. Bernanke. Well, again, it was an issue of how much they 
could swallow, how much total risk they could take on, how much 
capital they have, and just the shortness of time from their 
    Senator Menendez. So you are telling the Committee that, as 
far as you are concerned, the American taxpayer has no 
liability here.
    Mr. Bernanke. I am not saying that. There is----
    Senator Menendez. Well, what is--I am trying to quantify 
the liability. Give the Committee a sense of what the liability 
is for the American taxpayer in this regard.
    Mr. Bernanke. I do not know the exact number. I think----
    Senator Menendez. And that is my concern.
    Mr. Bernanke. Well, again, our advisor suggests that we 
have collateral that is worth as much or more as our loan. 
Senator, I would just simply like to point out that this cost, 
if it turns out to be a cost--which is by no means obvious--
must be weighed against the effects on the American economy and 
the American financial system of allowing this firm to collapse 
and all the consequences that would have had for the markets 
and for the economy.
    Senator Menendez. Well, listen, I realize that. I said that 
in my opening statement. I also realize that a year ago, when I 
said we were going to have a tsunami of foreclosures, you all 
downplayed it, and we have not even seen the crest of that 
tsunami. And I believe that that consequence to the economy is 
equally consequential.
    As a matter of fact, if, in fact, these securities are 
mortgage-backed residential and commercial securities, I am not 
sure of the value.
    What does ``highly rates''--you have mentioned several 
times ``highly rated securities.'' What does ``highly rated'' 
mean in a time where so many highly rated securities have 
absolutely plummeted?
    Mr. Bernanke. Senator, all I can say is that we are not 
basing our evaluations on face values. We are basing them on 
market values from several different sources. I cannot give any 
firmer guarantees than that. I don't know, President Geithner, 
if you want to add to this, but we believe based on independent 
professional advice and our own evaluation that we have an 
excellent chance of recovering the full amount, as well as 
    Senator Menendez. Well, I have to be honest with you. 
Haven't you gone beyond a--it seems to me--as I understand the 
process that you set up, what the Fed is getting in exchange is 
a question. That is a bit surprising because the deal is far 
from a standard loan. That money goes to JPMorgan. The firm is 
not the borrower. The Fed cannot demand repayment from JPMorgan 
if the Bear assets turn out to be worth less than what has been 
promised. And what is odd is that if there is any money left 
over--which hopefully there will be, but I am not so sure. I am 
really concerned that it is not. The Fed gets to keep the 
residual value for itself. That seems to be more of an 
investment than a collateral loan. You have really stretched 
the limits of what this is all about.
    Chairman Cox, you know, what are you all doing at the SEC? 
I mean, it seems to me that we always say, oh, we have learned 
all these things. We can never have the foresight to look ahead 
and say, you know, we need to change the regulatory system to 
ensure that in the dynamics of all of these instruments that 
are being used that we have the appropriate regulation and we 
are looking for the right standards to ensure that this does 
not happen. You know, when a JPMorgan analyst says that, in 
fact, it is not indisputable that rumor and innuendo can bring 
down a firm, and quickly, you know, that is troubling, 
particularly at a time when shorting of stocks as a core 
investment style becomes so widespread.
    What are we doing? What are we doing to ensure that that 
just cannot happen? And to put the taxpayers at the risk--at 
the risk--because I have not heard anything here that gives me 
a sense that we are whole by any stretch of the imagination.
    Mr. Cox. Senator, the fact that unsecured funding might not 
be available in times of stress is baked into all the 
regulatory models that are used for both commercial banks and 
investment banks in this country and around the world. The idea 
that secured funding, even for good collateral, would be 
unavailable and in such breathtaking fashion as occurred in 
this case was indeed a revelation. And everyone has inferred 
that lesson since the time. As a result, not waiting for new 
legislation or even new regulation, the SEC and the Fed are in 
all five of these firms, working with those firms to make sure 
that they do things such as, first, increase their liquidity 
pools; second, lengthen the term of their financing; third, 
redouble their focus on their own risk practices and models. 
And beyond that, the act that the Fed has taken in opening the 
discount window to all of the firms has dramatically changed 
the risk landscape.
    So much has changed since this happened, but you are 
absolutely right that we are living in very different times.
    Senator Menendez. Mr. Chairman, I will not belabor it. I 
just want to make one last point. There are all series of new 
financial instruments which we have not kept up with in a 
regulatory context. I urge those of you who have not to read 
the book ``Trillion Dollar Meltdown.'' I think he does a very 
good job of describing what we are facing and what we are 
headed toward. And I have to be honest with you. I am looking 
for our regulators to be protectors, not following the 
aftermath, the cleanup brigade. And I do not think that what we 
have had here--what we have here is a cleanup brigade, not a 
protector of the very institutions that we need to have 
protected for the well-being of all Americans.
    Thank you, Mr. Chairman.
    Chairman Dodd. I thank the Senator. I do not know if you 
were here in the room or not, Senator, when I mentioned earlier 
that the issue right now, in fact, is there some additional 
authority that the regulators need that they do not have, since 
we have now expanded the opportunity to investment banks and 
broker-dealers at a discount window here where capital 
requirements and other regulatory sanctions at least exist on 
the member banks here, should we be doing something.
    The Chairman is going to let me know whether or not we need 
to be giving them some authority in this window. Again, it is a 
limited period of time, but, nonetheless, that is an important 
consideration so we do not look back and say why didn't we do 
something in the middle of all of this. And they are very 
legitimate questions that you and Senator Tester have raised 
and were raised as well as to--I look back on some of these 
other arrangements, to be looking back on the situation at 
Chrysler or others. You know, to what extent was there some 
assets that were coming back to cover the very exposure that 
potentially we have. So a very good set of questions.
    Senator Corker.
    Senator Corker. Mr. Chairman, thank you. I think this has 
been an outstanding hearing, and to all of you for your 
patience. I know I am one of the few things that separates you 
from leaving the building and having lunch and doing something 
maybe more productive. But I want to generally say that there 
is going to be all kind of postmortems, I know, on this deal, 
and that you all had to make decisions in a vortex of a short 
amount of time and a lot happening and a lot at stake. And I am 
sure there are even decisions that you can think back upon that 
you might have made a little bit differently. But, generally 
speaking, I think that you acted in the best interest of the 
financial markets and our country, and I want to thank you for 
that. I think it has been a good thing.
    And I would actually say that I know a lot of people are 
asking, you know, what ``too big to fail'' is. My guess is any 
of the institutions today, because of where we are liquidity-
wise, they are so intertwined, would have been dealt with in 
this manner, any of them. And, anyway, again, I think it was 
probably prudent.
    I have read the testimony of the witnesses coming after 
you, and I know that Alan Schwartz--who I know has not had a 
good life over the last several weeks, nor have his 
stockholders--talked a great deal about the rumors and how in 
essence--I mean, it was just laced--I mean, in essence, if you 
read his testimony, it almost solely occurred because of rumors 
and the ability of those rumors to move quickly with 
telecommunications the way they do today.
    On the other hand, President Geithner, you were asked the 
question about, you know, would it have made sense to open up 
the Fed window, and I think I heard you say that you did not 
think that was prudent, that you would have, if I heard you 
correctly, opened the window to other comparatively well-
managed firms, but you would not have done so to Bear Stearns, 
which gives me an indication that it was more than rumors, that 
you actually felt like the firm was not well managed. And I 
just would like for you to square that up, if you will, with 
Mr. Schwartz's testimony.
    Mr. Geithner. This is a very difficult question, and, 
again, I cannot--I do not think anybody can say with confidence 
what would have happened if we had done this, what would have 
been possible. But just to go back to what I said to Senator 
Dodd on this, it is not clear to me, it is far from clear to me 
that the facilities we designed carefully to try to mitigate 
these market pressures would themselves have been powerful 
enough, sufficient to insulate Bear from the position they 
found themselves in at that time.
    I do not think I can say it any differently. It is just not 
clear to me, it is very hard to know--I may be wrong, but I 
just--it seems to me that the combination of the unique 
pressures on markets and the specific position Bear was in 
makes it hard to reach the judgment that would have delivered a 
different outcome.
    Senator Corker. I would just make the observation, based on 
the testimony today and other written statements recently, that 
it appears to me there is a tremendous difference--I know one 
of the other Senators talked about the relationship between 
capital and liquidity. There is a relationship, no question, 
but there is a vast, vast difference. And I do wonder whether 
any of the firms, any of the major firms that we all know 
today, any of them could survive, period, with a run on their 
particular facility. And I would love to have any--it seems to 
me that none of them could with the liquidity change that 
Secretary Cox referred to earlier with the run, that we have no 
firms in our country today that could stand a run on their 
particular institution.
    Mr. Geithner. I think you are right that financial systems 
rely on confidence. Confidence can go quickly. Without 
liquidity, no leveraged financial institution can survive. And 
the system as a whole depends on the ability of institutions 
individually to convince their creditors and people who fund 
them that they should continue funding them. And every system 
relies on that.
    What is unique about our system is that we put in place 
almost a century ago a set of protections to reduce the risks 
to the economy that come from runs on banks. But the system has 
changed a lot since then, and those protections do not extend 
to a set of institutions who are also vulnerable to liquidity 
pressures, who also play a very important role in the economy. 
And we have been trying to adapt our system to compensate for 
that change, but we are going to have to think through very 
carefully a set of other changes in the future to get ourselves 
a better balance.
    But you are absolutely right that every system depends on 
confidence, and no leveraged financial institution can 
withstand the abrupt cliff of unwillingness of people to fund 
    Senator Corker. It just seems to me that in the future, as 
we look at what might happen over the next couple of years--and 
I know that is not the focus of our meeting--that really 
liquidity should be our focus and not capital. Capital I know 
is important, but at a time like this, liquidity is certainly 
much more that way. And I know of the things you recommended 
was shock absorbers, and I think that in essence may be what 
you are referring to, but I look forward to expanding that 
discussion a little bit later. I only have 7 minutes here.
    Secretary Steel, I know that Secretary Paulson and you both 
were involved in the negotiations in, it seems to me, a fairly 
big way. I am not criticizing that in any way. And I am sure 
that Secretary Paulson was focusing with the Fed Chairman on 
the fact that the price needed to be low because of the moral 
hazard issue, that if there were, in fact, going to be a 
transaction, the share price needed to be very, very low.
    I guess I am a Bear Stearns person, or a former Bear 
Stearns--I guess a present Bear Stearns stockholder. Where are 
we as a country, as a Federal Government, as it relates to 
shareholder suits and those kinds of things? What kind of--I 
know you all thought about that as you were moving through the 
process, but where does that put the Federal Government as it 
relates to shareholder suits?
    Mr. Steel. Well, I am not an expert in this area, and maybe 
someone else here will be, but I will do my best. I think that 
this was a transaction that was agreed upon between JPMorgan 
Chase and Bear Stearns. On behalf of the Government, the 
Federal Reserve Bank of New York was at the table because----
    Senator Corker. But let me just add something to that. The 
fact is that my sense is Chairman Bernanke wanted buy-in by 
Treasury. In other words, they did not want a $29 billion 
guarantee without the Treasury saying good things about what 
they had done. I am sure there was--and I mean that in a 
positive way. I think that is healthy that you all were talking 
with each other. The fact that Secretary Paulson was saying low 
price I am sure affected the whole transaction. It is kind of 
like, look, there needs to be a low price or maybe we will not 
say good things about what happened.
    And so I am just putting in that context. It seemed to me 
that that does affect, if you will, the terms of the 
transaction. I am just wondering, again, if you could in that 
context talk to me.
    Mr. Steel. I will try, and then I would invite Chairman 
Bernanke to speak. I think that Secretary Paulson and others at 
Treasury were active participants. I think that this twin 
responsibility of wanting to be sensitive to the state of the 
markets and what the situation could cause balanced with also 
wanting to not encourage a sense of moral hazard. And 
consistent with that is a price that seems to be appropriate. 
And I guess the answer to that is low, and I am sure that the 
Secretary provided that perspective to Chairman Bernanke and 
President Geithner.
    I just would add, though, sir, that throughout this 
process, I can report to all of you that there was good 
collaboration, and I view that as a good thing, that people 
were helping each other, trying to think about various issues, 
and the 96 hours was fairly fraught. And the Secretary was in 
constant communication and trying to be helpful to Chairman 
Bernanke and President Geithner as they came to work through 
this and offered his perspective.
    Senator Corker. I will ask one last question. It seems to 
me that the amount of taxpayer liability that the Fed was 
willing to put up actually determines the value of the stock. 
In other words, if it had been willing to guarantee $100 
million, the stock price might have been $20 or maybe $30. Who 
    So I know there is going to be a debate that ensues over 
the next couple of years, a debate as to whether the Fed acting 
alone can risk taxpayer dollars on its own or whether the Fed 
needs to seek the approval of other people in political 
positions. And, by the way, I do not have a position. I am 
looking forward to learning.
    But I wonder if you might comment on that. I know this 
transaction had to happen in a hurry, and it seems to me there 
was healthy collaboration between all departments when this 
occurred. But should, in fact, the Fed need the approval of the 
Treasury Secretary or somebody else in a ``political position'' 
that is looking in a different way at taxpayer funds when 
something like this is done?
    Mr. Bernanke. Well, Senator, first of all, there was 
excellent collaboration, and we very much valued not only the 
Treasury's support as a Department but the market knowledge and 
insight of Secretary Paulson and Under Secretary Steel. So that 
was a very useful collaboration, much of it taking place at the 
wee hours of the morning.
    In terms of legal authorities, you should recognize that we 
loan money against collateral all the time. We do not do it 
usually in quite these unusual circumstances, but we do have 
the authority to do it. But certainly given the unusual 
circumstances, it was helpful for us to have--to consult with 
the Treasury to make sure that they were comfortable with what 
we were doing, and it was very helpful that they were.
    You also raise a good point, which is that, as I said 
earlier, my main concern was that this deal happen so that 
there not be the implications for the market of a Bear default. 
And I did not personally have a strong view on the share price, 
but it is true that to the extent that the Fed was facilitating 
the transaction, it would clearly have been--you would have 
questioned it I think even more if the price had been very 
high. You would have asked the question: Why didn't the 
Government, you know, strike a better deal? So that certainly 
is a relevant consideration. And, indeed, when JPMorgan raised 
its offer for Bear based on a number of considerations over the 
next week, the Government renegotiated and approved our 
situation as well. So those two things were linked in that 
respect, certainly.
    Senator Corker. I know my time is up. I would love to ask 
some more questions, but thank you, Mr. Chairman.
    Chairman Dodd. Well, you are going to be able to submit 
them if you want. I realize we have such a heavy participation 
by members in the second round that it is probably not going to 
be possible, but we can submit questions, and I would urge you 
to do so. They are good questions.
    Senator Corker. Thank you.
    Chairman Dodd. Senator Bayh.
    Senator Bayh. Thank you, Mr. Chairman, and thank you to our 
panelists. I am grateful for your dealing with these very 
complex, very significant challenges that arose in these 
circumstances, and I think a fair amount of modesty is in order 
for those of us who were not there in the room trying to deal 
with this. And yet I think you understand we need to try for 
the purposes of going forward to prevent situations like this 
from recurring as best we can.
    Chairman Bernanke, I would like to begin with you. How 
much, as we gather here today, has been lent through the 
discount window to investment banks?
    Mr. Bernanke. Well, the amount differs day by day. I 
think--and, President Geithner, correct me if I am wrong--I 
think a recent number was on the order of $35 to $40 billion.
    Senator Bayh. How long do you anticipate this continuing?
    Mr. Bernanke. Well, we are going to keep the Primary Dealer 
Credit Facility open so long as conditions remain stressed and 
these liquidity issues that we have been talking about are 
still prevalent. We want to make sure that conditions have 
improved, so we are not going to be precipitate in closing that 
window. But our legal authority requires, you know, exigent 
circumstances, and so at some point we would have to close it.
    Senator Bayh. I thought Mr. Geithner went through a list of 
several advisory or supervisory activities that you have been 
trying to counsel people about how to improve their condition. 
Is there a requirement on behalf of these investment banks that 
have used the discount window that they listen to Mr. Geithner 
and follow up on his recommendations? Or can they just 
disregard him at their pleasure?
    Mr. Bernanke. Well, first of all, we are cooperating very 
closely with the primary supervisor, the SEC, and the firms are 
also providing excellent cooperation both in information and in 
    We have a very strong tool. We do not have to lend to them. 
We can deny anyone who wants to come to the window if we do not 
feel that they are safe and sound and do not present adequate 
    Senator Bayh. I am interested just as a shadow banking 
system seems to have arisen, perhaps we have the seeds of a 
shadow supervisory or regulatory structure in nascent form 
here. But, in any event, I am glad to know that they are aware 
of your ability to lend or not lend, and perhaps that does lead 
to them taking suggestions to heart when we do that. Thank you, 
Mr. Chairman.
    Mr. Geithner, to you, second, I think the Chairman was 
right, and as many, including my colleague Senator Corker, 
pointed out, we did not bail out, at least in substantial 
regard, the shareholders of Bear Stearns. But we did ride to 
the rescue of the credit holders. I think that is fair to say. 
And the counterparties certainly were rescued in this 
    Do you have any plans to identify who these counterparties 
were, what kind of risks they had run, so that we can evaluate 
whether they had engaged in reasonable behavior or not since we 
have, you know, provided a substantial service to them?
    Mr. Geithner. Well, I guess I would just step back and 
begin by saying that you cannot protect the system against the 
risks of this type of systemic crisis without some----
    Senator Bayh. Well, the reason I ask, Mr. Geithner, I 
suppose the failure of Bear Stearns, while tragic in and of 
itself, did not really pose a systemic risk. It was the 
counterparties, it was the ripple effect from that, correct? 
    Mr. Geithner. Yes. I would say they are inseparable.
    Senator Bayh. And somebody mentioned a thousand 
counterparties or thereabouts. I guess in order to keep this 
from reoccurring and to really understand what was going on 
here, we need to understand, you know, what was the magnitude 
of the counterparty risk.
    Mr. Geithner. Well, I agree. I think that the--I would say 
anybody in this world today is spending a huge amount of time 
trying to figure out what their exposure is directly and 
indirectly, not just the first round but the second round, 
third round, fourth round effects of this kind of thing. Very 
hard to do that. But in some sense, what you are seeing in 
markets--the reason markets are so fragile now is partly the 
symptom of people preparing for and buying more insurance 
against those very difficult to measure effects as these things 
ripple through the system.
    But, one, I would say I would put on the top of the agenda 
for how you think about risk management improvements and reform 
just the point you made, which is how to make sure people can 
do a better job of figuring out what that exposure is in 
extreme events better ahead of the boom.
    Senator Bayh. If I could get your reaction to a couple of 
suggestions that have been made for our consideration going 
forward, some of these special-purpose, off-balance-sheet 
vehicles are pretty exotic. Obviously, they had a tremendous 
impact here, and yet there were no minimum capital 
requirements, and the holders of these were not really required 
to report their results. Do you think there should be minimum 
capital requirements? And in the off-balance-sheet world, 
should the results be required to be reporter?
    Mr. Geithner. Bob, Secretary Steel, I cannot remember which 
part of the President's Working Group report addresses this 
question, but a lot of issues around accounting treatment, the 
disclosure, the capital treatment, and how liquidity puts are 
regulated in that context, which a lot of people thought, you 
know, are going to be working through. I agree with you it is 
an important question. We have got to get it right. I do not 
think we have got it right at the moment.
    Mr. Steel. And it will be a combination of market 
discipline, which transparency will make clear. Sometimes 
people did not recognize what was going on, so the combination 
of transparency with better risk management from financial 
    Senator Bayh. We have really got to look at the accounting 
standards with regard to some of this off-balance-sheet stuff--
    Mr. Steel. Yes, sir.
    Senator Bayh [continuing]. And the appropriateness of 
capital requirements and margin requirements and all that kind 
of thing.
    I just have--oh, I have got a whole minute left. How about 
that? Two more questions. Chairman Bernanke, to you, and back 
to your point again, we did not--the equity holders in Bear 
took a huge hit here. The holders of the bonds, I do not follow 
the value of their credit instruments, but I suppose they have 
performed much better. Is that a fair guess on my part, 
following the government's intervention?
    Mr. Bernanke. That is correct, but you had many short-term 
lenders, including----
    Senator Bayh. Well, here is my question. If going forward 
the lesson--and perhaps, Secretary Steel, this gets to you a 
little bit--is that the lenders of equity need to be more 
prudent in the risks they take. What lesson are we sending to 
the providers of credit and the kind of risks that they take? 
And might this not skew the market toward greater risk taking 
in the credit arena than the equity arena? And what are the 
consequences of that?
    Mr. Bernanke. You raised an excellent question, Senator. It 
is hardly the case, though, that the debt spreads for other 
companies have shrunken to zero, you know, that lenders believe 
now that they are completely safe. There is still quite a bit 
of concern about counterparty and credit risk. So it is hardly 
the case that we have, you know, persuaded the market that debt 
instruments are entirely safe. But you are absolutely right, 
there is a bit of an asymmetry there.
    Senator Bayh. My final question, Mr. Chairman, and it has 
been touched upon by a number of others, and I just throw it 
out for any of you. Obviously, the public is following this, 
and there are a variety of perspectives. People who have made 
prudent decisions--I am talking about homeowners here who have 
made prudent decisions, who are paying their mortgages. You 
know, they wonder, well, you know, those who did not make 
prudent decisions, they are receiving some assistance. What 
about me? And yet at the same time, if we allow some of those 
to go down, it does have an impact on them. And you had to make 
a decision here about the systemic risks with a large Wall 
Street bank and were providing up to $29 million in credit. We 
have made a--going back to the 1930s, you know, opening up the 
discount window, again to try and at the top level provide 
systemic risk.
    When constituents of mine ask me about all this, what would 
you say to them and the appearance of, well, when it comes to 
large Wall Street institutions, we ride to the rescue, and yet 
for the little guy--and I think Senator Schumer mentioned this. 
In the aggregate, which could be just as important, it was at 
the genesis of all this, there is a greater degree of 
indifference with regard to them. What would you say to people 
who raise that concern?
    Mr. Bernanke. Well, I think the key point to make--and I 
realize it is not an easy sell sometimes, but the truth is that 
the benefits of our actions were not Bear Stearns' and not even 
principally, you know, Wall Street. It was Main Street. It was 
the fact that the financial system has been under a lot of 
stress, and that has affected our ability to grow. It has 
affected employment. It has affected credit availability. And I 
think people are sophisticated enough to understand that if the 
financial system crashes or at least is severely hobbled, the 
economy cannot grow in a healthy way either. And that is why we 
did what we did.
    On the other hand, it is also important to address the 
problem you are referring to, which is the housing issue. I 
would say that the Fed is trying to help on that dimension as 
well. By cutting interest rates, for example, we have reduced 
the pressure of resets, for example. And by improving liquidity 
in the market, we have helped to reduce mortgage rates. So we 
are doing our part in that respect. We are also working with 
communities on the local level through our reserve banks.
    So we are trying to address both issues, but our ultimate 
concern is the health of the American economy and of the 
average person.
    As I said before, I think one of the key issues here is 
housing, though, and I commend the Congress for focusing on 
that issue, which I believe is crucial both to the financial 
situation and to the economic situation.
    Senator Bayh. My time has expired, and I do not expect any 
of you to comment further, unless you want to. But I would just 
conclude, Mr. Chairman, by saying that the reason for my--and I 
appreciated your answer very much, Chairman Bernanke. The 
reason for my question is that it seems to me that in trying to 
strike the balance between systemic risk and moral hazard, in 
the moment you made the right decision. And yet I have been 
somewhat disappointed, Mr. Chairman. You and Senator Shelby 
have done a great job, but some of the things that would go to 
the sort of little guy, for lack of a better term, are still 
out there to be addressed. And I think it is important we send 
a message to them that we are going to take their concerns to 
heart as well as those that present systemic risk from the top; 
those that present in the aggregate systemic risk at the bottom 
also need to be addressed in a real way so that the reality and 
perception of fairness in our system is maintained for all the 
    Chairman Dodd. Well, it could not have been said better, 
and obviously, the point of today, in fact, is to contribute to 
that sense of confidence that people need to feel. And the 
perception is--and I appreciate the answer of the Chairman as 
well. The perception is--and I think all of us are aware of 
this; I hope we are, anyway--that it seems to be lacking 
balance, that we are not addressing as directly as we could the 
problem of those individuals who are at 7,000 or 8,000 a day 
running the risk of losing the most important investment in 
their life. Most of them will never own a stock or a bond or 
anything else, more than likely. They will count on that home, 
that equity in that home for their retirement, for a health 
crisis, for their kids' education, for all of these things that 
can happen. That is the great asset, the great wealth creator 
for them. And it has been put at great jeopardy and great risk. 
And so we need to do a far better job, and my hope is in the 
coming days we are going to. But you have articulated it very, 
very well, Senator.
    Senator Casey.
    Senator Casey. Mr. Chairman, thank you very much. I may be 
last. Is that correct? I just want the panel to know that, 
unless someone else walks in.
    Thank you for your testimony and your presence here. I want 
to focus my questions principally, I think initially, to 
Chairman Bernanke and to President Geithner on a couple of 
areas. One in particular is this question of collateral, the 
valuation of the collateral. And I think for purposes of my 
questions, we could probably establish a couple of things.
    First of all, pursuant to a question by Chairman Dodd I 
guess we are going to get a report as part of this record about 
that valuation. Is that correct?
    Mr. Bernanke. You will receive certainly a list of the 
major categories and the valuations.
    Senator Casey. OK. And we can also establish for the record 
that the valuation of the collateral in this arrangement was 
established by Bear Stearns. Is that correct?
    Mr. Bernanke. That is correct, but in our accepting it, we 
had the advice both of our own experts and also the investment 
advisory firm.
    Senator Casey. And something that, Chairman Bernanke, you 
know from our Joint Economic Committee hearing from yesterday, 
I asked you about the question of if there was a shortfall from 
the valuation placed upon the collateral and then what happens 
to be something less than $30 billion, if that were to occur, 
that that differential, that shortfall, the taxpayers would not 
be able to go back then to JPMorgan to make that up. Is that 
    Mr. Bernanke. That is correct.
    Senator Casey. So I wanted to ask and turn my attention, I 
think, to President Geithner and Chairman Bernanke. Looking at 
both sets of testimony, you outlined a lot of the detail of 
what happened here, especially, Mr. Geithner, your fairly 
exhaustive review of what happened here day by day and 
sometimes hour by hour.
    The one thing I thought was missing--and I want to explore 
it--or a couple things. First of all, I did not get any sense 
of--first of all, BlackRock was not mentioned, as far as I 
could tell by reading it. I am not saying that they necessarily 
had to be mentioned, but I think there is a missing piece there 
in terms of the role of BlackRock. You had said that their fee 
would be--is still being negotiated or the payment terms. But I 
think what I want to know, in the context of what happened 
here, this was obviously very complicated. The time pressures 
were excruciating, and I recognize that. But I want you to fill 
in some blanks for me and for the Committee members. In terms 
of just generically, were there steps taken here as it pertains 
to the particular question of valuation of collateral, concern 
about taxpayer interest here, all of those basic concerns, were 
there steps that you took here because of the exigent 
circumstances that you would not take if you had more time? 
That is No. 1.
    And, No. 2, walk us through the process that you undertook 
or, Chairman Bernanke, that you and your team undertook to do 
the due diligence to make sure that we were doing everything 
possible to make sure that the valuation of the collateral that 
Bear Stearns provided was adequate for you to go forward? Do 
you get my sense of what--I am concerned about the process 
here, even though you had tremendous time pressures. I just 
want to walk through that with you.
    Mr. Geithner. Again, it is hard to know what would have 
been possible, but I think if we had had more time, we would 
have done exactly the same thing in the sense that we would 
have had a mix of our own people looking at the collateral and 
its value; we would have had--we tried to get the best 
expertise in the world to give us a second opinion on that. We 
would have had more time certainly to go through the details. 
But I think the fundamental parameters we established for what 
we would accept and what we would not accept and the design of 
the structure to mitigate the risk of any loss are things that 
we would have done, I think come to, even if we had a lot more 
    But as we have been clear, there is risk in this 
transaction. There is no doubt about it.
    Senator Casey. Sure.
    Mr. Geithner. But I think we have been very exceptionally 
careful to limit that risk, and we have tried to provide as 
much detail as possible as to how we limited that risk, but 
there is risk in this. But, of course, the judgment we were 
making is the comparison between that modest risk and the 
certainty of very substantial losses across the financial--
including to the comparatively prudent.
    Senator Casey. OK. I just want to know more about the role 
of BlackRock in this. In other words, what did they contribute 
in this window of time? If you can summarize the due diligence, 
the analysis.
    Mr. Geithner. You know, more eyes are better than one, one 
pair, so there is value in that. They have got a set of 
expertise that is really exceptional, and they were able to 
help us get as much confidence as we could in that period of 
time, that we had some sense of the overall risk we were 
    So I do not know how else to say it beyond that.
    Senator Casey. But was part of that--was BlackRock charged 
with the responsibility of providing--well, two questions: one, 
charged with the responsibility of providing a valuation of the 
collateral. Were they asked to do that? And I realize the time 
was short, but were they asked to do that?
    Mr. Geithner. Well, let me come back to----
    Senator Casey. Or were they asked to do something in 
substitution of that?
    Mr. Geithner. No. Let me come back. We reached a decision 
to finance in a carefully designed structure a portfolio of 
securities that would be valued at Bear Stearns' marks on March 
14th. A lot of uncertainty in how conservative those marks 
were. Some may have been more conservative than others; as a 
matter of fact, some less conservative. Very hard to know. But 
there was uncertainty around what those things were actually 
    That uncertainty exists today, of course, because these are 
very complicated markets. It is very unclear over time what the 
value of those things were likely to be.
    What BlackRock did is help us make some judgments, I think 
good judgments, about what we should take and what level of 
risk was that going to be leaving us with.
    Senator Casey. But that did not include a valuation.
    Mr. Geithner. Well, of course. Part of what they are going 
to be doing in sort of how to think about managing this 
portfolio with us will be a bunch of judgments about valuation. 
And as I said in my written testimony, we will disclose 
quarterly our fair value estimate of this portfolio through the 
life of this transaction that is outstanding. So that will give 
people a reasonable picture, a reasonable frequency, about what 
is happening in terms of best estimate of value over time.
    Senator Casey. Chairman Bernanke, do you want to add 
anything to that?
    Mr. Bernanke. No. I think that given the remarkable time 
pressure, President Geithner and his team did a good job of 
getting a good estimate of the--and a good level of confidence 
in the quality of the assets, which, again, we had a great deal 
to do in choosing. They were not some residual.
    Senator Casey. In terms of the question overall of due 
diligence, not just as it pertains to the valuation of the 
collateral but just generally, when you are facing this kind of 
decision, you are making determinations rather quickly. What is 
the process you undertake on due diligence? In other words, I 
know you said in your testimony that you dispatched a team of 
examiners to Bear Stearns; you spoke to due diligence later in 
the testimony. You go on to talk about the lending against the 
collateral and the authority or that. But describe for us in 
summary what that means in terms of----
    Mr. Geithner. I think the best way to say it is----
    Senator Casey. Is there a checklist of due diligence that 
you undertake?
    Mr. Geithner. I would say as much as we can, as carefully 
as we can in the time allotted, with the best resources 
available. But we had not faced and hope to not face again 
quite this level of challenge in terms of complexity in 
reaching those judgments. But I would be happy to walk you or 
your staff through in more detail all the things we did.
    Senator Casey. If you could provide that for the record, we 
would appreciate that.
    I think this is the last question. On the question of 
interest payments, Mr. Geithner, is it correct that your new 
partner in this received an agreement that they would receive 
interest payments at a rate 4.5 percent greater than what the 
Fed would receive?
    Mr. Geithner. That is correct.
    Senator Casey. And when it comes to the question of 
arriving at an interest payment, how did you arrive at that 
    Mr. Geithner. That is an interest they are taking on a 
subordinated note, which has a lot of risk in it. Remember, 
they are going to absorb the first losses, the first billion of 
any losses on this. That interest rate, if you look at similar 
structures in the market, is way, way below what would normally 
have accompanied that type of position. But, like anything, it 
was a negotiation.
    Senator Casey. But that interest rate is higher than what--
    Mr. Geithner. That is right, higher, but----
    Senator Casey [continuing]. Taxpayers will get.
    Mr. Geithner. But that makes sense given the nature of the 
risk. And it really should be just relative to the risk and the 
different funding situation of us and them in that context. And 
I think in light of that, it is an economically very sensible 
arrangement for the taxpayer.
    Senator Casey. When you make that determination, are you 
evaluating risk in the transaction itself plus greater risk to 
the credit markets in the economy? Or how do you----
    Mr. Geithner. No, I think in the--well, of course, overall 
in reaching these judgments, we were trying to find a balance 
between what was best for the system and what was possible. But 
in this case, it was just--I think, again, the relative 
economics of the different risks in the structure we designed 
support a different interest rate, although if this had been 
done in a different context, if you look at a similar structure 
in the market, that interest rate, which, as you said 
correctly, is 450 basis points above ours, would have been 
multiples and multiples higher.
    Senator Casey. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much----
    Mr. Bernanke. Senator Casey, could I----
    Senator Casey. Certainly.
    Chairman Dodd. Sure.
    Mr. Bernanke. I just want to add one point on the interest 
payments, which is that we, the taxpayers, the Federal Reserve, 
get paid all our principal and all our interest before JPMorgan 
gets a penny. So they do not get paid interest until we are 
fully made whole.
    Senator Casey. Thank you.
    Chairman Dodd. Thank you, Mr. Chairman.
    Let me, because I made the request and Senator Casey raised 
it again earlier, and that is the requirement or the request by 
the Committee here to have, if we can, I would say to Chairman 
Bernanke, the marked-to-market value at the close of business 
yesterday of these assets. The Committee would like to--I don't 
know whether that should be addressed to you, Mr. President, or 
you, Mr. Chairman, but to whomever it should be addressed, it 
would be helpful to the Committee, I think, to get that.
    Mr. Geithner. I apologize, Senator. I was just talking to 
my chief of staff.
    Chairman Dodd. It was a request I made earlier about the 
    Mr. Geithner. About the valuation.
    Chairman Dodd. Yes.
    Mr. Geithner. Well, we laid out in my written testimony a 
description of the collateral in broad terms----
    Chairman Dodd. No, I just want to know the value of it.
    Mr. Geithner. No, I understand that. And we will--we would 
like to work out some arrangement with your staff so they could 
come and confidentially review the portfolio, and in that 
context, as I said, we will go forward. We will provide a 
quarterly valuation on fair value--quarterly estimate of the 
fair value over time.
    Chairman Dodd. Well, again, this is a very important point, 
obviously considering the potential exposure----
    Mr. Geithner. Exactly, precisely.
    Chairman Dodd. It is important to this Committee that we be 
able to have access to that. It is going to be very, very 
    Mr. Geithner. I understand that.
    Chairman Dodd. Let me just--a couple of quick points, if I 
may, and try to raise--one, and it has been raised by some 
already. I will make this quick if I can. But I was struck. I 
went back and looked at the volume of transactions. I guess, 
Chairman Cox, I would like to address this to you, if I can. I 
was looking at the volume of transactions. It looks like 
historic volume. I am looking at the amount of transactions 
that occurred daily, weekly. Transactions on a daily basis, the 
numbers run at Bear Stearns, running up to this week, 3 
million, 5 million, 6 million, 8 million, 7 million, 2 million. 
She has roughly those numbers.
    You get into the week of March 10th through the 14th, and 
the volume jumps to 32 million, 54 million, 26 million; on 
Friday, March 14th, 186 million. A substantial jump in volume.
    I am also intrigued about the 30-day puts--the 30-dollar 
puts, excuse me, over 10 days. There seems to have been a 
rather significant--in fact, someone ran the math on it for me, 
and if you made a $600 investment on Thursday in Bear Stearns, 
on Monday that was worth about $37,000. Not a bad deal to make.
    To what extent is the Fed looking at this--excuse me, not 
the Fed. The SEC. And I understand you answered the question 
earlier you cannot comment on investigations. Let me put it 
this way to you, I guess, Chairman. I mean, I would hope that 
you are looking at this, and to the extent this kind of spike 
that occurred here, it would seem to me must have triggered 
some sort of bells and whistles at the SEC here. This goes 
beyond rumors. There is no violation in law about rumors. There 
is about collusion. And when I look at a 10-day on 30-day puts, 
I wonder what is going on here, and when I see the spike, it at 
least raises bells and whistles in my mind what is going on.
    I guess I can ask you this: Did your agency react to this 
at all? Was there a reaction going on that week to these 
    Mr. Cox. Yes, Mr. Chairman. Your hopes will be, I think, 
met and exceeded with respect to the agency's response to these 
concerns. There has been some discussion here today about the 
concept of ``too big to fail.'' The rumors surrounding the 
activity you describe are too big to miss, and our Enforcement 
Division is very active for a number of reasons, including the 
fact that a well-policed market is essential to market 
confidence. This is all about market confidence.
    Chairman Dodd. Well, I appreciate that.
    Let me, if I can, jump to one other issue. Again, this has 
been a subject--Senator Menendez, Senator Tester, many people 
have raised the issue.
    Let me frame, if I can, this issue. Again, I want to say 
what I did at the outset here. I agree with those who said 
look, we are going back and reviewing this more for future 
benefit, I sense. At least I am. I obviously want to know what 
happened, but there are some precedents we may be setting here 
that I want to make sure we do not necessary duplicate. Or if 
we are, to understand why we are going to do it in the context 
of sound policy and prudent judgment.
    And it goes to this. If I am incorrect at all in framing 
this in terms of the transaction, you correct me. I want to 
focus on the $30 billion worth of assets involved here. As I 
understand it, Bear Stearns will sell $30 billion worth of its 
assets to this new LLC which is funded by a $29 billion loan 
from the Federal Reserve Bank of New York and a $1 billion loan 
from JPMorgan Chase. Bear then receives $30 billion in cash 
from this LLC. The deal is contingent and contemporaneous with 
the merger. So that the $30 billion in cash then goes to 
JPMorgan Chase.
    In effect, JPMorgan Chase will lend $1 billion to buy 
assets and then get $1 billion back immediately once it buys 
Bear Stearns, which now has the $30 billion in cash on its 
balance sheet.
    Is that a correct characterization? Is that what this is? 
Does that describe it?
    Mr. Bernanke. JPMorgan is certainly taking $1 billion of 
risk on this position. They are not somehow avoiding that risk.
    Chairman Dodd. But then when they acquire Bear Stearns they 
get the money back, they get the cash.
    Mr. Bernanke. Right, but they have the $1 billion note 
financing the LLC which they will not get repaid if the----
    Chairman Dodd. OK, I understand.
    Let me ask you a couple of questions. One is was this--you 
mentioned earlier that there were a number of other people who 
expressed an interest in being involved, that you reached out 
to a number of other people. Were they aware--were all the 
other potential purchasers aware of this particular offer?
    Mr. Geithner. Let me just clarify one thing. Bear reached 
out to a number of different people.
    Chairman Dodd. Right, and you talked to--you encouraged it.
    Mr. Geithner. We encouraged them to reach out to as many 
people as possible.
    Chairman Dodd. Right.
    Mr. Geithner. But I think it was pretty clear to me, at 
least, I think, that at the time when we were contemplating 
things we could do to facilitate this, there was no other 
institution that was going to be in a position to make a 
binding commitment to acquire them and, critically, guarantee 
their obligations.
    Now if--again, it is very hard to know if it would have 
been possible. If, at that moment, there were more than one 
institution in that position, would we have done the same 
thing? Of course, we would have had to have been prepared to do 
that. It would be in our interest, in some sense, because then 
we could have had a bit more of a sense of what a feasible set 
    But we made the judgment, which I think is right--and I 
think it was clearly true late Friday night that that was 
necessary--that we had to maximize the chance something was in 
place before Asian markets opened because of the chain of 
events set in place by the events of late Friday.
    Chairman Dodd. Which was Sunday night?
    Mr. Geithner. Yes, that is right. I am sorry, Sunday night. 
I apologize.
    But of course, if we had been in the situation where there 
were a range of institutions at that point who were really 
committed to doing this and had the ability to do it and could 
have stood behind Bear, would we have made a similar 
arrangement with them? Of course, we would have considered 
that. And it would have been in our interest, if we had gotten 
to that point, that would have been better for us.
    Chairman Dodd. Again, I appreciate that. It is an important 
    I also, and this goes to the issue--and I again, listen, 
again, the time constraints in dealing with all of this, I 
think those are very valid points you've made here.
    But in terms of any precedent setting nature of this, what 
it looks like to many of us up here--and we are all, listen, 
hoping and relying that these assets are going to turn out to 
be worth more than, in fact, the numbers we are talking about. 
We hope that is the case. But again, the issues that Senator 
Menendez raised and others raised obvious questions about it.
    What it looks like, if I had to try and frame this to 
people, is that we have socialized risk and we have privatized 
reward. We are on the hook--hopefully it does not happen, but 
we are on the hook. Why didn't we try to take some of those 
assets and at least cover to some degree the potential, merely 
the potential, of the liability of the American taxpayer as we 
have done in other examples--totally different, in many ways, 
than what we are talking about here. But in the past warrants, 
for instance, were a part of that risk. That we could bring 
back at least potentially covering the potential of possible 
losses to the American taxpayer.
    Mr. Geithner. I think, Senator, we have actually designed 
it with that in mind and with that objective and reach, in the 
sense that if these assets are managed over time--and it is 
perfectly possible they will be--that there is a positive 
return to them, then that return is captured for the American 
    Chairman Dodd. I understand that, again, but--you've heard, 
I made my point on this and I've kept you a long time.
    Let me turn to Senator Shelby.
    Senator Shelby. I will try to be quick, just a few 
    Everybody here knows, banking is managing risk or trying to 
manage risk. We have extraordinary stress, it seems, in the 
marketplace today, financial markets. A lack of confidence in 
the market. A lot of exotic products that probably a lot of us 
certainly do not understand. I hope you do, as regulators, but 
I am not sure.
    Liquidity, a lot of capital, lack of liquidity. Too much 
leverage. But we know banking is leverage, to some extent, and 
managing risk.
    I fear, and I feared this for a long time when I was 
Chairman of the Committee, that the market might be running 
ahead of the regulators with products and so forth. And if you 
continue as regulators, whether you are the Fed Chairman, the 
SEC Chairman, at Treasury, or the New York Fed, which is a very 
important part of the Fed system, to continue to react to 
situations after they happen, where are we going to be?
    And my last observation would be is this an unusual era we 
are going into now? Or is this an intervention by the Fed and 
Treasury and others? Is this a one-time deal? I do not believe 
you know the answer to that. We certainly do not know the 
answer to that. We hope. But we had better, I believe, from 
this point up here on the Banking Committee, and you as 
regulators, had better be concerned.
    And I hope, and Senator Dodd and I have been on this 
committee a long time together, more than anybody, more on this 
side or that. But we have seen stress, we have been through the 
thrift bailout.
    I hope--this $29 billion is not peanuts, it is not a few 
dollars. It is a lot of money. And I hope that the Fed manages 
that risk. And I hope that they get this money back by managing 
    But we have got some investment banks that you all know 
here, and some commercial banks, that are dying for capital and 
probably liquidity. So I hope this is one heck of a wakeup call 
to you as regulators.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much.
    By the way, I mentioned earlier the fact that there are a 
lot of people in this country owning stock. I should have made 
that point. My point is, in terms of great value, it is the 
home that is the substantial value for people.
    You have been incredibly patient. There are probably some 
additional questions from members on writing, and I will ask 
them to submit them quickly to you. And if you could respond as 
quickly, I would appreciate it very, very much.
    This has been very helpful to us. I know it is a lot of 
time to take but this transaction has obviously provoked 
serious questions from all of us and constituents across the 
country. So we are very grateful to all of you for taking the 
time in being here, and we thank you very, very much.
    I am sorry, Senator Corker, do you have----
    Senator Corker. I know everybody wants to leave and I know 
you have got people--if you could just give us, while we have 
this panel together, which is a unique group--the sense of what 
inning we are in not as it relates to the economy but just the 
issue of liquidity itself and sort of getting back to norms, if 
you will? Chairman Bernanke, and not everybody has to respond 
if one is sufficient, but I wonder if you would just give us a 
sense of that today?
    Mr. Bernanke. Well, a lot of losses have been taken and I 
think a lot of the adjustment in house prices, for example, has 
taken place. But we have to remain agnostic and see how the 
economy evolves.
    We remain ready to respond to whatever situation evolves 
and that is, I think, part of the value of having the Federal 
Reserve and the Treasury have this flexibility to respond to 
different conditions.
    Senator Corker. But any sense of where we are from the 
standpoint of liquidity and getting back to norms?
    Mr. Bernanke. I think we have seen some improvement 
recently, but you know, we have to see if it persists. I cannot 
guarantee that it will persist.
    Senator Corker. Thank you, sir.
    Chairman Dodd. Thank you. Thank you all very, very much. We 
appreciate you being here.
    We will take just a couple of minutes of break while we 
bring in our second panel and we express our gratitude to them, 
as well.
    Senator Reed [presiding]. I would like to, on behalf of 
Senator Dodd, welcome the second panel. He is taking a 
momentary break.
    I would recognize on this panel James Dimon, the Chairman 
and Chief Executive Officer of JPMorgan Chase, and Mr. Alan D. 
Schwartz, the President and Chief Executive Officer of the Bear 
Stearns Companies, Incorporated.
    Gentlemen, thank you. Mr. Dimon, if you are ready, we would 
be pleased to accept your testimony.

