Bernanke says Fed had no advance warning of Bear Stearns trouble

Wed, Apr 2 2008, 15:01 GMT
http://www.afxnews.com

WASHINGTON (Thomson Financial) - The Federal Reserve did not have any advance warning of the impending financial collapse of Bear Stearns, but now has examiners onsite at investment banks to evaluate their capital situation and potential risks, Fed Chairman Ben Bernanke told Congress's Joint Economic Committee this morning.

Bernanke said the first notification was on the morning of Thursday, March 13 that the liquidity position of the company had deteriorated drastically and that it would file for Chapter 11 bankruptcy reorganization the next morning unless some financing was arranged.

The Fed and Treasury arranged 30 bln usd of financing through JP Morgan Chase. "We did not bail out Bear Stearns," Bernanke told the committee. "We did what we did because it was necessary to maintain the integrity and viability of the financial system."

While Bernanke said the actual financial risk to the Fed in taking on suspect securities as collateral for the loan was nowhere near the potential 29 bln usd now on its books (JP Morgan would take the first 1 bln usd of any losses), he also told the committee: "I'd hope not to ever do it again".

Because the Fed has now opened up its discount window for direct lending to investment companies as well as banks, the Fed now has its bank examiners on site at the investment companies to assess their financial positions and Bernanke said he did not expect another Bear Stearns-type situation to occur.