S. HRG. 110–974 

TURMOIL IN U.S. CREDIT MARKETS: EXAMINING 

THE RECENT ACTIONS OF FEDERAL FINANCIAL 

REGULATORS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE RECENT ACTIONS OF FEDERAL FINANCIAL 

REGULATORS 

THURSDAY, APRIL 3, 2008 

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

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


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TURMOIL IN U.S. CREDIT MARKETS: EXAMINING THE RECENT ACTIONS OF FEDERAL FINANCIAL 

REGULATORS 


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50–394 2010

S. HRG. 110–974 

TURMOIL IN U.S. CREDIT MARKETS: EXAMINING 

THE RECENT ACTIONS OF FEDERAL FINANCIAL 

REGULATORS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE RECENT ACTIONS OF FEDERAL FINANCIAL 

REGULATORS 

THURSDAY, APRIL 3, 2008 

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

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


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(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

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 


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(III) 

C O N T E N T S 

THURSDAY, APRIL 3, 2008 

Page 

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 

WITNESSES 

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 


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(1) 

TURMOIL IN U.S. CREDIT MARKETS: EXAMINING THE RECENT ACTIONS OF FEDERAL 

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. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

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 


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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 mortgages? 

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 


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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 are. 

With that, let me turn to my colleague from Alabama, Senator 

Shelby. 

STATEMENT OF SENATOR RICHARD C. 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 attention. 

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 


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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 Johnson. 

STATEMENT OF SENATOR TIM JOHNSON 

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 


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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 middle. 

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 hearing. 

Senator Bennett. 

STATEMENT OF SENATOR ROBERT F. 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 happened. 

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. 

STATEMENT OF SENATOR JACK 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 


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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. 

STATEMENT OF SENATOR WAYNE 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. 

STATEMENT OF SENATOR CHARLES E. 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. 


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STATEMENT OF SENATOR JIM 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 questioning. 

Chairman DODD. Thank you, Senator Bunning. 

Senator Carper. 

STATEMENT OF SENATOR THOMAS R. 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 week. 

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 


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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. 

STATEMENT OF SENATOR ELIZABETH 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. 

STATEMENT OF SENATOR ROBERT 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 foreclosure? 

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. 


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STATEMENT OF SENATOR JON 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. 

STATEMENT OF SENATOR BOB 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. 

[Laughter.] 

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. 

STATEMENT OF SENATOR MIKE 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 did. 


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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. 

STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

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 shortterm 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 

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ported 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 21⁄4 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 


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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 objectives. 

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. 

STATEMENT OF CHRISTOPHER COX, CHAIRMAN, SECURITIES 

AND EXCHANGE COMMISSION 

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. 


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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 standards. 

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 


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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 brokerdealers 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’ brokerdealer 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 exVerDate Nov 24 2008 00:38 Mar 17, 2010 Jkt 050394 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 E:\HR\OC\A394.XXX A394

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perienced 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. 

STATEMENT OF ROBERT STEEL, UNDER SECRETARY OF 

TREASURY FOR DOMESTIC FINANCE, DEPARTMENT OF THE 

TREASURY 

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 consequences. 

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 


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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 


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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 growth. 

Thank you, and I look forward to your questions, sir. 

Chairman DODD. Thank you very much, Mr. Secretary. 

Chairman Geithner. 

STATEMENT OF TIMOTHY F. GEITHNER, PRESIDENT, FEDERAL 

RESERVE 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. 


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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 fate. 

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 economy. 

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 


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they can provide finance to the mortgage market and help reduce 

the risk of avoidable foreclosures. 

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 conclude. 

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 liquidity. 

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 


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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. 


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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 intervention. 

From my perspective, the outcome reached that evening and the 

subsequent agreement reached a week later, are fully consistent 

with those two objectives. 


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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 conditions. 

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 liVerDate Nov 24 2008 00:38 Mar 17, 2010 Jkt 050394 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 E:\HR\OC\A394.XXX A394

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quidity 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, 


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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 point. 

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 points. 