                         JPMORGAN CHASE

    Mr. Dimon. Thank you very much.
    Senator Reed. If you could just bring that forward and make 
sure the microphone is on.
    Mr. Dimon. Can you hear me now?
    Senator Reed. Yes, sir.
    Mr. Dimon. Thank you.
    Good afternoon, Chairman Dodd, Senator Reed, Ranking Member 
Shelby, and members of the Committee. My name is Jamie Dimon. I 
am the Chairman and Chief Executive Officer of JPMorgan Chase. 
I appreciate the invitation to appear before you today.
    Mr. Chairman, your letter inviting me to testify asked me 
to address a number of issues relating to the JPMorgan-Bear 
Stearns merger. At the outset, I want to underscore a few key 
points about the transaction.
    First, 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 and the broader 
    Second, we could not and would not have assumed the 
substantial risks of acquiring Bear Stearns without the $30 
billion facility provided by the Fed. While we wanted to help, 
and I believe we were the only firm ultimately in the position 
to help, we had to protect the interests of our shareholders.
    Third, this transaction is not without risk for JPMorgan. 
We are acquiring some $360 billion of Bear Stearns assets and 
liabilities. The notion that Bear Stearns' riskiest assets have 
been placed in the $30 billion Fed facility is simply not true. 
And if there is ever a loss on the assets pledged to the Fed, 
the first $1 billion of that loss will be borne by JPMorgan 
    Let me turn now to how we became involved in the effort to 
rescue Bear Stearns and avoid a financial crisis. On Thursday 
evening, March 13th, Bear Stearns called to tell us that it 
might not have enough cash to meet obligations coming due the 
next day and that it needed emergency help. We contacted the 
New York Fed and learned that they were aware of the situation 
and that they recognized that a Bear Stearns bankruptcy posed a 
serious risk to the financial system.
    Working through the night and into Friday morning, the New 
York Fed agreed to establish a secured lending facility for the 
company using JPMorgan as a conduit. But it became clear by the 
end of Friday that a comprehensive solution would be needed 
before the markets reopened in Asia on Sunday evening.
    We had teams of people working around the clock that 
weekend in an effort to determine what we could do to help. My 
perspective from the start was that we could not do anything 
that would jeopardize the health of JPMorgan. That would not be 
good for our shareholders and it would not be good for the 
financial system.
    But I also felt that to the extent it was consistent with 
the best interest of shareholders, we would do everything we 
reasonably could to try to prevent the systematic damage that 
the Bear Stearns' failure would cause. We, the management team 
and the whole board of the company, viewed that as an 
obligation of JPMorgan as a responsible corporate citizen.
    By Sunday morning we had concluded the risks were too great 
for us to buy the company entirely on our own. We informed the 
New York Fed, Treasury, and Bear Stearns of our conclusion. 
This was not a negotiating posture, it was the plain truth.
    The New York Fed encouraged us to consider what kind of 
assistance would allow us to do a transaction. That is what we 
did. Finally, on Sunday evening, the private and Government 
parties announced a plan with three core elements.
    First, JPMorgan would acquire Bear Stearns in a binding 
stock deal worth $2 per share to Bear's shareholders.
    Second, the Fed would provide the merged company with a $30 
billion non-recourse loan, collateralized by a pool of Bear 
Stearns assets valued on Bear Stearns' books at the same 
    Third, JPMorgan would provide an unprecedented guaranty on 
hundreds of billions of Bear Stearns' trading obligations. This 
was done to assure the market that it could continue to do 
business with Bear and prevent a further run on the bank.
    We hoped that the initial plan would save Bear Stearns and 
reassure the market that Bear Stearns would survive, but we 
also understood that we had to monitor the situation very 
closely. It soon became clear that we had not done enough. 
Customers and counterparties continued to flee for two reasons: 
the market perceived our guaranty as too narrow; and it doubted 
that the $2 offer price would be enough to get Bear Stearns' 
shareholders to approve the transaction.
    Discussions with Bear Stearns and the Federal Government in 
the week following the initial merger led to a revised rescue 
plan with a package of five critical new elements designed to 
address these real concerns. First, we strengthened our 
guaranty to cover virtually all of Bear Stearns products, 
customer relationships, and subsidiaries.
    Second, in a response to a request from the Fed, we gave it 
a separate guaranty on its existing loans to Bear Stearns.
    Third, we agreed to take the first $1 billion of losses 
that might ultimately flow from the Fed's $30 billion non-
recourse funding.
    Fourth, Bear agreed to sell $95 million newly issued shares 
to us, representing 39.5 percent of its voting stock.
    And fifth, to help achieve finality, we increased our offer 
to $10 per share.
    The amended plan seems to have worked. In the week 
following its announcement, the liquidity situation at Bear has 
stabilized. And that day Standard & Poor's raised Bear Stearns' 
credit ratings.
    Let me say a word also about the $30 billion of collateral 
for the Fed. We are subject to a confidentiality agreement with 
the Fed in relation to those assets, so I am constrained in 
what I can say. But I can make a few general points.
    The assets taken by the Fed consist entirely of loans that 
are current and rated investment grade. We kept the riskier and 
more complex securities in the Bear Stearns' portfolio for our 
own account. We did not cherry pick the assets in the 
collateral pool. The process of designating what collateral 
would be pledged was overseen by the New York Fed's advisor, 
BlackRock, a recognized expert in the field.
    While no one can predict how the portfolio will ultimately 
perform--and, of course, it could actually increase in value--
if the portfolio declines in value, the first $1 billion of 
that loss will be borne solely by JPMorgan.
    Finally, let me turn to the Committee's interest in the 
implications of this rescue for American taxpayers. The key 
point, in my view, is this: Bear Stearns would have failed 
without this effort, and the consequences could have been 
disastrous. The idea that a Bear Stearns fallout would have 
been limited to a few Wall Street firms just is not so. People 
all over America, union members, retirees, small business 
owners, and our parents and children, are now invested in the 
financial system through pensions, 401(k)s, mutual funds, and 
the like.
    A Bear Stearns bankruptcy could well have touched off a 
chain reaction of defaults at other major financial 
institutions. That would have shaken confidence in the credit 
markets that have already been battered and it could have made 
it harder for home buyers to get mortgages, harder for 
municipalities to get the funds they need to build schools and 
hospitals, and harder for students who need loans to pay 
    Moreover, such a cascade of trouble could have further 
depressed consumer confidence and consumer spending, resulting 
in widespread job losses, and accelerated the ultimate 
    Mr. Chairman, the events of the past 3 weeks have been 
extraordinary. I commend you and your colleagues for examining 
their implications for the future. One thing I can say with 
confidence: if the public and private parties before you today 
had not acted in a remarkable collaboration to prevent the fall 
of Bear Stearns, we would all be facing a far more dire set of 
    Thank you, and I look forward to answering your questions.
    Chairman Dodd [presiding]. Thank you very, very much.
    Mr. Schwartz, we thank you.
    By the way, let me--I was out of the room for 30 seconds 
before you came in and I apologize that I was not here 
personally to welcome both of you. Let me extend that welcome 
and thank you. You have been here a long time already this 
morning. But having the benefit of hearing a wonderful 
distinguished panel of regulators here is certainly--having 
spent some time with them.
    I should have said, by the way, and I want to note this. 
While I did not speak with either of these two gentlemen over 
the weekend, Chairman Bernanke and Secretary Paulson called 
periodically over that weekend to sort of at least keep me 
posted on generally what was going on. And so I was very 
grateful they have taken time out at least to generally keep me 
informed. I was not aware of any of the details of this, I must 
    I will also tell you that I spent 72 hours at the end of 
that, leaving in fact on Sunday evening, to meet with the 
Economic Ministers of the European Union in Brussels on Monday 
morning, having flown all night, leaving without knowing the 
outcome and fearful that I was going to have to get on a plane 
and come right back again in the morning.
    The press has already reported this, but the reception of 
the conclusion was warmly received. That is not to suggest they 
were not understanding of the difficulties, Mr. Schwartz, that 
you and the employees of Bear Stearns and others and 
shareholders faced, but going to the point earlier about 
whether or not this was a better outcome, the reaction was 
    With that, Mr. Schwartz, thank you.


