Testimony Offers Details of Bear Stearns Takeover
Three weeks after the market crisis that forced the rescue of Bear Stearns, federal officials and senior Wall Street executives offered their first public account on Thursday of the harrowing four days of negotiations that led to a deal to sell the investment bank to JPMorgan Chase.
In testimony before the Senate banking committee, top officials from the Federal Reserve, the Treasury Department and the Securities and Exchange Commission also strongly defended their actions, answering critics who have said that the government should have taken more aggressive steps months, or years, earlier to prevent the problems plaguing the financial markets.
Critics have also questioned bailing out the creditors of one Wall Street investment firm possibly at taxpayers’ expense.
The officials responded that they had no choice but to act for the broader good of the markets and the economy. A failure to save Bear Stearns, said Timothy F. Geithner, the president of the Federal Reserve Bank of New York, would have led to “a greater probability of widespread insolvencies, severe and protracted damage to the financial system and, ultimately, to the economy as a whole.”
The testimony disclosed that Treasury Secretary Henry M. Paulson Jr. had insisted that Bear be paid a very low price for its stock by JPMorgan Chase. The testimony also offered more details about the pressures on Bear. The firm’s chief executive, Alan D. Schwartz, said that he thought on Friday morning that he had engineered a loan, backed by the Federal Reserve Bank of New York, that bought him 28 days to find a solution.
But he said he realized that he had misunderstood the terms of the loan when the Fed decided later that day that the loan would only last through the weekend and that he had only until Sunday afternoon to find a buyer for the 85-year-old firm.
The testimony also disclosed that regulators were unaware of Bear’s precarious health and did not know until the afternoon of Thursday, March 13, that the firm was planning to file for bankruptcy protection the next morning.
Pummeled by market rumors of insolvency, the investment house lost more than $10 billion — or more than 80 percent — of its available cash in a single day. Only a few days earlier, the chairman of the Securities and Exchange Commission, Christopher Cox, had sought to calm investors, telling reporters that “we have a good deal of comfort about the capital cushions” at Bear and other large investment houses.
By Sunday, March 16, Federal Reserve and administration officials had orchestrated a $30 billion rescue of the firm, and the firm announced that its stock, which last year had been trading at $171 a share, would be sold to Morgan Chase for $2 a share. (The offer was later revised to $10.)
Under questioning by Sen. Christopher Dodd, the committee’s chairman, both Ben S. Bernanke, the chairman of the Fed, and Geithner said they played no role in setting the price, which was one of the most controversial elements of the deal.
“We had no interest or no concern about the stock price that was evaluated,” Bernanke testified.