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. 


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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 bilVerDate Nov 24 2008 00:38 Mar 17, 2010 Jkt 050394 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 E:\HR\OC\A394.XXX A394

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lion. 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 complete. 

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 issues. 

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. 


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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? 


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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 

situations. 

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 21⁄2 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 described. 

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 

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ing. 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 constructive. 

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 market. 

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 


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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 questions. 

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 


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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. 


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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 carefully. 

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 discussions. 

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 credit. 

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 


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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 


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the extent to which secured financing markets also became vulnerable. 

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 


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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. 


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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 people. 

Senator ALLARD. Any other comments? Yes. 


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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 Committee. 

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 

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man 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 applies. 

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? 


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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 mishmash, 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 mortgages’’? 

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 that? 

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 

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ing, 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 already. 

What do you have to say about this, Mr. Secretary? 


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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 accurate? 

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 


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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 great. 

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 


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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 allknowing 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 absences. 

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? 


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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 

Stearns? 

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. 


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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 to. 

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 no? 


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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 again. 

Senator TESTER. If another investment bank of similar size were 

in the same situation tomorrow, would you duplicate your effort? 

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 

much. 

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 for? 


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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 that. 

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. 


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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 


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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 future. 

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 


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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 

that. 

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 away. 

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. 


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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 operations. 

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. 


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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 transaction? 

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 

transaction? 


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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, 

but—— 

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 


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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 guarantee? 

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 perspective. 

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 mortgagebacked 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 


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and our own evaluation that we have an excellent chance of recovering the full amount, as well as interest. 

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 protecVerDate Nov 24 2008 00:38 Mar 17, 2010 Jkt 050394 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 E:\HR\OC\A394.XXX A394

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tors, 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 


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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 it. 

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 


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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 


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been willing to guarantee $100 million, the stock price might have 

been $20 or maybe $30. Who knows? 

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 


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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 conduct. 

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 collateral. 

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 situation. 

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? So—— 

Mr. GEITHNER. Yes. I would say they are inseparable. 


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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 institutions—— 

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—— 


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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. 


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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 participants. 

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. 


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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 correct? 

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 time. 


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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 taking. 

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 worth. 

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 


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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 determination? 

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, 


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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 valuation—— 

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 important. 

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. 


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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 activities? 

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 wellpoliced 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. 


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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 was. 

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 

point. 

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 


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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 taxpayer. 

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 observations. 

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 it. 

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. 


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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. 

[Recess.] 

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. 

STATEMENT OF JAMES DIMON, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, JPMORGAN CHASE 

Mr. DIMON. Thank you very much. 


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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 economy. 

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 alone. 

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 


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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 amount. 

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 


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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 tuition. 

Moreover, such a cascade of trouble could have further depressed 

consumer confidence and consumer spending, resulting in widespread job losses, and accelerated the ultimate downturn. 

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 challenges. 

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 say. 

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 


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going to the point earlier about whether or not this was a better 

outcome, the reaction was such. 

With that, Mr. Schwartz, thank you. 

STATEMENT OF ALAN D. SCHWARTZ, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, THE BEAR STEARNS COMPANIES, INC. 

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. 


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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 night. 

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 employees. 

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 stockfor-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 


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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 longstanding 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. 


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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 days. 

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 


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situation, we were informed that their view of the language was no, 

it could be up to 28 days but could be removed. 

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 here. 

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? 


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So I do not actually remember who suggested it or not suggested 

it, but it was the only way that we could have done it. 

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 socalled 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 suggestion. 

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 share? 

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 share. 

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 know? 

Speak of your own bank first. I know you know where you are. 

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 happens. 


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Senator SHELBY. Sure, because the buck stops with you, basically. 

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 did. 

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 investments. 


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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 assistance? 

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, 

gentlemen. 

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 facil- ity, the first facility, and $1 billion of the second facility? 

Mr. DIMON. That is correct. 


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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 issue? 

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 risk. 

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 sheet. 

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 


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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 pace. 

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, 

gentlemen. 