    Mr. Schwartz. Thank you, Chairman Dodd, Ranking Member 
Shelby, Senator Reed.
    My name is Alan Schwartz. I am the President and Chief 
Executive Officer of the Bear Stearns Companies. Bear Stearns 
and its 14,000 employees provide global investment banking 
services, securities and derivatives trading, clearance and 
brokerage services, and asset management services worldwide. I 
have been part of and have grown with, the Bear Stearns family 
for over 32 years. I am saddened by the fast-moving events of 
the past several weeks that bring me here today.
    During the week of March 10th, even though the firm was 
adequately capitalized and had a substantial liquidity cushion, 
unfounded rumors and attendant speculation began circulating in 
the market that Bear Stearns was in the midst of a liquidity 
crisis. The company assured the public that our balance sheet, 
liquidity, and capital were strong but the rumors and 
conjecture persisted.
    Due to the stressed condition of the credit market as a 
whole and the unprecedented speed at which rumors and 
speculation travel and echo through the modern financial media 
environment, the rumors and speculation ultimately became a 
self-fulfilling prophecy. Because of the rumors and conjecture, 
customers, counterparties, and lenders began exercising caution 
in their dealings with us, and during the latter part of the 
week outright refused to do business with Bear Stearns.
    Even if these counterparties and institutional investors 
believed, as we did, that we were stable, it appears that these 
parties were faced with the dilemma that if the rumors proved 
to be true they could be in the difficult position of having to 
explain to their clients and others why they continued to do 
business with Bear Stearns.
    As the week progressed, unfounded rumors grew into fear and 
our liquidity cushion dropped precipitously on Thursday, as 
customers withdrew cash and repo counterparties increasingly 
refused to lend against even high-quality collateral. There 
was, simply put, a run on the bank.
    I want to emphasize that the impetus for the run on Bear 
Stearns was in the first instance the result of a lack of 
confidence, not a lack of capital or liquidity. Throughout this 
period, Bear Stearns had a capital cushion well above what was 
required to meet regulatory standards. However, by Thursday of 
that week, a tipping point was reached on liquidity. The market 
rumors became self-fulfilling and Bear Stearns' liquidity pool 
began to fall sharply.
    At that point, we needed to find a source of emergency 
financing to stabilize the situation and calm our clients and 
counterparties. On Thursday, we reached out to JPMorgan, among 
others, in part because JPMorgan served as our clearing agent 
and was therefore already familiar with our collateral 
position. We also informed the SEC and the Federal Reserve as 
to what was happening.
    We worked through the night and on Friday morning, March 
14th, JPMorgan agreed to make a short-term loan available to 
Bear Stearns, supported by a back-to-back loan from the New 
York Federal Reserve Bank. We believed at the time that the 
loan, and the corresponding backstop from the New York Fed, 
would be available for 28 days. We hoped this period would be 
sufficient to bring order to the chaos and allow us to secure 
more permanent funding or an orderly disposition of assets to 
raise cash if that became necessary.
    However, despite the announcement of the JPMorgan facility, 
market forces continued to drive and accelerate our precipitous 
liquidity decline. Also, that Friday afternoon, all three major 
rating agencies lowered Bear Stearns' long-term and short-term 
credit ratings. Finally, on Friday night, we learned that the 
JPMorgan credit facility would not be available beyond Sunday 
    The choices we faced that Friday night were stark: find a 
party willing to acquire Bear Stearns by Sunday night, or face 
what my advisors were telling me could be a bankruptcy filing 
on Monday morning which could likely wipe out our shareholders 
and cause losses for certain of our creditors and all of our 
    Therefore, we set out to find a potential purchaser to 
acquire Bear Stearns that had the wherewithal to provide the 
backing we needed, an arrangement we hoped would reassure our 
constituencies and curtail the flight of our clients and 
counterparties. And we needed to find and reach agreement with 
such a party over the weekend.
    On Sunday, March 16th, after an intense effort to find the 
best transaction possible, we reached the first agreement with 
JPMorgan which has been much discussed in the press. JPMorgan 
would acquire Bear Stearns for $236 million, or $2 a share. 
Significantly, JPMorgan also agreed immediately to guarantee 
the trading obligations of Bear Stearns and its subsidiaries.
    As part of this deal, as has been noted, JPMorgan obtained 
an agreement from the New York Fed to loan up to $30 billion to 
JPMorgan, secured by certain of Bear Stearns' assets. While we 
at Bear Stearns had some understanding that JPMorgan was 
seeking this commitment, we were not directly involved in the 
negotiations between JPMorgan and the Government.
    The following week, due to market uncertainty about the 
guarantees and the successful completion of the deal, the 
agreement between Bear Stearns and JPMorgan was renegotiated. 
In the end, JPMorgan agreed to pay $10 a share for Bear Stearns 
in a stock-for-stock merger. Enhancements were made to 
JPMorgan's guarantee of our operating and certain other 
obligations, and a number of other changes were made to give 
greater certainty of closing.
    At the same time, we understand that JPMorgan's agreement 
with the New York Fed was modified to make the terms more 
favorable to the New York Fed.
    In sum, before unfounded rumors began circulating in an 
already precarious credit market, leading to the run on Bear 
Stearns, the company had adequate capital and liquidity, and a 
book value of approximately $12 billion. Facing the dire choice 
of bankruptcy or a forced sale under exigent circumstances, we 
salvaged what we could to avoid wiping out our shareholders, 
bondholders, and 14,000 employees.
    Federal officials that you talked to today and JPMorgan are 
in a better position than I to discuss their rationale and 
motives for participating in this transaction. I can only say 
that as devastating as these events have been for the Bear 
Stearns family, the failure of Bear Stearns could have had an 
even more extensive, devastating impact on the stability of the 
financial markets as a whole and it may have triggered a run on 
other investment banks with potentially disastrous effects on 
the Nation's overall economy.
    Like many of us, I am certainly glad such a disaster did 
not occur.
    Thank you for your time. I am prepared to answer any 
questions that you might have.
    Chairman Dodd. Thank you very, very much. It was well said, 
Mr. Schwartz.
    On behalf of all of us here on this dais, our sympathies go 
out to your employees. I have just read story after story about 
long-standing employees, having spent careers at Bear Stearns, 
who watched assets go from a Friday to a Monday that literally 
were devastating for them. There is no adequate way we can 
express our sorrow to them what happened.
    Obviously, the shareholders have the same sort of feelings, 
but obviously the employees particularly, it is a particularly 
hard blow.
    You know, you and I chatted some months ago and you raised 
with me this whole idea of the discount window. I am going back 
to now--I don't know whether it was last spring. I've forgot 
exactly when I stopped by and chatted with you at Bear Stearns 
about the various ideas and you raised this issue.
    And I raised the issue, and I do not know if you were in 
the room or not when I raised the issue this morning, when I 
had a hearing a couple of weeks ago and raised with, in fact, a 
panel of regulators including the Vice Chairman of the Federal 
Reserve Bank about the possibility of opening the discount 
window. And it was widely rejected out of hand as something 
that would just be inadvisable.
    Then, of course, you had the events on Thursday night and 
then again on Sunday night. And I raised the question, had that 
decision been reached earlier--whether on Thursday night or 
even before--whether or not this might have salvaged the 
situation and avoided this 96 hours that you and Mr. Dimon and 
others went through.
    You heard earlier, in response I think to Jack Reed's 
question, it may have been, the question to President Geithner 
about whether or not, in fact, had this window been opened 
whether or not Bear Stearns would have qualified for them as a 
prudent risk.
    Would you respond to that, as well?
    Mr. Schwartz. I certainly would, Senator. I think what I 
conveyed to you, if I remember correctly, when we spoke was 
that it was my view--and I think shared by some others in the 
investment banking community--that this was the first major 
credit crisis that we had experienced since there had been an 
elimination of some of the Glass-Steagall restrictions against 
the competition or the participation in investment banking by 
commercial banks.
    And that it felt to me that, as this environment unfolded, 
having direct competition, people being in the same exact 
businesses between commercial banks and investment banks, and 
the commercial banks having a known access to a liquidity 
source for all of their high-quality collateral and the 
investment banks not having that, that created a situation that 
I thought was precarious for the whole financial system.
    Now getting directly to the point about what might have 
happened if action had been taken more quickly, I will just 
parse it in two ways because I remember there were two 
questions about it: what happened if they had just opened that 
window on Thursday night? Or what if they had done it sooner?
    On Thursday night, I think, as Mr. Geithner pointed out, 
there was already a run going on--But--when he said that, the 
experience on Friday that showed that even the facility they 
came up with did not stop the run, as we know, on Friday 
afternoon--I think the problem with that analogy is when you 
make an emergency situation available for one particular bank, 
that does not shore up the confidence in that particular bank. 
I think that is different than if you make a facility available 
for all investment banks as a precautionary note. I think the 
situation could be different.
    Having said that, I do not know whether Thursday night 
would have been too late, since the run on the bank and the 
crisis of confidence was occurring Thursday afternoon. It is my 
strong belief that by every measure that I can think of that 
our balance sheet, our capital ratios, our risk profile lined 
up well with all of our leading competitors. So I do believe 
that if, as a policy measure, the discount window had been 
opened to investment banks for their high-quality collateral, I 
think it is highly, highly unlikely, in my personal opinion, 
that we would be in the situation we find ourselves in today.
    Chairman Dodd. Let me, getting down to the weeds a bit on 
this, but I had read your testimony, and you just made the 
point again here this afternoon, that you were working on an 
assumption that that extension was going to be good for 28 
days. President Geithner said, as I recall his language, it was 
up to 28 days, which is kind of a different reaction here.
    Take me through that a little bit. I presume someone, at 
some point, raised the question that this was going to be more 
than 2 days?
    Mr. Schwartz. I want to start by saying that everything 
happened in a very, very short period of time on Monday 
morning, when we put this together. So we first got a draft of 
what we were going to be putting out that referenced an 
agreement between JPMorgan and the New York Fed, and then 
referenced JPMorgan's facility to us. And I believe the 
language said that there would be an interim period of up to 28 
    When we, our advisors, and others read that, I think we 
interpreted it--just the language--that the initial period 
would be 28 days, unless we could stabilize the situation in a 
shorter period of time.
    As it turns out, and maybe exacerbated by the situation 
with the run that continued on Friday, and since this was not 
stabilizing the situation, we were informed that their view of 
the language was no, it could be up to 28 days but could be 
    And so I think there was just an honest different reading 
of the same words.
    Chairman Dodd. Let me, if I can, I raised sort of at the 
end of the appearance by the panel of Federal regulators--
again, and you both have forgotten more in the next 10 minutes 
than I will ever probably understand about all of this. But 
this question of what happens--when I looked at the volume, and 
this was just getting up on Yahoo, in fact, I looked at the 
volume of trades with Bear Stearns historically. I do not know 
if that was just that month or so, but the numbers are--I do 
not know if that has been true throughout the last year or so, 
but that 3 million, 2 million, 5 million, 6 million, 7 million. 
And then jumping to that Friday of 156 million, not to mention 
the $30 puts for 10 day, that truncated period that went on 
    Share with the Committee here your own thoughts and 
observations. It sounds like more than just rumors to me that 
were contributing to this.
    Mr. Schwartz. Well, point No. 1, I do not have any specific 
facts and I hope some facts will emerge over time. Given what I 
have been through in the last few weeks, I do not want to 
encourage too much rumor speculation. I would like the people 
to find the facts.
    But I would say that the nature and the pattern of the 
rumors--I mean, one of the things we were trying to do was get 
facts out that discounted the rumors that were out there. And 
the minute we got a fact out, more rumors started or a 
different set of rumors. So you could never get facts out as 
fast as the rumors.
    I would just say that as an observer of the markets, that 
looked like more than just fear. It looked like there were 
people that wanted to induce a panic. There are lots and lots 
of reasons why people could have a financial motivation to 
induce a panic. There is a lot of the trading that would point 
to that.
    I can only hope--there are laws against manipulating the 
market. There used to be laws in this country against spreading 
rumors about banks because they could cause a run on the bank. 
There are no such laws on investment banks, but there are laws 
against manipulating the markets.
    If facts can come to light, I think that would be very 
appropriate to go after.
    Chairman Dodd. Mr. Dimon, welcome, and thank you for being 
here, as well. Appreciate it very, very much.
    In your testimony, you said that the--and I quote here--
``The New York Fed encouraged us to consider what kind of 
assistance would allow us to do a transaction.''
    Mr. Steel, the Secretary, in his testimony said that 
JPMorgan first approached the New York Fed asking for 
Government assistance.
    Can you help us out as to which of these versions is----
    Mr. Dimon. Mr. Chairman, I think lots of things took place 
in a very brief period. When we had the conversation that we 
would be unable to do the loan, we had a quick conversation 
what would it take if you got help to do it?
    So I do not actually remember who suggested it or not 
suggested it, but it was the only way that we could have done 
    Chairman Dodd. Let me just ask you the question here, if I 
can. Did you or any of the senior management at JPMorgan Chase 
ever have a conversation with anyone in the Federal Government 
about the price that you were going to offer for Bear? And if 
so, who did you talk to and what did they say?
    Mr. Dimon. With President Geithner, the answer is he knew 
the price but he always said that it was a decision of JPMorgan 
Chase. And at one point with Secretary of Treasury Paulson, he 
also knew the price. We had spoken several times. He also made 
it very clear that that was the decision of JPMorgan Chase but 
did express the point of view, which was held by a lot of 
people including on the JPMorgan Chase side that the higher the 
price, the more the so-called moral hazard. So that was simply 
taken into consideration among all the other factors in what 
the price would be.
    Chairman Dodd. So the stories that have gone around and 
been circulating about your willingness to pay $4 a share, and 
that that was rejected flatly in a very direct way by the 
Treasury are not true?
    Mr. Dimon. Right. And I think another fact that can answer 
that, Mr. Chairman, is that soon thereafter we were willing to 
pay more. And we felt completely free to make such a 
    Chairman Dodd. I understand that came, but I am looking at 
that 96 hour period, in that window.
    Mr. Schwartz, let me ask you, were you ever offered $4 a 
    Mr. Schwartz. No. We were, at differing times during the 
negotiation, different prices were discussed as potential 
prices. But the only actual offer we ever received was $2 a 
    Chairman Dodd. Senator Shelby.
    Senator Shelby. Mr. Dimon, you are the CEO of one of our 
largest banks. Do you believe that most of our bigger banks are 
well capitalized and have enough liquidity today? Or do you not 
    Speak of your own bank first. I know you know where you 
    Mr. Dimon. We have always believed in being extremely well 
capitalized, conservative accounting, filling loss reserves, 
and being prepared for what we call bad weather, which happens 
when you do not really expect it.
    I really cannot speak about all the other financial 
institutions in the country.
    Senator Shelby. Do you believe, do you have any inkling 
that the Fed might have to go to intervene again--we keep 
bringing this up--if another house failed?
    Mr. Dimon. Senator, I do not know the answer to that but I 
think they have done an awful lot of powerful financing that 
hopefully will either eliminate or greatly reduce the chance of 
having that happen again.
    Senator Shelby. Mr. Schwartz, do you believe that your 
management team at Bear Stearns has any responsibility for the 
company's collapse?
    Mr. Schwartz. Well, Senator, I do not think a management 
team can ever say it bears no responsibility for anything that 
    Senator Shelby. Sure, because the buck stops with you, 
    Mr. Schwartz. Yes, the buck stops here and we, and our 
shareholders, pay the price.
    Senator Shelby. Sure.
    Mr. Schwartz. I can just tell you that--I can guarantee you 
it is a subject I have thought about a lot. Looking backwards, 
and with hindsight, saying if I had known exactly the forces 
that were coming, what actions could we have taken beforehand 
to have avoided the situation. And I just simply have not been 
able to come up with anything, even with the benefit of 
hindsight, that would have made a difference to the situation 
that we faced.
    Senator Shelby. Did you believe at Bear Stearns, when the 
week began, that you had adequate capital and liquidity to 
carry on business? By Thursday you had problems. On Monday, how 
were you on Monday?
    Mr. Schwartz. Well, I certainly believed on Monday that we 
had adequate capital and liquidity. They were in our normal 
ranges. And by most measures, I believe our capital was 
measured as being above standard.
    I always had a concern. I never dreamed it would be as 
rapid as things happened here, but I always had a concern that 
the lack of a known liquidity facility for your collateral is 
something that can cause a problem with the lenders against 
that collateral. All of us, as investment banks, lend against 
high-quality collateral and we turn around and use that 
collateral. We never believed we could rely on unsecured 
financing. We always felt like we needed a collateral pool.
    And I did worry that there was an environment that could 
happen that if we did not have--if the market could not see 
that we had some place to go and borrow against that 
collateral, then the fears could start. I just never, frankly, 
understood or dreamed that it could happen as rapidly as it 
    Senator Shelby. Do you believe that a lot of the value of 
the collateral just collapsed?
    Mr. Schwartz. No, I do not think----
    Senator Shelby. Caused by rumors and other things?
    Mr. Schwartz. I do not think the value of the collateral 
collapsed. The willingness of people to lend against it----
    Senator Shelby. Dissipated.
    Mr. Schwartz [continuing]. On our behalf just dissipated 
because of fear.
    Senator Shelby. Mr. Dimon, for some time, JPMorgan Chase 
has acted as the clearinghouse for Bear Stearns. I believe that 
JPMorgan Chase also has extensive OTC derivative contracts with 
Bear Stearns. What was the extent, sir, of JPMorgan Chase's 
interconnectedness with Bear Stearns prior to Bear's 
announcement of their intention to file for bankruptcy? And 
what would have been the impact on your company's balance sheet 
if Bear Stearns had been liquidated? Were these considerations 
that went through your mind? Because you were connected. You 
were the banker, basically, the commercial banker for the 
    Mr. Dimon. Senator, yes. We were one of their bankers and 
one of their main clearinghouses. So we had obviously extensive 
relationships and exposures.
    But the answer to the question, our direct exposure on that 
day was approximately zero. And where we did have exposure, it 
was fully and totally collateralized.
    Our real exposure would have been if Bear Stearns went 
bankrupt, the impact it would have had on the financial system. 
We probably would have lost money, but we still would have been 
in fine shape.
    So it really was not one of the reasons we went ahead and 
did this transaction.
    Senator Shelby. Mr. Dimon, in your testimony, you also 
point out that the assets securing the Fed's loan, and I will 
quote your words, ``consist entirely of loans that are current 
and domestic securities rated investment grade'' and that 
JPMorgan Chase is retaining ``the riskier and more complex 
securities in the Bear Stearns' portfolio.''
    Since your company, and you gave us an amount earlier of 
$300-something billion----
    Mr. Dimon. $300 billion was the amount of assets we are 
buying from Bear Stearns; right.
    Senator Shelby. OK. Since your company will be purchasing, 
according to your testimony, the riskiest assets of Bear, why 
did you opt not to purchase Bear without Federal assistance? If 
the Fed is truly getting good assets--and we hope and pray they 
are and they work out--why does JPMorgan Chase not want to 
purchase those assets, or why did you not? Want some 
    Mr. Dimon. Senator, one of the concerns we had was how much 
exposure can we take on top of our other exposures. So we 
already had plenty of mortgage exposures and risky security 
exposures and we could do nothing that would leave JPMorgan in 
the precarious position--like you have seen happen to lots of 
other institutions.
    Senator Shelby. You could not jeopardize your bank----
    Mr. Dimon. You have to look at how many straws can you put 
on the camel's back. And we are fairly conservative and we went 
as absolutely far as we could go, both in terms of taking risky 
assets, taking more mortgage assets, and having to borrow 
another $30 billion.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Dodd. Senator Reed.
    Senator Reed. Thanks very much, Mr. Chairman. Thank you, 
    I just want to clarify, Mr. Dimon, the guarantee that you 
have, that you mentioned in your testimony. The loan is for $30 
billion which was extended by the Fed. You are guaranteeing the 
first $1 billion of that?
    Mr. Dimon. Yes, so the $30 billion special facility, 
Senator, we are going to take the first $1 billion of loss. The 
Fed has also lent $25 billion to Bear Stearns under the primary 
facility, another $25 billion, which exists today. And we have 
also guaranteed that.
    Senator Reed. So you are guaranteeing the $25 billion total 
facility, the first facility, and $1 billion of the second 
    Mr. Dimon. That is correct.
    Senator Reed. Thank you very much.
    Mr. Schwartz, you have said, and I think Chairman Cox also 
said, that your capital ratios were adequate as far as the 
supervisors were concerned. Many things seemed to be in order 
just several days before this transaction was entered into. But 
others have raised the issue of your leverage, the fact that 
you might have been more highly leveraged than other 
competitive institutions. Can you comment on that leverage 
    Mr. Schwartz. Yes, I can.
    I think that when people examined our balance sheet, a lot 
of people examined it very carefully and got very comfortable 
with it. There is one measure of leverage, which is total 
assets to equity, which I do not think that any sophisticated 
analysis of a balance sheet says that one measure is a sign of 
leverage. It depends on what kinds of assets with what kinds of 
    The way capital cushions are monitored is you look at all 
of the liabilities that you have or all of the assets that you 
have, and you take a haircut based on the risk of those assets. 
And those are basically across the board, across the industry, 
the same.
    And so when you looked at our capital versus the perception 
of risk by those measures compared to other people, our capital 
looked very adequate for the risk that we had on our balance 
    Senator Reed. The other issue that is raised is that a lot 
of your funding was very short-term funding and that you left 
yourself exposed to a sudden seize up of the market, as 
happened. Could you comment on that?
    Mr. Schwartz. I could, and it is a good question because I 
think some of the testimony you have heard today said that this 
credit problem has been intensifying for many, many, many 
months. Coming into it, we had made a decision to reduce our 
reliance on unsecured financing at all and get all of our high-
quality collateral out, and as much as we could get it out on 
longer term lines. We also borrowed in the long-term markets 
when we could.
    As this credit environment has frozen, it became very, very 
hard to continue to borrow in the long-term market and the 
facilities that one had against secured collateral that were 
term, as they termed out people did not want to lend for a 
longer period of time and they started shortening.
    Having said that, we worked as hard as we could against 
that and we actually had a bigger liquidity cushion than we 
have had in a long, long time from the actions that we took.
    Senator Reed. Let me ask you another question. You had two 
funds that failed, basically, and mortgage securities were 
principal items in the funds. And it caused concern not only 
here but in Wall Street. And your response to the failure of 
those funds, did that dramatically alter your behavior? Or can 
you comment about how you reacted to those fund failures?
    Mr. Schwartz. I am not sure I understand the question.
    Senator Reed. Well, some would suggest that that was a 
strong wakeup call about the overall condition. Also, it 
alerted to many people in the market the potential for further 
disruption at your firm and raised, I think, in my mind the 
obvious question of how do you not only compensate but perhaps 
even overcompensate for that, not only the economic effect but 
the psychological effect? I mean, you are a major firm, one of 
the premier firms. You have had two funds that you have backed 
your reputation with, and they have totally failed.
    Mr. Schwartz. Correct. Well, there is no question that 
those funds that had our reputation, they were not our economic 
exposure. But they were our reputation and we took a 
significant reputational hit because of that. We were extremely 
aware of that.
    We did an awful lot of things. And the thing that we could 
do the most was just put our heads down and perform as we went 
forward because we could not set the clock back.
    We also, we did step in. We had no obligation to make a 
loan to those funds, but we decided to make a loan to one of 
those funds in an attempt to try and save investors money, if 
we could liquidate the collateral in an orderly basis. The 
markets continued to go down, we were not able to accomplish 
that, and then we did take some losses on that loan.
    But we ended up with a loss for the quarter. I think if 
somebody puts in context the losses that we took relative to 
many, many financial institutions, they actually were not 
