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US Fed Chief Defends Investment Bank Bailout


Top U.S. financial officials say the markets could have been thrown into chaos if the government had not taken strong action to rescue a big investment bank that was falling into bankruptcy. But critics say the move put billions of dollars at risk, and unfairly helps large investors at a time when ordinary people facing home foreclosure get little aid. VOA's Jim Randle reports from Washington.

Bear Stearns, one of the biggest investment banks in the country, was on the verge of bankruptcy last month, until the U.S. central bank stepped in to help JP Morgan arrange to buy the struggling bank, something critics say put billions of dollars of taxpayers' money at risk.

But Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee the Bear Stearns rescue was justified because the collapse of the firm would hurt confidence and stall trading in markets that are already troubled.

"The damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain," he said.

New York Federal Reserve Bank President Tim Geithner played a key role in the effort to prop up Bear Stearns and says officials took the action reluctantly, but decided the cost of inaction was too high.

"Americans would face lower incomes, lower home values, higher borrowing costs for housing, education and other living expenses, lower retirement savings, and rising unemployment," he said.

Several senators urged officials to avoid similar problems in the future by speeding efforts to streamline and improve regulation and oversight of the financial system.

Committee Chairman Christopher Dodd agreed that rescuing Bear Stears was necessary because the failure of a large institution would be a risk to the financial system.

But he said the government should be just as quick and generous in helping throngs of troubled homeowners facing foreclosure for the same reason officials came to the aid of the big investment bank.

"Thousands and thousands and thousands of foreclosures create as much systemic risk as one investment bank," Senator Dodd said.

Home foreclosures have put the U.S. housing industry in a state of turmoil, and has hurt the overall economy here and elsewhere.

A bill designed to help avert some foreclosures has been under discussion by senators this week. One version of the plan would expand counseling services for families in danger of losing their homes, give local governments grants to buy foreclosed properties, and offer tax breaks for people who buy them. It would also give tax breaks to some homebuilders.

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