Chairman DODD. Thank you, Senator, very much. 

Senator Corker. 


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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 standpoint? 

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 price. 

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 


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to pay a higher price if they had a chance to do the kind of due 

diligence that normally goes with a large acquisition. 

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 none. 

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 funded. 

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 ConVerDate Nov 24 2008 00:38 Mar 17, 2010 Jkt 050394 PO 00000 Frm 00092 Fmt 6633 Sfmt 6602 E:\HR\OC\A394.XXX A394

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gress 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 longer. 

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 close. 

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. 


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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 collateral. 

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 on. 

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. 


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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 sense. 

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, gentlemen. 

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 


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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, 


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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 transaction. 

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 that. 

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 


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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 


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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 home. 

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:] 


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RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN DODD 

FROM BEN S. BERNANKE 

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. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM BEN S. BERNANKE 

PRIMARY DEALER CREDIT FACILITY

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 over-regulation? 

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 dealers. 


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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 Stearns. 

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 riskweighted assets of Bear Stearns for purposes of the Board’s riskbased 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. 


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EMERGENCY LENDING AUTHORITY

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 longterm 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 


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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 investmentgrade 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. 


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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 loans. 

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 lending. 

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? 


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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 economy. 

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 


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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. 

LESSONS LEARNED AND TOO BIG TO FAIL

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 markets. 

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 

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sition 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). 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM BEN S. BERNANCE 

Q.1. If Bear Stearns, which was only the 5th largest dealer, was 

prevented by the Fed from failing, will you allow anyone to fail? 

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 fail? 

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 overthe-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 superVerDate Nov 24 2008 00:38 Mar 17, 2010 Jkt 050394 PO 00000 Frm 00191 Fmt 6601 Sfmt 6602 E:\HR\OC\A394.XXX A394

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vision 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 that? 

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. 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN DODD 

FROM CHRISTOPHER COX 

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 


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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 finanVerDate Nov 24 2008 00:38 Mar 17, 2010 Jkt 050394 PO 00000 Frm 00193 Fmt 6601 Sfmt 6602 E:\HR\OC\A394.XXX A394

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cial 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? 


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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 collapse. 

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. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM 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, 


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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 reasons. 

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 


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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. 

IMPACT OF BANKRUPTCY FILING BY BEAR STEARNS

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 


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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 firmwide 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 


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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 supervisors. 

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 


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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 loss; 

• 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 events. 

• 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 positions; 


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• 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 initiatives. 

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 requirements. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM 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 fail? 

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 


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Commission and other financial regulators must review our existing statutes and rules to determine how well the existing framework applies in the current financial marketplace. 

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. 


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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 

pennies. 

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 positionbased 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 brokerdealers using the alternative method of computing net capital is 2% 

of aggregate debit items. As a result of this balance of requireVerDate Nov 24 2008 00:38 Mar 17, 2010 Jkt 050394 PO 00000 Frm 00203 Fmt 6601 Sfmt 6602 E:\HR\OC\A394.XXX A394

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1See Exchange Act Release No. 49830, Jun. 8, 2004 (69 FR 34428, Jun. 21, 2004). 

2This 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. 

ments, 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 brokerdealer 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. 

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, 


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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. 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN DODD 

FROM ROBERT STEEL 

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. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM ROBERT STEEL 

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. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM ROBERT STEEL 

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-capitalized. 

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 fail? 

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 recommendations. 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN DODD 

FROM TIMOTHY F. GEITHNER 

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. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM TIMOTHY F. GEITHNER 

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. 

LESSONS LEARNED AND TOO BIG TO FAIL

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 markets; 

• 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 offbalance 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 products. 

Our first and most—important priority continues to be helping 

the economy and the financial system get through the present criVerDate Nov 24 2008 00:38 Mar 17, 2010 Jkt 050394 PO 00000 Frm 00207 Fmt 6601 Sfmt 6602 E:\HR\OC\A394.XXX A394

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sis. 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. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM TIMOTHY 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 fail? 

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 


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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 fail? 

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. 


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