particularly large.
    And once again, if you took a look at our balance sheet, as 
many people did, we had recovered. Our capital ratios were 
strong. Our liquidity was strong. We were back to earning 
money. And our business was actually moving along at a nice 
    Senator Reed. I have one more question.
    After your experience with these funds, and I think also 
with the growing economic situation that all of your 
competitors were facing, there was a need to raise additional 
capital even though you might technically be well capitalized. 
I think you had attempted to enter into a transaction with 
China's CITIC Securities in October and that transaction did 
not close. Was there any particular significance to the failure 
to close that transaction or to raise capital by other ways?
    Mr. Schwartz. No, there are two parts to that question, if 
I could. First, in terms of raising capital, it is my 
understanding that if you looked at the capital raising that 
went on at other financial institutions, it was often--it was 
always accompanied by a very significant loss that was 
reported, and that that loss had brought their capital down. 
And it is my understanding that the capital they raised brought 
their capital ratios back up to acceptable levels. So that is a 
different situation than anticipatory.
    The transaction with CITIC Securities, the largest 
securities firm in China, was a transaction that we thought had 
tremendous strategic value to the firm. And as part of the 
transaction, we were raising $1 billion in capital. They did 
extensive due diligence on us. They agreed to go forward with 
the transaction. We needed to get approvals from the various 
regulatory authorities in the United States. We had just gotten 
those approvals. They were about to go and get the same 
approvals from the CSRC when all of the events of the week we 
described happened.
    Senator Reed. Thank you very much, Mr. Chairman. Thank you, 
    Chairman Dodd. Thank you, Senator, very much.
    Senator Corker.
    Senator Corker. Mr. Chairman, thank you, and thank both of 
you for being here today. I know that this is kind of a 
bittersweet situation with stockholders of one company feeling 
good and the others not. But I thank you both for being here. I 
know you have had both distinguished careers.
    From the standpoint of JPMorgan, I know there has been 
comments. Our Chairman mentioned the large amount of options, 
trading that took place, toward the end of the week on the 
downside. I know that Mr. Schwartz has talked about things 
stronger than rumors, if you will, driving that. You obviously 
had this relationship and were obviously paying attention to 
what was happening. I wonder if you have any editorial comments 
regarding what was actually happening, whether it was actually 
driven by people who had nefarious kind of thoughts and 
actions, or whether it was just in fact rumors from your 
    Mr. Dimon. Senator, I do not know what the real facts are 
here, but I think there is enough smoke around the issue that 
it is a proper thing for the regulators to look at what 
actually happened. And I personally think that if people 
knowingly created or passed on false rumors, they should be 
punished under the law.
    Senator Corker. The negotiation that took place at the end 
of the day, I mean, it was either not be in business or sell. 
So it really was not much of a negotiation. It sounds to me--
which I understand under the circumstances. It seems to me that 
actually the pricing of the stock was based more upon making 
sure there was not, in essence, some kind of moral hazard.
    I wonder if you could speak to that just for a moment?
    Mr. Dimon. I think, Senator, the price of the stock was not 
really based on the value of the company. It was really based 
upon protecting the downside of JPMorgan. I told you buying a 
house is not the same as buying a house on fire. While some 
people look at the upside, and we hope there is upside for our 
shareholders, we were far more focused on the downside. Other 
people were there and could not do it at all, probably at any 
    And then obviously during the next week we did recognize 
there was more value there. And I think it ended up for a fair 
play for the Bear Stearns' shareholder, too.
    Senator Corker. From your side, Mr. Schwartz, in essence it 
was just whatever the price was, it was; right? I mean, at that 
point, there was no negotiation. It was, in essence, what was 
JP willing to do. It does not seem like there was much 
leverage, from your standpoint?
    Mr. Schwartz. Well, I think all the leverage went out the 
window when a deal had to happen over the weekend. I think that 
we had another party who had started doing due diligence on 
Friday, a sophisticated party who after doing due diligence was 
prepared to write a multi-billion dollar check to invest into 
equity at Bear Stearns. But he was going to require some 
significant financial institutions that he had relationships 
with to provide a funding facility.
    That is one example of a type of party that we could have 
talked to. I think there could have been other large financial 
institutions that would have liked to, including JPMorgan might 
have wanted to pay a higher price if they had a chance to do 
the kind of due diligence that normally goes with a large 
    But I think to go to a board of directors on a weekend and 
say that we are stepping into the shoes in this credit 
environment of another financial institution, and say we are 
going to do that on a basis where we have to commit firmly to 
the transaction, we understood in those circumstances there 
were very, very few entities, and we thought maybe if any.
    So we understood that JPMorgan was stepping up to doing 
that, and the price, we had no leverage at all.
    Senator Corker. Mr. Dimon, you obviously are highly 
heralded and should be, and I am sincerely happy for you and 
the stockholders of your company.
    What is it that you and your colleagues now, in this 
environment, are doing, if you will? I mean, people are looking 
at liquidity issue of having short-term debt against longer 
term obligations.
    What is it that, just as a group your colleagues are doing 
to make sure that you stay strong and that these types of 
issues do not occur with other institutions?
    Mr. Dimon. Senator, I appreciate the nice comment about 
JPMorgan. I should point out, we have made plenty of mistakes 
ourselves. So we do not stand in front of you as if we made 
    Senator Corker. Sure.
    Mr. Dimon. And we are always looking at capital measures, 
risk measures, accounting, loss reserves. How bad can it get? 
How bad can the storm be? Stress testing, and there are 
multiple other measures we look at, including just plain old 
common sense. What happens if you are wrong? Because very often 
you are wrong.
    So we try to maintain as firm a balance sheet and finance 
the company way ahead of time so that we do not ever get in a 
position where we can find ourselves in financing difficulty.
    Senator Corker. But are you and your colleagues even 
changing the way you are doing business right now based on the 
circumstances of the last 30 days? Are more proactive steps 
being taken by other colleagues?
    Mr. Dimon. I believe the answer is yes a little bit but not 
in a material way. But we, like everybody else, when events 
like the past few weeks happen, hopefully we learn from them. 
So we analyze them to death and then we go through all the 
facts and we look at what we can do better. And we are in the 
process of doing that today.
    But we feel we are completely properly capitalized and 
    Senator Corker. And just the last question. I know when 
people began accessing the Fed window they realized that right 
behind that regulatory issues were going to come. I wonder if 
you might give some editorial comments about some notions in 
that regard knowing that that has to be coming with access to 
Fed funds?
    Mr. Dimon. Right, so Senator, many people commented this 
morning about the need for change in the regulatory system and 
that some of the things we all live under were--those laws were 
passed, and they are closer to the Civil War than they are 
today. We all acknowledge we need streamlining, modernization. 
And I think opening up the primary window to investment banks 
does have policy ramifications. And I hope the regulators and 
the Congress spends a good amount of time to come up with good 
policies and rules that prevent at least this kind of accident 
from happening again.
    Senator Corker. Thank you, Mr. Chairman.
    Mr. Dimon. Thank you very much, Senator.
    Senator Carper.
    Senator Carper. Thanks, Mr. Chairman.
    Gentlemen, thank you for being here. Thank you for your 
extraordinary patience and for standing up during a really 
difficult period of time, for not just your shareholders and 
your institutions but I think for our country.
    I was Treasurer of Delaware a number of years ago when the 
folks at Chrysler just about went belly up. There was a bailout 
faction here, an assistance plan faction here in Congress to 
help save Chrysler. We participated in our State, along with a 
number of other states that had Chrysler facilities.
    There was a bit of a hue and cry about taxpayer bailout at 
the time. And it turned out the U.S. Treasury made money off 
the deal. And we in Delaware did, too. And Chrysler has had 
some ups and downs since. We are hopeful that they are going to 
survive, but knock on wood they will be around for a lot 
    But there have been concerns raised in this instance that 
potentially some taxpayer exposure, Treasury exposure. I do not 
know that the taxpayers are going to walk away, as we did with 
Chrysler, actually being better off and being able to show a 
profit for our intervention. But in terms of whether or not it 
was worth it for the taxpayers, was it for our country, what 
comments would you have there for us?
    Mr. Dimon. Well, Senator Carper----
    Senator Carper. What would be the upside for----
    Mr. Dimon [continuing]. I think the first comment is this 
would have been far more, in my opinion, expensive for 
taxpayers had Bear Stearns gone bankrupt and it added to the 
financial crisis we have today. It would not even have been 
    I think the Fed has protected itself with the expected loss 
note and the collateral, the long-term funding, the 
professional management, and we will hopefully get back all 
this money and possibly more.
    And we did have a conversation at one point with the Fed 
that we could have done it differently, share upside and 
downside. But I was not aware of all of the regulatory 
statutory issues they have in doing something like that. I 
think they have certain constraints they live under by law.
    Plus, we did not have a lot of time. We had literally 48 
hours to do what normally takes a month.
    Senator Carper. Mr. Schwartz, Senator Corker over there 
asked you a question I was planning to ask myself. The question 
is if you go back in time, I do not think the Congress had to 
pass a law to say to the Federal Reserve, you can open a 
discount window to investment banks. I believe they did that, 
they took that step under a law that may have been passed in 
the Great Depression if I am not mistaken. I do not know that 
it was ever exercised until now. It may have been exercised 
prior to now but it has not been exercised often.
    The question that Senator Corker has asked is what are the 
ramifications in terms of regulation, presumably regulation 
from the Fed. I just want to go back to that and say if this is 
the kind of thing that is going to happen with more frequency, 
again what are the ramifications for regulations from the Fed 
for--JPMorgan Chase already has to deal with that. But Bear 
Stearns and other investment banks do not.
    Mr. Schwartz. Right. So I do think that look, it is a well-
established precedent under regulation that financial 
institutions that rely on confidence, that knowing that there 
is liquidity for their assets actually inspires that 
confidence. And so it is much harder to start rumors that they 
have no place to go with their collateral if there is an 
identifiable place at the Government where they could take that 
    So the rumors and the fear become deflated by the fact that 
people know that they have a liquidity source. And therefore, 
you have to find some other thing.
    So I believe that going forward, I think everybody had to 
move here in a very, very, very rapid basis. I think when 
people sit down, all of the people in Government, and look at 
this I think they are going to say we need a new system. And I 
think that one of the elements of that system I am convinced of 
will be that the major investment banks--I was very glad to see 
Sunday night that the window was open to those investment 
banks. I was very, very glad to see that.
    I think that some sort of facility will be made available 
to keep a run on the bank from starting or happening. I think 
that it is very appropriate to ask if that is going to be part 
of a new regime of some kind then what are the other oversights 
and regulatory reviews that have to occur to make sure it is 
done on a sound basis? And I think that process will begin and 
I hope it moves in a positive direction.
    Senator Carper. Thank you.
    The last question I have deals really with us and our 
action. We have been sort of observers, to some extent, 
watching the Federal Reserve be involved in a variety of ways, 
extraordinary ways, in the last couple of months, and to watch 
Treasury being involved in setting up Project Hope now, and a 
number of other things to try to help the situation.
    It is our turn now. And it is our turn now, and the 
leadership Senators Dodd and Shelby bring to the floor today--
literally today--for debate and vote legislation that is 
designed to deal with the situation, again restore some 
additional liquidity, deal with the homes that are foreclosed 
    What advice would you have for us as to one or two elements 
that, if we do nothing else in the context of legislative 
action this week or next week, what would be some of the things 
on the must do list?
    Mr. Dimon. Senator, I think I can do the pretty long to do 
list. And most people that you speak to, it is kind of non-
partisan. We want to get it done. We know we need to make 
changes. There will be a lot of debate about those changes.
    I would say we should do it in due haste. You should get 
all the help you can get. And obviously JPMorgan, in any way, 
shape or form they can help would be happy to do so.
    And then have a regulatory system which adjusts very 
quickly after that because I do think that the regulatory 
authorities need to move very quickly in this new world. And 
they do not have the luxury to do some of the things you might 
have wanted them to do.
    For example, the Fed might have acted very differently that 
weekend had they other statutory authorities.
    Senator Carper. Mr. Schwartz, any advice for us as we turn 
to our legislative responsibilities?
    Mr. Schwartz. Not a lot. I do think that raising the limits 
on the conforming mortgages could be helpful to supply some 
liquidity to housing. I think expanding the authority of FHA to 
step back into a market that it was created for would make 
    I think those are short-term and I think helping homeowners 
stay in their homes is not only the right thing to do but it is 
good economic policy.
    I think longer term we have to look at the whole way that 
mortgages get underwritten because there has to be some 
liability for the people who underwrite the mortgages to make 
sure that they are applying standards appropriately.
    Senator Carper. Thank you very much. Thank you.
    Chairman Dodd. Thank you, Senator.
    We have been joined by Senator Menendez, who I believe has 
some questions, as well.
    Senator Menendez. Thank you, Mr. Chairman. Thank you, 
    Let me ask you, Mr. Dimon, with reference to the securities 
that are backing this transaction that the Fed has done, my 
understanding is they are largely mortgage-backed securities 
and related hedge investments. Is that a fair statement?
    Mr. Dimon. Yes, Senator.
    Senator Menendez. Do you know what the valuation of those 
assets are?
    Mr. Dimon. The valuation at which the Fed has taken them 
into the books is at the same valuation that Bear Stearns had 
them marked on March 14th. It is the same valuation that 
JPMorgan has taken the other $300 billion at as of March 14th.
    Senator Menendez. And what is that?
    Mr. Dimon. Whatever is on their books for.
    Senator Menendez. But in reality, that is not the valuation 
of them, are they? Is that the real value of it in the 
marketplace at this moment?
    Mr. Dimon. Well, Senator, I think you could have a big 
debate on what the value is. But I think that Bear Stearns--I 
believe BlackRock also has looked at it--believes those values 
are approximately appropriate.
    Senator Menendez. Why do you think that there was this 
first panel testified--I assume you agree with them--that there 
was a crisis of confidence and a set of rumors. Why do you 
think an institution of yours, with such reputation, such 
standing, could simply fall on a series of rumors if it is not 
a question of valuation at the end of the day?
    Mr. Schwartz. I think that, as I said in the earlier 
testimony or opening statement rather, I think that it is well 
established in financial history that institutions that lend 
money against assets, if people are concerned that there is a 
liquidity crisis or if there are rumors that their money is not 
going to be there after everybody else withdraws their money, 
there is a rush to the exit.
    In my mind that is what happened this week.
    Senator Menendez. Well, let me ask you, do you really know 
what the value is of the securities that you have?
    Mr. Schwartz. I think that when you ask do we know the 
value of the securities, I think that when you get into--I 
think Chairman Bernanke testified that if you look at 
securities that become highly, highly illiquid, if you have to 
sell them overnight then you will have a much, much lower value 
than if you look at what is a required return and how you value 
that return over a reasonable period of time.
    So do I think there are some assets on our balance sheet 
that may turn out to be worth less than what we are carrying 
them for? Yes. We have some significant hedges against a number 
of those assets that tend to move in the other direction where 
we are short.
    I also think there are a number of assets on our balance 
sheet that could be worth a lot more than what they are carried 
at. One example of that was highlighted in the transaction with 
JPMorgan where they asked for an agreement to be able to buy 
our headquarters building for $1 billion. It is not carried on 
our books at anywhere near that.
    Senator Menendez. Well, the problem is that Chairman 
Bernanke also testified in response to my questions that he 
cannot tell us what the liability of the American taxpayer is 
here. So if your valuations are equal to or greater, then we 
have no problem. If your valuations are less than, we have a 
problem even over the long term.
    And I think that I have seen some statements in some 
reports that, going back in time, say that when we had analysts 
doing this home mortgage crisis situation, there were 
analysts--and I do not know, Mr. Dimon, if your institution was 
one of them--who said we cannot really tell you the totality of 
the challenge that we might have.
    So I do not particularly think that you all know what the 
value of the instruments that you have really is. And that is 
part of our challenge here.
    Mr. Dimon, is it wrong to have said that you would not 
have, on behalf of your institution, entered into this 
agreement without the Fed's position?
    Mr. Dimon. Senator, that is correct.
    Senator Menendez. And as such, the reason you took that 
position is why?
    Mr. Dimon. Because, remember JPMorgan was buying another 
$300 billion of assets, some of which were far riskier than the 
$30 billion. And we analyzed this from our downside that we can 
only put on so much debt, so much risky asset, so much risky 
assets we already had. And we could not leave JPMorgan, for any 
reason, under any circumstances, in a predicament where we 
could jeopardize our financial health. And that is a judgment 
call we made, how many straws can you put on that camel's back? 
And that is all we could do. And we would have and could have 
done no more.
    Senator Menendez. And so you looked at the transaction and 
you looked at the assets that would be acquired and you said 
there are more straws there that might break the camel's back 
than we can afford?
    Mr. Dimon. I think the way we analyze it is what is the 
chance that things can go wrong or get worse? We do not live in 
a static world. So while we know that things can get better, 
the question I had to answer for my board is what if things get 
worse? Are we in good enough position? And it was plain simple, 
and we needed the capital and the funding ability so that 
JPMorgan remained a strong healthy institution after the 
    Senator Menendez. And hopefully the Federal Exchange, on 
behalf of the American taxpayer, asked the same question.
    Thank you, Mr. Chairman.
    Chairman Dodd. It is a great question and I tried to frame 
it, Bob, after you had left. I do not want to over-simplify it, 
but the concerns I think on this aspect--and again, all the 
time constraints and everything else, we are very conscious 
of--but what I called the socialization of risk and the 
privatization of reward and that we are all hoping that the 
case will be that this will turn out well. There is that 
question mark there, that we have.
    If that is a precedent-setting decision, it has incredible 
implications. And so I think it is important to identify it for 
what it is and recognize that we all hope this one works out.
    But as others have suggested, in the absence of several 
changes, we could be looking at other situations that come down 
the pike here, maybe at far greater risk than the ones we are 
talking about here. And to the extent we want to socialize 
risk, in a sense, the socialization of it, is going to raise 
some very serious questions here as well.
    But it is an excellent set of questions and I appreciate 
    Senator Menendez. Mr. Chairman, I would just make a note, 
if we went to socialize risk, then we should look at 
socializing the risk of mortgage foreclosures in this country.
    Chairman Dodd. That is a wonderful lead-in to my next 
question. In the sense that, to digress for a minute, because I 
do not want to miss the opportunity of having two very talented 
people here.
    And let me say, Mr. Schwartz, as well, when you and I had 
that conversation--however many months ago--about the discount 
window, I want to just say in this hearing room I regret that 
others did not listen to you at the time. I think it might have 
made a big difference.
    You had to have commensurate quality assets and collateral 
and regulatory framework for all of it. But I think 
unfortunately at the time there was a failure to understand the 
gravity of the problem. We kept on hearing the language, the 
problem is contained, that things are rosy, that things are 
getting better.
    It could not have been more wrong in their analysis of the 
situation. And had there been people listening and willing to 
utilize some of these vehicles earlier on at a time when I 
think we might have had a better response, we might be avoiding 
the kind of hearing we are having today.
    I want to ask you about this issue that--utilizing your 
talents here and background. Obviously, the points you have 
made in the absence of this decision, this merger. And I agree 
with this, I think most of us do here, that we would be looking 
at a very different situation having come Monday morning. And 
that is in no way to minimize the impact on employees and 
shareholders and the like. But I think you have framed it both 
well in terms of what was involved here.
    There are those, and Senator Menendez just raised the issue 
here. And I have been trying to come up with some ideas, again 
not new ideas. In fact, in the previous years the idea of 
trying to figure out a way to keep people in their homes, but 
also find that bottom here that will unleash capital and begin 
to move us out of this problem.
    I have raised this issue before, and Senator Shelby has 
been gracious enough to say let us hold some hearings to take a 
good hard look at it. There is a lot of potential exposure but 
there is some tremendous benefit as well.
    I do not know if you have had a chance to take a look at 
this idea--and I am not asking you to endorse a specific idea, 
but just to comment generally on this question of whether or 
not we can do something.
    In the past, actually the Federal Government bought these 
mortgages at highly discounted value and kept people in their 
homes for a period of time, and actually made money, I think 
some $14 million decades ago.
    What I am talking about here is ensuring through FHA, 
obviously getting a write down of the overall value of it, but 
keeping people in, a voluntary program over an extended period 
of time. And then have enough transactions occur so that you 
can help identify that floor.
    And if that is the case, then I am told by those who 
believe this could work, you then begin to see capital begin to 
move. Could you comment on that idea generally, as to the value 
of it, or what you----
    Mr. Schwartz. Well, I think there are a lot of pieces to 
the puzzle. I do think that in our own mortgage servicing over 
the years, we think that it is economically appropriate--
getting away from the social side of it for a second--that 
there are times when it is better to modify a loan, even cut 
the principal that somebody owes so they have an incentive to 
continue making their payments and those payments become easier 
to make.
    Because large numbers of people being taken out of their 
homes, as difficult as it is for those homeowners, also creates 
additional supply on the market which keeps affecting supply 
and demand for housing.
    So it is a very complicated set of facts and I think that 
an intersection of seeing where the appropriate modifications 
to give people a real chance to stay in their homes would help 
on the supply and demand side to stabilize the housing market 
which is, underneath all of this, a point I think you are 
making, Mr. Senator, is until we can stabilize the housing 
market, it is really hard to say what is going to happen to a 
lot of securities that relate to the value of homes in the 
United States.
    Chairman Dodd. Jamie?
    Mr. Dimon. Yes, sir. Senator, I agree--first of all, I 
think the legislation has moved rather quickly on Fannie Mae 
and Freddie Mac and changing things to make it more easy to get 
capital the borrower, the person who actually wants to buy the 
    I think when you are in a crisis like this, you should not 
stand on ceremony. You should fight the crisis. And those 
things will all have ramifications for future policy.
    I think using FHA to have people take haircuts on their 
mortgages--which would be the banks. I want to make sure that 
people understand, we are not looking for any sympathy in this. 
We are obviously--I think JPMorgan Chase had among the best 
underwriting standards but we also made mistakes and would like 
to be very helpful.
    I think a program and a policy like that could actually 
work quite well and we would love to get engaged and to see if 
we can help come up with something that makes sense for the 
homeowner and for the American public.
    Chairman Dodd. Thanks very, very much. I appreciate that.
    Senator Shelby, any closing comments?
    Senator Shelby. No, thank you.
    Chairman Dodd. I thank both of you. You have been very 
gracious and spent a lot of time here today. The first panel 
took a little longer than anticipated with the interest, 
obviously, by my colleagues here as well. But it has been very, 
very helpful.
    And I would like to leave the record open for a few days 
for members to submit some questions possibly to you that they 
did not get a chance to raise this afternoon.
    But we wish you well and this has been helpful to help 
clarify a lot of questions people have had out here.
    I thank you both.
    The Committee will stand adjourned.
    [Whereupon, at 2:59 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]



