In a testimony before the House Financial Services Committee on Thursday, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson emphasized the ongoing turmoil in the financial markets and the instability that these markets continue experiencing. They stressed for new regulatory powers to be put in place, insulating this way the national economy from damage in case a Bear Stearns collapse-scenario repeats itself.[Via:Examiner]
“In light of the Bear Stearns episode, Congress may wish to consider whether new tools are needed for ensuring an orderly liquidation of a systemically important securities firm that is on the verge of bankruptcy, together with a more formal process for deciding when to use those tools,” Bernanke said.
Secretary Paulson, also addressed the Congressional panel. He pointed out that some institutions, if they fail, can have a systemic impact. However, Paulson said, “for market discipline to effectively constrain risk, financial institution must be allowed to fail”… On a separate note here: this is not the first time Paulson has stressed allowing the banks “to fail point”. In an earlier interview with BBC, Mr Paulson said the US must devise a tougher regulatory system that can allow financial institutions to fail without causing wider economic turbulence. It’s fair to assume, the market understands there is nothing new in secretary’s latest remarks….Then Treasury chief directed his attention toward the issue of Fannie Mae (FRE) and Freddie Mac. (FNM) and sought to calm investors about the financial health of the mortgage giants. They are “working through this challenging period,” Paulson told Congress. “Their regulator has made clear that they are adequately capitalized.”
[Via:AP] “Bernanke called on Congress to consider giving the central bank explicit authority to oversee systems that process payments and other financial transactions by investment firms as well as banks. And, he recommended that Congress give a regulator the authority to set standards for capital, liquidity holdings and risk management practices for the holding companies of the major investment banks”.
Both Bernanke and Paulson endorsed creating new procedures by which the government can guide an orderly liquidation of a failing investment bank in an effort to minimize any fallout that might be inflicted on the broader financial system and the overall economy. Such procedures, which are in place for commercial banks, might have made the dissolution of Bear Stearns more orderly.