U.S. Federal Reserve (Fed) Chairman Ben Bernanke on Thursday defended the central bank's move to assist a Wall Street investment bank on the verge of bankruptcy, saying the Fed acted to prevent a failure that could have caused serious consequences to the U.S. economy. “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,” the Fed chairman told the Senate Banking Committee. Bernanke said that if Bear Stearns had been allowed to fail, it would have led to a “chaotic unwinding” of Bear Stearns' investments held by individuals and other financial institutions. “Moreover, 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,” he said. Bear Stearns, the country's fifth-largest investment bank, became the biggest victim of severely tight credit that has caused turmoil in markets since last August. Bernanke was the key witness at a hearing called to examine whether the Fed was justified in providing up to $30 billion to facilitate the sale of Bear Stearns to J.P. Morgan Chase. Democrats on the Banking Committee said they wanted to find out whether the Bush administration pressured the central bank to complete the sale of Bear Stearns and whether big investment banks were receiving preferential treatment over millions of Americans in danger of defaulting on their home mortgages. “Was this a justified rescue to prevent a systemic collapse of financial markets or a $30 billion taxpayer bailout for a Wall Street firm while [regular] people … struggle to pay their mortgages?” Banking Committee Chairman Christopher Dodd (Democrat from Connecticut) asked at the beginning of the hearing. Treasury Undersecretary Robert Steel told the committee that the Bush administration supported the Fed's actions. “The failure of a firm that was connected to so many corners of our markets would have caused financial disruptions beyond Wall Street,” he said.