Q.1. Does the Fed intend to conduct a study of what happened at 
Bear Stearns, with lessons learned?

A.1. The SEC, which was Bear Steams' prudential regulator, is 
conducting an in-depth study of the events that precipitated 
the firm's liquidity crisis. The SEC has promised to share the 
results of its study with us. We will assess the results of the 
SEC's review and then consider whether further study of what 
happened to Bear Stearns is necessary. In terms of lessons 
learned, one lesson that is already clear is that asset and 
funding liquidity can evaporate suddenly, even for very high 
quality assets. Both leveraged financial intermediaries and 
their prudential regulators must think through carefully the 
implications for prudent capital and liquidity buffers.



    Chairman Bernanke, the Federal Reserve is now lending 
regularly to securities firms under its Primary Dealer Credit 
Facility. It has been suggested that if the Fed is going to 
open its discount window to securities firms, additional 
regulation of securities firms may be needed.
Q.1. How do we balance the need to have appropriate supervision 
of securities firms, especially now that they can receive 
Federal loans through the Fed, against the need to preserve the 
competitiveness of our financial services sector and avoid 

A.1. All the primary dealers eligible to borrow from the 
Federal Reserve under the Primary Dealer Credit Facility (PDCF) 
are subject to supervision and regulation by the SEC. In 
addition, the parent companies of nearly all of these primary 
dealers are subject to consolidated supervision--either by the 
Federal Reserve in the case of dealers that are owned by a U.S. 
bank holding company, a foreign bank supervisory agency in the 
case of dealers that are owned by a foreign bank, or the SEC or 
OTS in the case of dealers that are not affiliated with banks.
    The Federal Reserve is working closely with the SEC to 
ensure that we have access to necessary financial, risk 
management, and other information about primary dealers--
including information about their capital and liquidity 
positions--and this coordination has been very useful to date. 
In the near term, the Federal Reserve does not see a need for 
any additional supervisory authorities with respect to primary 
    Over the longer term, the Federal Reserve is analyzing the 
costs and benefits of possible changes in the supervision and 
regulation of securities firms and their parent holding 
companies (particularly as regards their capital adequacy and 
liquidity). Upon completion of this review, we would be pleased 
to discuss these issues with you.

                           REGULATORY RELIEF

    It has been reported that as a condition for purchasing 
Bear Stearns, regulators promised JPMC certain regulatory 
relief, including SEC no-action letters and forbearance on 
capital requirements.
Q.2. Would you please list any and all regulatory relief your 
agency or department has agreed to provide JPMC in connection 
with its merger with Bear Stearns?

