WASHINGTON – Federal Reserve Chairman Ben Bernanke told a panel investigating the financial crisis that regulators must be ready to shutter the largest institutions if they threaten to bring down the financial system.
"If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved," Bernanke said Thursday while testifying before the Financial Crisis Inquiry Commission.
Bernanke also said it was impossible for the Fed to rescue Lehman Brothers from bankruptcy in 2008 because the Wall Street firm lacked sufficient collateral to secure a loan. Lehman's former chief executive told the panel a day earlier that the firm could have been saved, but regulators refused to provide help.
The Fed chief is presenting his analysis of the crisis and views on potential systemwide risks as the panel approaches the end of its yearlong investigation into the Wall Street meltdown.
Bailing out these institutions is not a healthy solution and great improvement will come from the new financial overhaul law, Bernanke said. It empowers regulators to shut down firms whose collapse pose a broader threat to the system.
"Too-big-to-fail financial institutions were both a source ... of the crisis and among the primary impediments to policymakers' efforts to contain it," Bernanke said.
"We should not imagine ... that it is possible to prevent all crises," he said. "To achieve both sustained growth and stability, we need to provide a framework which promotes the appropriate mix of prudence, risk-taking and innovation in our financial system."
Bernanke led the economy through the financial crisis and the worst recession since the 1930s. The Federal Reserve took extraordinary measures to inject hundreds of billions into the battered financial system.
Last week he said the central bank is prepared to make a major new investment in government debt or mortgage securities if the economy worsened significantly.
Members of the congressionally appointed panel have questioned the government's decision to let Lehman fall while injecting billions of dollars into other big financial institutions during the crisis.
Former Lehman CEO Richard S. Fuld Jr. testified Wednesday that the firm could have been rescued. But the regulators refused to help — even though they later bailed out other big banks.
Bernanke disagreed. He said bailing out Lehman would have saddled the taxpayers with billions of dollars in losses.
"It was with great reluctance and sadness that I conceded there was no other option" than allowing Lehman to fail, he said.
Asked how the Lehman case differed from that of American International Group Inc., which received $182 billion in taxpayer aid, Bernanke said there was a fundamental difference.
AIG, as the biggest insurance company in the U.S., had valuable assets which could back up the Fed's emergency loan, he said.
"The Federal Reserve will absolutely be paid back by AIG," Bernanke said.
Sheila Bair, the chairman of the Federal Deposit Insurance Corp., also is testifying at Thursday's hearing. She says in prepared testimony "the stakes are high" for regulators to effectively exercise their new powers under the financial overhaul law. If not, "we will have forfeited this historic chance to put our financial system on a sounder and safer path in the future," she says.
Comment:
What should be shut down is the Federal-Reserve system. Do you know they charge the taxpayers a fee for us to use our own money? It's true. The money is ours, yet we pay them to use it. Is that crazy or what? Here's something even crazier. We pay more in fees for $100 bills, than for $1 bills. Does it cost more to print $100 bills than $1 bills? No it doesn't. Does it cost the Federal Reserve more in paperwork to manage $100 bills than $1 bills? No it doesn't. Charging us more for the larger denominations is nothing more than Jew usury, and the American taxpayers just open their wallets and pay every year. It's utterly incredible. Then again, most of our middle and lower classes are unaware of these surcharges. The wealthy know, but some are making money off of this, others have so much that they aren't concerned, and still others are concerned that if they rock the boat, they might be subjected to economic sanctions from the Jew Banksters responsible for this rip-off.
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