A.2. The Board provided two regulatory exemptions requested by 
JPMC in connection with its proposed acquisition of Bear 
    First, the Board provided JPMC with a temporary (18-month) 
exemption from the risk-based and leverage capital requirements 
for bank holding companies. The exemption allowed JPMC 
initially to (i) reduce its risk-weighted assets by the total 
arnount of risk-weighted assets of Bear Stearns for purposes of 
the Board's risk-based capital adequacy guidelines for bank 
holding companies; and (ii) reduce its balance-sheet assets by 
the total balance-sheet assets of Bear Stearns for purposes of 
the Board's leverage capital guidelines for bank holding 
companies. The amount of the exemption going forward will 
shrink by one-sixth during each succeeding quarter until the 
exemption expires on October 1, 2009. JPMC has committed that 
it will remain well capitalized during this period, both with 
and without the exemption.
    Second, the Board provided JPMC with a temporary (18-month) 
exemption from section 23A of the Federal Reserve Act and the 
Board's Regulation W. The exemption allows JPMorgan Chase Bank 
to extend credit to Bear Stearns and issue guarantees on behalf 
of Bear Steams so long as the transactions are (i) fully 
collateralized; (ii) subject to daily mark-to-market and 
remargining requirements; and (iii) guaranteed by JPMC. The 
initial amount of the exemption was 50 percent of the bank's 
regulatory capital. The amount of the exemption going forward 
will shrink by one-sixth during each succeeding quarter until 
the exemption expires on October 1, 2009. All transactions 
between JPMorgan Chase Bank and Bear Stearns would continue to 
be subject to section 23B of the Federal Reserve Act, which 
requires financial transactions between a bank and an affiliate 
to be conducted on market terms.
    A copy of the Board's regulatory capital and section 23A 
exemption letter is attached.
    Although not a regulatory relief matter, the Board also 
approved the acquisition of Bear Stearns Bank & Trust by JPMC 
on April 1, 2008, on an expedited basis as provided in the Bank 
Holding Company Act. A copy of the Board's order approving the 
acquisition is attached.


    Chairman Bernanke, in my opening statement I mentioned the 
Federal Reserve's emergency lending authority. The Federal 
Reserve Act does not clearly specify the goals or purposes for 
which the Fed should exercise this authority. It only provides 
that lending to corporations should occur in unusual or exigent 
circumstances and when a corporation is unable to secure credit 
from other banking institutions. These relatively simple 
conditions effectively give the Fed broad discretion on when to 
exercise its emergency lending authority. You have written 
widely about the importance of inflation targeting, arguing 
that inflation-targeting provides ``discipline and 
accountability in the making of monetary policy.''
Q.3. If monetary policy benefits from a framework that provides 
discipline and accountability, would not the Fed's emergency 
lending authority also benefit from having clearer objectives 
and conditions provided by Congress?

A.3. In my view, the Congress has achieved an appropriate 
balance between the needs for discipline and accountability, on 
the one hand, and flexibility and judgment, on the other, in 
the statutory frameworks that it has established for both 
monetary policy and emergency lending.
    With regard to monetary policy, the Congress has 
established the goals of maximum employment, stable prices, and 
moderate long-term interest rates, and it has set a framework 
for monetary policy accountability, partly through semiannual 
reports and testimony on monetary policy. The Congress has left 
the specific interpretation of the statutory goals for monetary 
policy to the judgment of the Board of Governors and the 
Federal Open Market Committee; for example, the Congress has 
wisely Chosen not to quantify three goals of policy. Similarly, 
the Congress has provided only general guidance regarding the 
Federal Reserve's semiannual reports on monetary policy, 
leaving the specific content of such reports and the 
accompanying testimony to the judgment of the Federal Reserve.
    The Congress has chosen an analogous approach for the 
conditions and accountability for emergency lending. With 
regard to the conditions for emergency lending, the Congress 
has established a clear framework that sets a high hurdle for 
undertaking such activities: Emergency lending can be done only 
in unusual and exigent circumstances, only when the borrower 
cannot otherwise secure adequate credit accommodations, and 
only with the approval of at least five members of the Federal 
Reserve Board. However, the Congress left the specific 
interpretation of the first two conditions to the Board. In my 
view, this was a wise decision by the Congress: Financial 
crises tend to be unique events, making it very difficult to 
set in advance an appropriate set of specific conditions that 
would have to be met for emergency lending. Moreover, the 
Congress has established an ongoing framework for the 
accountability of the Federal Reserve's financial operations by 
requiring that the Board publish on a regular basis statements 
of conditions for the Reserve Banks and for the System as a 
whole. Within this reporting framework, the Board has provided 
detail on the amounts outstanding under its various credit 
programs both in routine circumstances and in the current 
period of financial stress. In addition, the Federal Reserve 
recognizes that when it undertakes emergency lending it has an 
obligation to explain why it believes the conditions for such 
lending have been met. Congress has the authority to review the 
Federal Reserve's explanations, as it did at the hearing on 
April 3.

    Chairman Bernanke, the Federal Reserve Act grants the Board 
of Governors broad emergency lending authority. It enables the 
Fed to extend the Federal safety net to corporations, such as 
investment banks, that otherwise are not guaranteed by the 
Federal government.
Q.4. Since taxpayers bear any losses on any emergency loans the 
Fed extends, should there be limits on the amount of lending 
the Fed can conduct under its emergency lending authority? And 
given budgetary implications of such lending, should the 
Treasury Secretary also have to formally approve these loans?

A.4. When Congress established the Federal Reserve as the 
nation's central bank, Congress considered it important that an 
independent agency be created to help maintain the stability of 
the U.S. financial system. Financial crises can develop quickly 
and with considerable intensity, and it is crucial that the 
Federal Reserve have authority to respond rapidly and 
powerfully to a severe crisis by, if necessary and appropriate, 
providing liquidity to the financial system.
    It is important to note that the Federal Reserve's 
emergency lending authorities are subject to a number of 
important qualitative limits. Most notably, the Federal Reserve 
generally has authority to lend to non-banks only in unusual 
and exigent circumstances, and when the borrower is unable to 
obtain adequate credit accommodations from other banking 
institutions. Moreover, these emergency credits must be secured 
to the satisfaction of the lending Federal Reserve Bank and 
approved by a super-majority of the Board of Governors of the 
Federal Reserve System. Consistent with the spirit of the 
Federal Reserve Act, we have only used our power to make 
emergency loans to non-depository institutions on a small 
number of occasions in the 75 years since Congress granted this 
authority to the Federal Reserve.
    The Federal Reserve also has been very careful in its 
recent actions to minimize any potential losses to taxpayers. 
All credit extended to primary dealers under the PDCF and all 
transactions with primary dealers under the term securities 
lending facility (TSLF) are fully secured by investment-grade 
securities with appropriate haircuts. In addition, the March 14 
loan to Bear Steams was repaid on March 17 without loss to the 
taxpayer. There are also substantial protections for taxpayers 
associated with the prospective $29 billion extension of credit 
by the Federal Reserve to be made in connection with the 
acquisition of Bear Stearns by JPMC. The collateral for the 
loan will be in the form of investment-grade securities and 
performing credit facilities, JPMC will bear the first $1 
billion of losses on the collateral pool, the Federal Reserve 
will be able to liquidate the collateral over a long-term 
horizon of at least ten years, and we have hired a professional 
independent investment adviser to manage the collateral pool.
    The Federal Reserve has never incurred any losses in 
extending credit through the discount window, and we will take 
every precaution to ensure that that remains the case.
    In light of the strict qualitative limits on Federal 
Reserve emergency lending, the Federal Reserve's practice of 
using this authority judiciously and safely, and the need for 
the Federal Reserve to be able to act in a financial crisis 
with maximum alacrity and independence of judgment, we do not 
think it would be necessary or appropriate to require the 
Secretary of the Treasury to approve Federal Reserve emergency 

Q.5. Also, does the Fed's mere possession of such broad lending 
authority create expectations that the Fed will not permit 
major financial institutions to fail?

A.5. Investors in and creditors of major financial institutions 
undoubtedly are now more aware of the Federal Reserve's broad 
emergency lending authority. There are substantial constraints 
on the Federal Reserve's authority, however, that should help 
promote continued market discipline. Specifically, in contrast 
to the FDIC's broad authority to resolve and/or liquidate 
insured depository institutions, the Federal Reserve does not 
have authority to acquire or otherwise resolve financial firms. 
The Federal Reserve may only address the liquidity needs of 
solvent non-depository companies in unusual and exigent 
circumstances. In this regard, the Federal Reserve did not 
prevent the demise of Bear Stearns. The resolution of Bear 
Stearns relied on a private sector acquisition.
    The inability of the Federal Reserve to acquire or 
otherwise provide a solvency backstop to financial institutions 
is reflected in the market prices of obligations of financial 
institutions and derivative instruments based on obligations of 
financial institutions. Prices of these financial assets imply 
that market participants are far from certain that the Federal 
Reserve would prevent major financial institutions from 
failing. In particular, market participants continue to pay 
substantial premiums for protection against losses from failure 
of most major U.S. financial institutions.
    Moreover, any incidental costs associated with the Federal 
Reserve's lending authority must be compared against the 
substantial benefits that accrue to the financial markets--and 
ultimately to taxpayers and homeowners--by allowing the central 
bank to respond quickly in emergency situations as a lender of 
last resort. Congress created the Federal Reserve in part to 
serve the traditional central bank function as lender of last 
resort and thereby to reduce in emergency situations the 
potential adverse effects of illiquidity on either an 
individual firm or on the financial system more broadly. The 
fact that the Federal Reserve has exercised this authority to 
extend credit to non-depository institutions on only a small 
number of occasions in the past 75 years underscores the high 
hurdle that Congress and the Federal Reserve have set for such 

                              MORAL HAZARD

Q.6. Chairman Bernanke, would you please address the extent to 
which the Fed's actions in this case have increased the risk of 
moral hazard?

A.6. Access to the federal safety net, including access to 
central bank credit, necessarily entails a degree of moral 
hazard. Thus, granting primary dealers access to Federal 
Reserve credit has increased moral hazard to some degree.
    Although the potential for moral hazard should be carefully 
analyzed and considered by policymakers, it seems more likely 
that the example of Bear Stearns--in which shareholders and 
management suffered considerable losses--and the broader 
distress in financial markets will serve as a potent reminder 
to primary dealers and other leveraged financial firms about 
the importance of prudent liquidity risk management. In 
particular, in developing their liquidity management plans, 
primary dealers and others must now attach considerable weight 
to scenarios in which their access to funding in the repo 
market is sharply curtailed. Of course, the Federal Reserve, 
the SEC, and other regulatory agencies will be working to 
reinforce that message.
    The adverse effects of moral hazard must and can be 
mitigated through prudential supervision and regulation. The 
SEC and the Federal Reserve have been monitoring the leverage 
and liquidity of the primary dealers. Going forward, the SEC 
and the Federal Reserve will assess what changes in prudential 
supervision and regulation of primary dealers (such as 
increased capital or liquidity requirements) are needed to 
mitigate moral hazard and ensure that the dealers manage their 
risks appropriately.
    The adverse effects of moral hazard from use of the Federal 
Reserve's emergency lending powers also must and can be 
mitigated through judicious, sparing, and disciplined use by 
the Federal Reserve of these powers. In this regard, as noted 
above, the Federal Reserve generally has authority to lend to 
non-depository institutions only in unusual and exigent 
circumstances and has very rarely exercised this authority.
    The Federal Reserve's actions with respect to Bear Stearns 
are instructive in this regard. The Federal Reserve facilitated 
the acquisition of Bear Stearns by JPMC because the substantial 
involvement of Bear Stearns in many important financial 
markets--at a time when the credit markets were particularly 
vulnerable--was such that a sudden failure by Bear Stearns 
would likely have led to a chaotic unwinding of positions in 
already severely strained circumstances. Moreover, a failure by 
Bear Stearns to meet its obligations would have cast doubt on 
the financial strength of other financial firms whose 
operations bore superficial similarity to that of Bear Stearns, 
without due regard to the fundamental soundness of those firms. 
The Federal Reserve judged that a sudden failure of Bear 
Stearns under these unusually fragile circumstances would have 
been extremely disorderly and would have risked unpredictable 
but severe consequences for many sound financial firms and for 
the functioning of the broader financial system and the 
    Moreover, as discussed in my answer to the previous 
question, any incidental costs associated with the Federal 
Reserve's lending authority--such as increased moral hazard--
must be weighed against the substantial benefits that accrue to 
the financial markets by allowing the central bank to serve as 
lender of last resort. The Federal Reserve's recent actions 
under its emergency lending authorities--the establishment of 
the PDCF and TSLF and the proposed financing of the JPMC 
acquisition of Bear Stearns--were essential to avert a 
financial crisis that likely would have had serious 
repercussions for the U.S. economy.


    We have heard the argument that Bear was ``too 
interconnected to allow to liquidate quickly''. This would 
appear to be the case for a number of financial entities, 
including both banks and non-banks.
Q.7. What changes in financial surveillance and reporting could 
the regulators use to make such a situation of 
``interconnectedness'' less likely to trigger the type of 
resolution the Fed entered into with Bear?

A.7. As noted in our answer to the previous question, although 
the interconnectedness of Bear Stearns was a consideration in 
the Federal Reserve's decision to facilitate the acquisition of 
Bear Stearns by JPMC, it was not a sufficient condition for the 
Federal Reserve's actions. Other important causes of the 
Federal Reserve's actions with respect to Bear Stearns were the 
suddenness of the collapse of the liquidity position of Bear 
Stearns and the unusually fragile conditions in the financial 
    Regulators have for some time been paying considerable 
attention to the extent and nature of commercial and investment 
banks' credit exposures to other large financial institutions, 
including exposures arising from OTC derivatives. But clearly 
this is an issue that deserves further attention. In 
particular, regulators need to understand and evaluate the 
effectiveness of the stress tests that these firms use to 
assess and limit the potential for exposures to increase 
significantly in stressed market conditions. Regulators also 
need to take a hard look at the firms' liquidity risk 
management practices, including their reliance on common 
sources of funding their vulnerabilities to sudden reductions 
in the availability of those types of funding.

Q.8. Given that the Fed has pursued this transaction, how can 
the Fed and perhaps the Congress now convince market 
participants that something similar will not happen again? And 
if we cannot convince market participants that is the case, 
what is the implication for risk-taking behavior in the future?

A.8. As discussed above, it seems likely that the considerable 
losses suffered by shareholders and management of Bear Stearns 
should serve to check and possibly diminish incentives for 
undue risk-taking by the owners and managers of large financial 
institutions. Moreover, as discussed above, the adverse effects 
of moral hazard from use of the Federal Reserve's emergency 
lending powers are mitigated by the sparing and disciplined use 
by the Federal Reserve of these powers. As noted above, the 
Federal Reserve generally has authority to lend to non-
depository institutions only in unusual and exigent 
circumstances, when the borrower is unable to obtain credit 
accommodations from other banking institutions, when the loans 
are secured to the satisfaction of the Federal Reserve, and 
when at least five members of the Board of Governors of the 
Federal Reserve System approve the transaction. The Federal 
Reserve's decision to extend credit in support of IPMC's 
acquisition of Bear Stearns was based on a highly unusual 
confluence of events, including the suddenness of the collapse 
of the liquidity position of Bear Stearns and the highly 
fragile state of the financial Markets at the time.
    As noted above, the Federal Reserve is currently analyzing 
whether changes in the supervision and regulation of securities 
firms and their patent holding companies (particularly as 
regards their capital adequacy and liquidity) would be 
appropriate to mitigate potential residual adverse effects of 
actions such as the Federal Reserve's recent emergency 
liquidity facilities.
    Attachments (2).



Q.1. If Bear Stearns, which was only the 5th largest dealer, 
was prevented by the Fed from failing, will you allow anyone to 

A.1. As a threshold matter, it is important to note that the 
Federal Reserve's authority to provide emergency support to 
non-depository institutions is limited to lending. In contrast 
to the FDIC's broad authority to resolve and/or liquidate 
insured depository institutions, the Federal Reserve does not 
have authority to acquire or otherwise resolve financial firms. 
We may only address the liquidity needs of solvent companies in 
unusual and exigent circumstances. The resolution of Bear 
Stearns relied on a private sector acquisition.
    The Federal Reserve's actions with respect to Bear Stearns 
are instructive in this regard. The Federal Reserve facilitated 
the acquisition of Bear Stearns by JPMorgan Chase because the 
substantial involvement of Bear Stearns in many important 
financial markets--at a time when the credit markets were 
particularly vulnerable--was such that a sudden failure by Bear 
Stearns would likely have led to a chaotic unwinding of 
positions in already severely strained circumstances. Moreover, 
a failure by Bear Stearns to meet its obligations would have 
cast doubt on the financial strength of other financial firms 
whose operations bore superficial similarity to that of Bear 
Stearns, without due regard to the fundamental soundness of 
those firms. The Federal Reserve judged that a sudden failure 
of Bear Stearns under these unusually fragile circumstances 
would have been extremely disorderly and would have risked 
unpredictable but severe consequences for many sound financial 
firms and for the functioning of the broader financial system 
and the economy.
    The inability and unwillingness of the Federal Reserve to 
acquire or otherwise provide a solvency backstop to financial 
institutions is reflected in the market prices of obligations 
of financial institutions and derivative instruments based on 
obligations of financial institutions. Prices of these 
financial assets imply that market participants are far from 
certain that the Federal Reserve would prevent major financial 
institutions from failing. In particular, market participants 
continue to pay substantial premiums for protection against 
losses from failure of most major U.S. financial institutions.

Q.2. Are there functions or transactions that have developed in 
our financial system today that are so essential that we need 
to update regulations or protections to ensure they do not 

A.2. A number of important financial markets have developed or 
gown considerably in the past decade. These include the markets 
for mortgage-backed securities and other asset-backed 
securities, over-the-counter derivatives (including in 
particular credit derivatives), securities lending and 
borrowing transactions, and repurchase and reverse repurchase 
agreements. Significant progress has already been made to 
improve the clearing and settlement of over-the-counter credit 
and equity derivatives, but more work needs to be done. The 
Federal Reserve and other financial regulators continue to 
review the resiliency of, and the adequacy of the 
infrastructure surrounding, these markets and are reviewing the 
supervision and regulation of the financial institutions that 
participate meaningfully in these markets.

Q.3. Chairman Bernanke, as recently as last February I asked 
you if you thought the inverted yield curve was signaling 
trouble ahead. Your answer was that you did not think the yield 
curve was a good indicator anymore. Do you still agree with 

A.3. My views on this issue have not changed. I continue to 
believe that the slope of the yield curve, taken on its own, is 
not a particularly useful indicator about future economic 
conditions. As I noted in my response to your question in 
February 2007, a flat or inverted yield curve that results from 
a decline in long-term interest rates need not signal a slowing 
of economic activity; instead, the lower long-term rates act to 
reduce financing, costs for businesses and households and 
encourage spending. In addition, recent empirical work has 
highlighted that a number of other financial indicators help 
predict future activity. These indicators include credit risk 
spreads on corporate bonds, measures of market liquidity, and 
lending policies at banks. Please be assured that we at the 
Federal Reserve are monitoring a wide range of indicators, both 
financial and nonfinancial, to assess the current state of the 
economy and to inform our forecasts of its path over time.


Q.1. The SEC as a consolidated regulator differs from the Fed 
because it does not have the ability to make loans to the 
entities under its jurisdiction. Is this a flaw in the SEC's 
ability to effectively regulate an investment bank? Or can the 
SEC work cooperatively and effectively with the Fed as the 
central bank to effectively address liquidity crises that may 
arise in the future? Does the SEC need any additional 
legislative authority?

A.1. The supervision of the CSE firms and the function of 
providing a back stop liquidity facility are separate 
activities, although they should be coordinated. There are 
other holding company supervisors in the U.S. and abroad that 
are not back stop liquidity providers. By way of analogy, a 
lender typically does not regulate, supervise, or manage a loan 
recipient, although it has a significant interest in monitoring 
the health of the borrower to protect its investment.
    The SEC should not be able to make loans to the entities 
under its jurisdiction, and the fact that it is not a lender is 
not a flaw in the regulatory approach. The CSE firms are 
fundamentally securities firms, and SEC is the most 
knowledgeable financial regulator in overseeing these complex 
trading operations. The Commission has a long history of 
cooperation and coordination with other domestic and 
international supervisors, including particularly the Federal 
Reserve, which quite properly does have lending authority. 
During the events at Bear, the SEC worked exceptionally closely 
with the Federal Reserve, as well as the Department of the 
Treasury, and we are continuing to work together to ensure that 
our regulatory actions contribute to orderly and liquid 
markets. We are currently formalizing our coordination in an 
information sharing arrangement with the Federal Reserve, so 
that processes are in place and a common set of data is 
understood by the interested supervisors.
    With regard to legislation, I believe Congress should 
establish a statutory framework for the mandatory consolidated 
supervision of systemically important investment banks and 
adopt, where appropriate, the applicable concepts from the 
Federal Deposit Insurance Corporation Improvement Act to govern 
the resolution of any future financial difficulties at a 
systemically important investment bank. Should Congress enact 
legislation to provide access to an external liquidity provider 
under exigent conditions in the future, the cooperative sharing 
of information and collaborative assessment of capital and 
liquidity that the SEC and the Federal Reserve are currently 
formalizing would provide the basis for making such an 
arrangement work.

Q.2. The Wall Street Journal wrote that the SEC ``is debating 
whether it would have been useful to have data about short-
term, or repo, financing from the banks that clear trades and 
hold collateral for the securities firms under the agency's 
review . . . It . . . could have been useful in identifying the 
problems at Bear. Currently, the Fed has access to the 
information, but the SEC doesn't.'' [``SEC Role is Scrutinized 
in Light of Bear Woes,'' March 27, 2008.] How would you respond 
to this?

A.2. Understanding the functioning of the interbank funding 
market is critical to understanding the process by which Bear 
Stearns came to face a liquidity crisis. Prior to March 13, 
Commission staff were in close contact with the Federal Reserve 
Bank of New York, which provided information on developments 
affecting not only Bear Stearns' ability to access this market, 
but also overall market conditions. In light of the importance 
of this information, the SEC and the Federal Reserve are 
currently formalizing an agreement to share this information.

Q.3. Do you believe that certain investment banks should be 
``too big to fail'' or that are, as Chairman Bernanke said, 
``too intertwined to fail,'' and, if so, under what 
circumstances? Do you feel that investment banks under certain 
circumstance should have access to the discount window?

A.3. The reality of the modern financial system is that there 
are a relatively small number of interconnected financial 
institutions--commercial banks, investment banks, and insurance 
companies both in the U.S. and globally--that are systemically 
important. Having a comprehensive and effective financial 
markets supervision regime--including established plans for the 
resolution of financial difficulties at one or more of these 
institutions--is critical to the stability of today's financial 
markets and by extension the broader economy. This does not 
mean that any insolvent bank is categorically ``too big'' or 
``too interconnected'' to fail, but rather that under certain 
circumstances its orderly resolution might prevent broader 
market problems.
    With regard to access to a backstop liquidity provider, 
current law provides for predictable access to the Federal 
Reserve 's liquidity facilities for certain financial 
institutions, but presently provides for access only under 
limited circumstances for other financial institutions that are 
arguably of equal systemic importance. This disparity presents 
a challenge for Congress and regulators for coping with the 
changing nature of the financial markets and the increasingly 
similar activities undertaken by the major financial firms 
regardless of whether they are labeled as commercial banks, 
investment banks, or with some other title.
    The PDCF facility is providing the investment banks and 
their supervisors invaluable tune and breathing room to analyze 
the events that led to the collapse of Bear Stearns, and to 
take steps to make investment bank funding plans more 
resilient. Whether such a facility should be available in the 
future depends on a number of factors, including the state of 
the supervision regime for the institutions that would be 
eligible to participate, the nature of the business in which 
these institutions are engaged, and the level of risk 
associated with those business activities.

Q.4. Investor confidence in Bear Stearns eroded sharply leading 
to its serious financial problems in the days leading up to its 
collapse. In its regulatory oversight, does the Commission 
assess the confidence that the markets have in securities firms 
in order to anticipate future problems?

A.4. Yes. In the course of its supervision, the CSE staff 
reviews and considers a wide array of information, including 
information from other regulators, market participants, analyst 
reports, and the financial press on market sentiment.

Q.5. Chairman Cox, you said in your letter to the Basel 
Committee that ``the fate of Bear Stearns was the result of a 
lack of confidence, not a lack of capital'' and cited ``rumors 
spread about liquidity problems at Bear Stearns, which eroded 
investor confidence in the firm.'' Should, or can, the 
Government address false rumors circulating in the market?

A.5. The SEC has broad enforcement authority to sanction rumors 
that constitute fraud. For example, the Commission recently 
filed an enforcement action against a Wall Street trader for 
spreading false rumors. In the context of the CSEs, I believe 
maintaining strong liquidity and capital positions at the CSE 
holding companies, improving transparency, and the current 
access to the PDCF go far to tempering the contagion that may 
result from false rumors. I also believe improving the 
clearance and settlement of OTC derivatives and addressing 
operational issues that arose when counterparties novated large 
volumes of OTC derivatives contracts away from Bear would 
assist in this effort.

Q.6. Some observers have alleged that during the week of March 
10 there was a great deal of improper short selling of Bear 
Stearns stock by investors who were spreading false rumors 
about problems at Bear Stearns. As a result, significant 
investors stopped doing business with Bear which caused a 
liquidity crisis that drove the stock price lower.
    In light of the discussion in recent years about short 
selling, will the Commission review whether it would be 
beneficial to impose greater sanctions for market participants 
who fail to deliver shares to cover on settlement dates or to 
reinstitute an uptick rule, perhaps with a larger increment?

A.6. Economic studies have shown that short selling is higher 
when there is a greater degree of uncertainty, and the period 
prior to and since the financial difficulties at Bear Stearns 
was associated with a high degree of uncertainty. If we uncover 
traders who attempted to make profitable trades by selling 
short and intentionally propagating false rumors, we will 
pursue those individuals in the enforcement context. With 
respect to Bear Stearns, specifically, we have yet to find any 
evidence that the lack of an uptick rule contributed to its 

Q.7. Does the SEC intend to conduct a study of what happened at 
Bear Stearns, with lessons learned?

A.7. Yes. Commission staff are currently undertaking a granular 
review of the loss of secured funding and its impact on the 
operations and liquidity of Bear Stearns.

                        CHRISTOPHER COX

                            FDICIA PRECEDENT

    Chairman Cox, in your testimony you point out that FDICIA 
established a framework for resolving difficulties experienced 
by commercial banks where systemic risk is involved. Because 
investment banks are not part of the deposit insurance system, 
the FDICIA process does not cover their failure even where 
systemic risk may be involved. The purpose of FDICIA, you note, 
is to ensure that Federal intervention involving systemic risk 
is guided by clear principles rather than improvised in the 
midst of a crisis.

Q.1. Do you believe that the regulatory response to the 
collapse of Bear Stearns was done on an ad hoc or improvised 
fashion due to the lack of clear statutory guidelines?
    What principles should guide Federal intervention involving 
institutions, other than depository institutions?

A.1. Yes, I do. The principles we should now follow should be 
informed by the experience of dealing with ``lender of last 
resort'' issues, including moral hazard, in the commercial bank 
regulatory context. In 1991, after experiencing record bank 
failures and with the FDIC deposit insurance fund at a record 
low level, Congress eliminated much of the FDIC's discretion in 
resolving troubled commercial banks by adopting the ``least 
cost test.'' At that time, Congress also recognized the 
importance of having a mechanism in place for senior government 
officials considering the resolution of difficulties at 
systemically important commercial banks. However, Congress has 
not provided for analogous provisions relating to investment 
banks, which meant that there was a sparse statutory framework 
within which regulators were operating during the difficulties 
with Bear Stearns.
    The Federal Reserve Board judged that it was appropriate to 
use its emergency lending authorities under the Federal Reserve 
Act to avoid a disorderly closure of Bear Stearns. The existing 
authority in the Federal Reserve Act gives the Federal Reserve 
broad authority to lend to many kinds of entities. In 
appropriate circumstances, that flexibility provides an 
important safety valve as is illustrated by Bear Stearns' 
financial crisis.
    Although there is not a specific framework in place that 
governed resolution of a systemically important investment bank 
not affiliated with a commercial bank during a financial 
crisis, the agencies worked together well and in a coordinated 
fashion that could only be enhanced by adopting a statutory 
framework. This statutory framework should provide for a 
mandatory consolidated supervision regime, borrowing where 
appropriate from applicable concepts in the Federal Deposit 
Insurance Corporation Improvement Act (``FDICIA '').
    Legislation to enhance the Commission's authority over 
consolidated supervised entities (``CSEs') should strengthen 
the oversight regime by providing the Commission statutory 
examination authority, capital setting and monitoring 
authority, and specific authority to impose progressive 
restrictions on activities and capital. This authority could be 
modeled on the Federal Reserve's authority over bank holding 
companies under the Bank Holding Company Act.
    Second, any such legislation should include requirements 
for a minimum frequency of examinations, for certain types of 
examinations (such as internal control examinations), and for 
the Commission to apply progressively more significant 
restrictions on an institution's operations as its capital 
adequacy falls.
    The FDICIA ``prompt corrective action'' capital categories 
would not be appropriate for CSEs in their precise form because 
the businesses of a broker-dealer and a bank differ in ways 
that make it inappropriate to impose exactly the same capital 
requirements. For example, a bank uses insured deposits from 
customers to make illiquid loans. A commercial bank's capital 
requirement is based on a percentage of the bank's assets, 
which includes those loans. In contrast, a broker-dealer must 
reserve 100% of customer cash at a bank and also supplement the 
reserve account with its own cash. A broker-dealer cannot use 
customer cash to fund its business. Only with appropriate 
consent from customers can either a bank or a broker-dealer 
lend customer securities.
    Similarly, the ``least cost resolution'' requirement in 
FDICIA would not be appropriate for a broker-dealer, or 
bankruptcy-eligible institution such as a bank holding company 
or an investment bank holding company. The ``least cost 
resolution'' requirement is directed at constructing an FDIC-
managed resolution of a failed bank in a manner that will be 
least costly to the FDIC's deposit insurance fund and 
potentially to taxpayers. The analogous regulated affiliate of 
an investment bank holding company, the registered broker-
dealer, is already covered by a statutory regime, the 
Securities Investor Protection Act, which addresses the 
financial failure of broker dealers, and protects customers 
whose money, stocks, and other securities are either stolen by 
a broker or put at risk when a brokerage fails for other 
    A statutory mechanism for the resolution of systemically 
important institutions would be valuable and would provide 
predictability and certainty to the markets. FDICIA also 
provides an exception to the restrictions on federal 
intervention for situations involving systemic risk affecting 
the financial marketplace. Under FDICIA, such a finding 
requires a two-thirds vote of the FDIC's and the Federal 
Reserve 's boards of directors and concurrence by the Secretary 
of the Treasury after consultation with the President. A 
similar framework (involving the relevant investment bank 
regulators) would be necessary to prevent a systemically 
important institution from declaring bankruptcy.


    Chairman Cox, it has been suggested that allowing Bear 
Stearns to file for bankruptcy could have triggered a much 
larger and more severe financial crisis. Since bankruptcy was 
not an option, and no firm was willing to buy Bear Stearns on 
its own, a Federal bailout was the only viable alternative left 
to regulators. The purpose of the bankruptcy code, however, is 
to provide an orderly process for the liquidation of firms.

Q.2. Would you please explain what would have happened if Bear 
Stearns had filed for bankruptcy and whether you believe a 
bankruptcy filing would have triggered a larger crisis? Would 
the same outcome occur today if another major investment bank 
filed for bankruptcy?
    Does the Bear Stearns example mean that a major investment 
firm cannot file for bankruptcy without triggering a financial 
panic? If so, do we need consider whether a specialized process 
is needed for the liquidation of such firms?

A.2. Unfortunately, unlike a laboratory in which conditions can 
be held constant and variables changed while the experiment is 
repeated, in the social science of the market the selection of 
one course of action forever forecloses all other approaches 
that might have been taken. To better understand the potential 
effect of the operation of the bankruptcy laws with respect to 
a complex financial institution such as Bear Stearns, it is 
important to highlight the different types of entities included 
in the Bear Stearns conglomerate.
    The Bear Stearns Companies, Inc., the publicly-traded 
holding company registered with the Commission, has over 350 
subsidiaries. These subsidiaries include broker-dealers 
registered with the Commission, futures commission merchants 
registered with the CFTC, foreign regulated financial firms, 
and unregistered U.S. and foreign entities including 
unregistered over-the-counter derivative trading entities. An 
entity such as Bear Stearns that decides to file for bankruptcy 
protection has numerous options concerning which entities may 
be included in the bankruptcy petition. For example, the 
holding company and certain unregistered affiliates may file 
for bankruptcy under Chapter 11. However, a registered broker-
dealer with customers is not eligible to file under Chapter 11 
but rather is governed by other statutory provisions (e.g. the 
Securities Investor Protection Act).
    A bankruptcy filing by one or more of the Bear Stearns 
entities would have triggered immediate action by Bear's 
counterparties in securities and financial transactions. While 
a bankruptcy filing generally is designed to maintain the 
status quo by imposing an automatic stay on all efforts by 
creditors to recover their claims against the debtor to give 
the debtor time to resolve its financial difficulties, the 
Bankruptcy Code excepts commodity, forward, and securities 
contracts; repurchase agreements; swap agreements; and master 
netting agreements from the operation of the automatic stay. 
Consequently, Bear Stearns holding company counterparties could 
have exercised their rights with respect to any collateral 
securing their transactions if Bear Stearns had failed to 
satisfy its obligations to those counterparties.
    In addition, in the case of these financial transactions 
and agreements, the Bankruptcy Code permits enforcement of 
contractual provisions that are triggered by an insolvency or 
bankruptcy filing (so-called ``ipso facto'' clauses), 
immediately permitting any counterparty to liquidate, 
terminate, or accelerate securities and financial transactions. 
If Bear Stearns filed for bankruptcy, its counterparties likely 
would have begun liquidating repurchase agreements and other 
collateral held to securitize those open positions, leading to 
further difficulties for the markets and possible liquidity 
problems for other firms.
    These consequences are not limited to broker-dealers, but 
would affect any large financial institution dealing in these 
types of contracts, including banks.
    This is not to say, however, that under no circumstances 
could a major investment firm use the bankruptcy laws without 
triggering a crisis. The events at Bear Stearns occurred during 
a time of pre-existing widespread market stress. Any future 
circumstance in which a major financial firm were to face 
bankruptcy would have to be judged in the context of then-
current market conditions. Moreover, since the Bear Stearns 
sale, the SEC and other financial markets supervisors in the 
U.S. and around the world have already taken steps to modify 
their approach to investment bank liquidity risk management, as 
well as broader problems in the credit markets that were 
understood to have contributed to the subprime crisis.

                              CSE PROGRAM

Q.3. Chairman Cox, would you please provide an overview of the 
nature and scope of your oversight of investment banks under 
the SEC's Consolidated Supervised Entities program? How many 
regulators do you have assigned to monitoring each investment 
bank? What type of financial reporting do you require?

A.3. Since 2004, through our voluntary consolidated supervised 
entities (CSE) program, the Securities and Exchange Commission 
has supervised Bear Stearns, Goldman Sachs, Lehman Brothers, 
Merrill Lynch, and Morgan Stanley at both the holding company 
and regulated entity levels. The program entails monitoring for 
firm-wide financial and other risks that might threaten the 
regulated entities within the CSE, especially the US. regulated 
broker-dealer and their customers and other regulated entities, 
here and abroad. Prior to the Bear Stearns sale, the SEC 
required that firms maintain an overall Basel capital ratio at 
the consolidated holding company level of not less than the 
Federal Reserve 's 10% ``well-capitalized'' standard for bank 
holding companies. Since that time we have further tightened 
both capital and liquidity standards. CSE firms provide monthly 
Basel capital computations to the SEC. The CSE rules also 
provide that an ``early warning'' notice must be filed with the 
SEC in the event that certain minimum thresholds are breached 
or are likely to be breached.
    Even prior to the experience with Bear Stearns, the SEC's 
supervision of investment bank holding companies has always 
recognized that capital is not synonymous with liquidity--and 
that more is required to determine a firm's financial health. 
For this reason, the CSE program requires substantial liquidity 
pools to allow firms to continue to operate normally in such 
environments. Prior to the Bear Stearns sale, CSEs were 
required to maintain funding procedures designed to ensure that 
the holding company has sufficient stand-alone liquidity to 
meet its expected cash outflows in a stressed liquidity 
environment where access to unsecured funding is not available 
for a period of at least one year. Since then, the SEC has 
further strengthened the liquidity requirements based on 
scenarios that contemplate significant impairment of access to 
secured funding as well.
    The Commission's CSE program supervises holding companies 
in a manner similar to the ``Federal Reserve 's oversight of 
bank holding companies. In addition to monthly computation of a 
capital adequacy measure consistent with the Basel II Standard 
and maintenance of substantial amounts of liquidity at the 
holding company, CSEs are required to document a comprehensive 
system of internal controls which are subject to Commission 
inspection. Further, the holding company must provide the 
Commission on a regular basis with extensive information 
regarding its capital and risk exposures, including market and 
credit risk exposures.
    The CSE program provides prudential holding company 
supervision that augments the oversight of regulated 
affiliates. Specifically, regulated broker-dealers are 
supervised both by the SEC and the primary self-regulatory 
organization, FINRA, which devotes a large amount of resources 
to overseeing the broker-dealers that are the core regulated 
entities within the CSE groups. This extensive supervision of 
the regulated entities in addition to the holding company is 
akin to bank supervision at the depository institution level as 
well as the holding company level. That is, the oversight of 
the registered broker-dealer is based on regulation at the SEC 
and SRO (such as FINRA) level, backed by examinations and 
enforcement. The oversight of the CSEs at the holding company 
level is similarly based on rules that incorporate principles 
of prudential oversight, backed by ongoing monitoring and 
examinations. Similarly, bank and insurance company affiliates 
are subject to functional regulation by the respective 
    The specific elements of this supervision include:

      At least monthly review of:

          Consolidated capital adequacy measures 
        computed under the Basel Accord;

          Liquidity measures computed under liquidity 
        guidelines developed by the firm and approved by the 
        Commission; and

      Credit and market risk measures computed using 
methods developed by the firm and approved by the Commission.

      At least quarterly review of consolidating 
financial statements that provide insight into the activities, 
measured by balance sheet usage and revenue production, 
conducted in unregulated affiliates.

      At least quarterly meetings with corporate 
treasury to monitor, inter alia:

      The liquid assets available to the holding 
company, namely those held at the parent and not in regulated 
entities, and the nature of the funding supporting the assets;

      The funding model used to determine the amount of 
long-term debt and equity necessary to support the balance 
sheet, including the schedule of ``haircuts'' for different 
types of balance sheet assets; and

      The impact on the firm of a liquidity stress 
scenario, intended to reflect the impact of both firm-specific 
and market events on the liquidity of the holding company.

      At least quarterly meetings with financial 
controllers at each firm to monitor, inter alia:

      Significant profit and loss (P&L) events at the 
desk level, including large losses, large gains, and large 
variances with prior quarters;

      P&L for non-trading businesses such as investment 
banking and retail brokerage;

      Significant accounting policy changes, especially 
those related to mark-to-market accounting; and

      The mark-to-market review process.

      At least monthly meetings with market and credit 
risk managers at each firm to monitor, inter alia:

      The firm's market risk profile, as reflected by 
VaR and other market risk measures;

      Validation of exposure measures through 
comparison of ex ante risk measures with realized profit and 

      Risk limits, usage of limits, and related 
governance issues;

      Concentrated credit risk exposures, and related 
governance issues; and

      Analysis of historical and theoretical scenarios 
intended to capture the impact of low-probability but severe 

      At least quarterly meetings with the internal 
auditors at each firm to monitor, inter alia:

      Evolution of the audit plan throughout the year 
as projects are added or deferred;

      Resolution, or escalation to the Audit Committee 
of the board, of significant audit findings; and

      Detailed discussions of selected audits, 
typically those with implications for risk governance.

      Targeted on-site inspections to test whether the 
firm robustly implements its documented policies and procedures 
with respect to, inter alia:

          Operational controls, including transaction 
        processing and risk measurement systems, applicable to 
        products booked in unregulated legal entities;

          Marking to market of complex and less-liquid 

         Consolidated capital computations; and

         Anti-money laundering.

     Topical reviews of businesses, activities, risk 
models, products and other topical issues as warranted by 
market developments, corporate acquisitions, and regulatory 

    The SEC has 25 staff persons in the CSE program with a 
range of backgrounds including financial analysts, 
statisticians, economists and lawyers. The size of the program 
has risen as the complexity and range of supervisory activities 
has grown, and further expansion is currently underway. As part 
of the Commission's FY 2009 budget request, the Commission is 
on the path to increasing by 60 percent the number of staff 
assigned to the CSE program.

                           REGULATORY RELIEF

    It has been reported that as a condition for purchasing 
Bear Stearns, regulators promised JPMC certain regulatory 
relief, including SEC no-action letters and forbearance on 
capital requirements.
Q.4. Would you please list any and all regulatory relief your 
agency or department has agreed to provide JPMC in connection 
with its merger with Bear Stearns?

A.4. On Sunday, March 16, 2008, JPMorgan Chase contacted SEC 
staff about relief and guidance that they sought in furtherance 
of a possible deal. To assist in advancing a possible 
transaction, the SEC staff was able to provide several letters 
clarifying the staffs position on certain matters connected 
with the merger.
    Specifically, the Division of Trading and Markets wrote a 
letter addressing the timing of JPMorgan 's filing of a Form BD 
with the SEC. The Division of Investment Management wrote two 
letters concerning issues under the Investment Company Act and 
Investment Advisers Act arising out of the change in control of 
investment advisers affiliated with Bear Stearns. The Division 
of Corporation Finance wrote a letter addressing sales by 
client accounts managed by JPMorgan and Bear Stearns of the 
other firm's securities, in view of the control relationship 
created by the merger agreement. The Division of Enforcement 
wrote a letter concerning investigations and potential future 
inquiries into conduct and statements by Bear Stearns before 
the public announcement of the transaction with JPMorgan. The 
staff declined to provide assurances about possible future 
enforcement actions, or to provide relief on capital 

                        CHRISTOPHER COX

Q.1. Are there functions or transactions that have developed in 
our financial system today that are so essential that we need 
to update regulations or protections to ensure they do not 

A.1. The complexity and interconnectedness of financial markets 
is both a source of strength and an area of concern. It is 
therefore a key responsibility of the SEC and every regulator 
to update regulations and protections to keep pace with changes 
in the marketplace. Doing so is a process and not a result, so 
at all times the Commission and other financial regulators must 
review our existing statutes and rules to determine how well 
the existing framework applies in the current financial 
    One recent example where financial supervisors have been 
concerned is the proliferation of over-the-counter derivatives 
and their potential destabilizing effect on the markets and 
market participants. The SEC and the Federal Reserve Bank of 
New York are cooperating on an initiative to improve the 
clearance and settlement processes as well as documentation of 
OTC derivatives. Improvement in these areas is an important 
first step in reducing risk in this space.

Q.2. Chairman Cox, can you elaborate on the point in your 
testimony that we need to put in place methods for resolving 
problems in troubled investment banks?

A.2. I believe that a statutory mechanism for the resolution of 
systemically important institutions would be valuable and would 
provide predictability and certainty to the markets. Such a 
statutory framework should provide for a mandatory consolidated 
supervision regime for investment banks and adopt, where 
appropriate, applicable concepts from Federal Deposit Insurance 
Corporation Improvement Act (``FDICIA'') to govern the 
resolution of any future financial problems at an investment 
bank holding company.
    Legislation to explicitly authorize the Commission's 
authority current voluntary program for supervision of 
consolidated supervised entities (``CSEs'') should strengthen 
the oversight regime by providing the Commission statutory 
examination authority, capital setting and monitoring 
authority, and specific authority to impose progressive 
restrictions on activities and capital. This authority could be 
modeled on the Federal Reserve's authority over bank holding 
companies under the Bank Holding Company Act.
    Second, any such legislation should also borrow certain 
applicable elements from FDICIA. These could include 
requirements for a minimum frequency of examinations, for 
certain types of examinations (such as internal control 
examinations), and for the Commission to apply progressively 
more significant restrictions on an institution's operations as 
its capital adequacy falls.

Q.3. What role do you think elimination of the ``uptick'' rule 
played in the demise of Bear Stearns, and in market turmoil 
generally? Are you reevaluating that rule change in light of 
recent events?

A.3. With respect to Bear Stearns, specifically, we have yet to 
find any evidence that the lack of an uptick rule contributed 
to its collapse. A high level of short selling in Bear Stearns 
was likely even if the uptick rule was in place.
    By way of background, last year the SEC repealed Rule 10a-
1, the rule that required that short sales on exchanges occur 
in an upward market. Before we made this change, the Commission 
engaged in a multi-year pilot program to test the effects of 
the uptick rule, in which the rule was lifted for all trades in 
about 1,000 stocks. The results of a study of this pilot 
conducted by SEC economists, as well as studies conducted by 
several academics, showed that removal of the uptick rule did 
not significantly affect market quality.
    A number of observers have subsequently called for 
reinstatement of the short sale rule because they believe that 
its repeal has contributed to increased market volatility. 
Others have cited its repeal as a contributing factor to the 
trouble facing securities firms. These concerns are misplaced 
for at least two reasons. First, volatility has increased in 
foreign markets as well as domestic. These foreign markets did 
not see a change in their short-selling rules, suggesting the 
increase in market volatility has causes unrelated to the 
elimination of the uptick rule. Second, the uptick rule was not 
an effective barrier to short selling, even when the price of a 
security was declining, because today's equity markets trade in 

    Questions regarding the 2004 ``Alternative Net Capital 
Requirements for Broker-Dealers That Are Part Consolidated 
Supervised Entities'':
Q.4. Please evaluate what impact the 2004 rule change had on 
the collapse of Bear Stearns. In that evaluation, please 
compare and contrast how Bear Stearns would meet regulatory 
capital requirements under the alternative method and the 
traditional method. If possible, please provide the data 
quarterly since the rule was implemented, as well as a similar 
comparison for the other four large investment banks.

A.4. The simple answer is that The Bear Stearns Companies, Inc. 
was not subject to any consolidated capital requirement. Prior 
to 2005, the Commission supervised the capital of only the 
registered broker-dealer affiliates of The Bear Stearns 
Companies Inc, and did not supervise the capital of the entity 
as a whole. When Bear Stearns' application to become a 
consolidated supervised entity (CSE) was approved by the 
Commission in 2005, the holding company was for the first time 
required to compute capital based on the Basel Standard and to 
maintain a ratio of regulatory capital to risk-weighted assets 
of no less than 10 percent. Thus the Alternative Net Capital 
rule resulted in the imposition of a new capital requirement, 
and the imposition of a significant monitoring regime 
administered by the Commission that had never before existed.
    For Bear Stearns' regulated broker-dealers, the alternative 
net capital calculation did not reduce the actual amount of 
capital. The same is true for the other CSE firms. In fact, 
tentative net capital at many firms rose as a result of the new 
requirements. While as a general matter, the alternative method 
could reduce the position-based charges for market risk and 
counterparty credit exposures as implicit recognition is given 
for diversification effects, these potential reductions are 
coupled with new requirements on liquid capital. Under the 
alternative method, broker-dealers are required to hold a 
minimum of $1 billion in tentative net capital, defined as 
capital less deductions for illiquid assets. They are similarly 
required to formally notify the Commission in the event that 
tentative net capital falls below a $5 billion early warning 
threshold, imposing a de facto $5 billion standard. Finally, 
for practical purposes, the minimum net capital requirement for 
the CSE broker-dealers using the alternative method of 
computing net capital is 2% of aggregate debit items. As a 
result of this balance of requirements, the minimum required 
capital of the major broker-dealers was not reduced when they 
joined the CSE program.

Q.5. Please explain why in the cost benefit analysis of 
adopting the rule, the Commission considered the benefit the 
broker-dealers would receive from lower capital charges, but in 
the cost analysis the Commission failed to consider any 
possible cost for the increased systemic-risk from reducing the 
capital requirements for the large broker-dealers.

A.5. As stated above, the rule did not reduce the minimum 
required capital.
    The risks to the broader market in connection with Bear 
Stearns arose not from the alternative method for calculating 
net capital at the regulated broker-dealer, but from the loss 
of access by the parent firm, The Bear Stearns Companies, Inc., 
to the secured financing market. This sudden loss of liquidity 
by a major financial firm posed potential risks to Bear 
Stearns' counterparties and threatened to more broadly shake 
market confidence in the overall U.S. financial system.
    It should be added that the net capital rules are designed 
to preserve investors' funds and securities in times of market 
stress, and they served that purpose in this case. This 
investor protection objective was fully met by the current net 
capital regime, which--together with the protection provided by 
the Securities Investor Protection Corporation (SIPC) and the 
requirement that SEC-regulated broker-dealers segregate 
customer funds and fully-paid securities from those of the 
firm--fully protected Bear Stearns' customers without creating 
any new systemic risks.

Q.6. Please explain why the Commission amended the definition 
of Tentative Net Capital to include securities for which no 
ready market existed. Please evaluate what impact that decision 
had in causing Bear Stearns to fail.

A.6. In 2004, the Commission promulgated rules to implement its 
alternative net capital requirements for broker-dealers that 
are part of consolidated supervised entities \1\ to allow 
certain broker-dealer \2\ to include as part of their tentative 
net capital certain securities that have no ``ready market.'' 
The amendments allow broker-dealer subsidiaries of CSE firms to 
calculate market and credit risk charges using internal models, 
such as value-at-risk (``VaR'') for market risk and potential 
future exposure for credit risk. These amendments also modified 
the definition of tentative net capital for the broker-dealers 
that are part of a consolidated supervised entity to allow them 
to use a different methodology to determine whether a security 
has a ``ready market'' for purposes of the net capital rule.
    \1\ See Exchange Act Release No. 49830, Jun. 8, 2004 (69 FR 34428, 
Jun. 21, 2004).
    \2\ This treatment is open only to those broker-dealers that apply, 
and are approved, to calculate net capital in accordance with Appendix 
E to the Net Capital Rule. As of May 15, 2008, there are six broker-
dealers approved to calculate net capital in accordance with Appendix E 
to the Net Capital Rule. Broker-dealers approved to calculate net 
capital in accordance with Appendix E must maintain at least $1 billion 
in tentative net capital, and must immediately notify the Commission if 
their tentative net capital falls below $5 billion.
    The 2004 amendments did not eliminate the ``ready market'' 
test for allowable assets. Rather, they subjected less liquid 
positions included in tentative net capital to market and 
credit risk charges, as well as to additional market risk 
charges above and beyond value-at-risk where warranted. Only if 
the broker-dealer is able to demonstrate to the staff that its 
models adequately capture the material risks associated with 
those positions may the broker-dealer include a portion of 
those positions after appropriate charges. If a broker-dealer 
is unable to make such a demonstration, it cannot include those 
securities as part of its tentative net capital.
    The staff of the Division of Trading & Markets believes 
that the run on Bear Stearns was unconnected to the nature of 
assets held in the broker-dealer, and that the changes to the 
broker-dealer net capital standards permitted by the 2004 rule 
changes played no role in Bear Stearns' financial distress.


Q.1. Does the Treasury intend to conduct a study of what 
happened at Bear Stearns, with lessons learned?

A.1. In March, members of the President's Working Group on 
Financial Markets (``PWG'') issued a comprehensive review of 
policy issues related to recent financial market turmoil. The 
PWG recommended measures to reform mortgage origination, 
strengthen risk management, enhance disclosure and improve 
market discipline in the securitization process, and reform 
disclosure and use of credit ratings. When implemented, these 
recommendations will change behavior and strengthen our markets 
through greater risk awareness, enhanced risk management, 
strong capital positions, prudent regulatory policies, and 
greater transparency. The PWG has committed to measuring 
progress by the end of this year, so as to ensure the 
implementation of these recommendations.
    Treasury remains prepared to work with you or your staff on 
specific questions related to the Bear Stearns acquisition.


                           REGULATORY RELIEF

    It has been reported that as a condition for purchasing 
Bear Stearns, regulators promised JPMC certain regulatory 
relief, including SEC no-action letters and forbearance on 
capital requirements.
Q.1. Would you please list any and all regulatory relief your 
agency or department has agreed to provide JPMC in connection 
with its merger with Bear Stearns?

A.1. The Treasury Department has not agreed to provide 
regulatory relief to JPMC in connection with its acquisition of 
Bear Stearns. We understand that the independent bank 
regulators, including the Office of the Comptroller of the 
Currency, have provided such relief, but we cannot speak on 
their behalf.


Q.1. If Bear Stearns, which was only the 5th largest dealer, 
was prevented by the Fed from failing, will anyone be allowed 
to fail?

A.1. It is not accurate to say that Bear Stearns was prevented 
from failure. Bear Stearns shareholders experienced significant 
losses, many Bear Stearns' employees will have to find other 
jobs, and a company that has survived for 85 years will no 
longer exist. Instead, the Federal Reserve's actions 
facilitated the orderly acquisition of Bear Stearns so as to 
promote more stable markets and minimize financial disruptions 
beyond Wall Street. Our role at the Treasury Department was, 
and continues to be, to minimize any impact on the real economy 
and to support the independent regulators and their efforts to 
enhance risk management practices for our financial 
institutions and ensure our financial institutions are well-

Q.2. Are there functions or transactions that have developed in 
our financial system today that arc so essential that we need 
to update regulations or protections to ensure they do not 

A.2. The current regulatory framework for financial 
institutions is based on a structure that has been largely knit 
together over the past 75 years. Moreover, it has evolved in 
response to problems without any real focus on overall mission. 
In order to address these shortcomings, Secretary Paulson 
introduced Treasury's Blueprint for a Modernized Financial 
Regulatory Structure on March 31st. This report outlines a 
number of short, intermediate, and long-term improvements that 
can strengthen the U.S. financial system. We at the Treasury 
look forward to engaging with Congress on these 


Q.1. President Geithner, you testified that the New York 
Federal Reserve Bank, ``began to explore ways in which [it] 
could help facilitate a more orderly solution to the Bear 
situation. [It] did not have the authority to acquire an equity 
interest in either Bear or JPMorgan Chase.'' Do you feel that 
the Federal Reserve Bank should have the authority to acquire 
equity interests in private companies?

A.1. The potential benefits of providing the Federal Reserve 
with explicit authority to acquire equity interests in 
financial institutions would have to be balanced against the 
potential risk that such authority could raise expectations 
about the probability of future intervention, thereby 
contributing to moral hazard. We are in the process of 
examining the adequacy of our existing authority and 
instruments and are working closely with other supervisors to 
examine the lessons we should draw from this episode. This 
includes giving careful consideration to how best to adapt 
supervisory policies and the overall supervisory and regulatory 
framework, as well as the legal framework for insolvency and 
liquidation of financial institutions, to address the 
challenges we face going forward.


                       SYSTEMIC RISK AFTER MERGER

Q.1. President Geithner, what impact will JPMC's merger with 
Bear Stearns have on its capital levels and are you confident 
that the merger will not expose JPMC to any liabilities that 
could threaten its solvency? In other words, what assurance can 
you provide that this merger will not produce a much larger 
systemic risk by undermining the financial position of one of 
the nation's largest banks?

A.1. JPMC remained well-capitalized (as defined in section 
225.2 of the Board of Governors Regulation Y) following its 
acquisition of Bear Stearns. Although there are significant 
risks in this transaction, we believe that JPMC has the 
capacity to manage those risks and to absorb any potential 
losses that may result from the merger.


    We have heard the argument that Bear was ``too inter-
connected to allow to liquidate quickly''. This would appear to 
be the case for a number of financial entities, including both 
banks and non-banks.
Q.2. What changes in supervision or financial surveillance and 
reporting could the regulators use to make such a situation of 
``interconnectedness'' less likely to trigger the type of 
resolution the Fed entered into with Bear?

A.2. The The President's Working Group on Financial Markets, 
the Senior Supervisors Group and the Financial Stability Forum 
have each recently issued reports aimed at identifying some of 
the critical weaknesses in the system that were revealed by 
this crisis. These reports also outline a range of 
recommendations for making the global financial system more 
resilient in the future. Included among those recommendations 
are the following:

      Strengthen the capacity of the core financial 
institutions to withstand periods of severe stress by 
increasing the size of the capital and liquidity buffers they 
hold even during periods of robust growth and highly liquid 

      Strengthen risk management practices by enhancing 
oversight and creating better incentives for firms to manage 
their risk in a forward-looking manner that incorporates both 
on and off-balance sheet exposures as well as the potential for 
distress to be firm-specific or system-wide;

      Improve the capacity of the system to absorb a 
default by a major market participant by enhancing the 
robustness of the market infrastructure, particularly in the 
over-the-counter derivatives and repo markets; and

      Increase the effectiveness of market discipline 
by improving the disclosure practices of sponsors, 
underwriters, and investors with respect to a range of 
instruments including securitized and structured credit 

    Our first and most--important priority continues to be 
helping the economy and the financial system get through the 
present crisis. Longer term, we will be working closely with 
financial supervisors in the U.S. and abroad to advance the 
objectives described above and strengthen the resiliency of our 
financial system.

Q.3. Given that the Fed has pursued this transaction, how can 
the Fed and perhaps the Congress now convince market 
participants that something similar will not happen again? And 
if we cannot convince market participants that is the case, 
what is the implication for risk-taking behavior in the future?

A.3. Congress gave the Federal Reserve the responsibility and 
the authority to act to promote financial stability. The 
particular legal authority used to facilitate the Bear Steams 
transaction has been used very sparingly by the Federal Reserve 
over the last 75 years, and its use in this context was 
motivated by the specific--and extraordinary--circumstances 
that prevailed at that time. The fact that we found ourselves 
in those extraordinary circumstances makes a compelling case 
for undertaking a comprehensive reassessment of how we use 
regulation to strike an appropriate balance between the 
efficiency and dynamism of the financial system on the one hand 
and resiliency and stability of the system on the other. 
Achieving this balance will entail a mix of changes to our 
regulatory policies--some of which are described above in my 
response to your previous question as well as to our broader 
regulatory structure and to certain aspects of our crisis 
management framework. Policymakers in the U.S. and around the 
world are actively engaged in the process of identifying and 
implementing the necessary changes.
    It is important to note that the actions we took in the 
context of these extraordinary circumstances were designed to 
protect the system in a way that minimized the ``moral hazard'' 
consequences of providing that protection. No owner or 
executive or director of a financial institution would look at 
the outcome for Bear Stearns and choose to see their firm 
managed in such a way as to court a similar outcome.

                          F. GEITHNER

Q.1. If Bear Stearns, which was only the 5th largest dealer, 
was prevented by the Fed from failing, will you allow anyone to 

A.1. Our decision to lend in connection with the acquisition of 
Bear Stearns by JPMC was based on the systemic risk generated 
by the confluence of a number of extraordinary factors, 
including the rapidity with which Bear Steams' funding capacity 
had eroded and the exceptionally fragile conditions that 
prevailed in short-term funding markets at that time. Bear 
Stearns, although smaller than the other major investment 
banks, was a significant counterparty in these and other 
critical markets. In our view, these extraordinary 
circumstances meant that the disorderly unwinding of a major 
market participant could likely trigger contagion and transmit 
distress to a much wider range of markets and market 
participants than just those directly connected to that firm. 
The combination of the fragile state of markets and Bear's role 
as counterparty in derivatives and secured funding markets 
meant that a default would likely have caused very substantial 
damage to the financial system and to the economy as a whole.
    Substantial changes to our regulatory policies and 
regulatory structure are needed. The Federal Reserve is working 
in concert with the U.S. Treasury Department and supervisors 
and regulators from around the world to improve the capacity of 
our financial system to withstand stress, including the stress 
that would occur in the wake of the failure of a major 
institution. A description of some of the key elements that 
should guide this process is provided in the response to your 
second question below.

Q.2. Are there functions or transactions that have developed in 
our financial system today that are so essential that we need 
to update regulations or protections to ensure they do not 

A.2. The U.S. financial system has long been one of the most 
dynamic and innovative systems in the world. It is an ongoing 
challenge for regulators and supervisors to keep abreast of the 
innovation taking place, and to devise and adopt the right mix 
of incentives and constraints to keep the system stable without 
reducing that dynamism. As has been the case in past crises, 
this episode has highlighted a number of areas in which 
innovation outpaced market participants' understanding of the 
risks, and the system became less transparent and more 
vulnerable to acute instability. We have begun the process of 
considering what set of changes to our regulatory and 
supervisory framework are needed to enhance financial 
stability. Our objective should be to preserve the dynamism of 
our markets while also strengthening their capacity to 
withstand stress. This will require changes to our regulatory 
policies and our regulatory structure, as well as a careful 
look at the set of crisis management tools at our disposal. 
Among the changes that will be needed are: (1) a stronger set 
of capital and liquidity ``shock absorbers'' in those 
institutions that are critical to market functioning and the 
overall health of the economy, with a stronger form of 
consolidated supervision over those same institutions; (2) a 
more robust financial infrastructure, especially in the 
derivatives and repo markets; (3) a more effective mix of tools 
to manage crises; and (4) a more streamlined regulatory 
framework that provides the Federal Reserve System with the 
right mix of authority and responsibility for promoting 
financial stability and responding to systemic threats when 
they arise.
    Our first and most important priority continues to be 
helping the economy and the financial system get through the 
present crisis. In the longer term, we will be working to 
advance the objectives described above, with the goal of 
strengthening the resiliency of our financial system.