WASHINGTON -- The Federal Reserve and Treasury Department orchestrated the "fire sale" price for the quick purchase of investment bank Bear Stearns, the chief executive officers of the banks involved told Congress yesterday, while disagreeing about whether such a rushed deal was necessary.
During a gripping five-hour hearing before the Senate Banking Committee, the chief executive officers of Bear Stearns Cos. and JPMorgan Chase gave their versions of events that led to the government-brokered sale of the venerable bank March 16, with $29 billion in taxpayers' money at stake in the deal.
Bear Stearns CEO Andrew Schwartz and JPMorgan Chase CEO James Dimon said that top U.S. government officials encouraged a low sale price - originally $2 a share but later raised to $10 - to avoid rewarding investors who had made a bad bet.
They said that Timothy Geithner, president of the Federal Reserve Bank of New York, and Treasury Secretary Henry M. Paulson Jr. knew of the price being discussed and that both pressed for a deal that did not bail out investors who had gotten themselves into trouble.
They agreed on this much: As recently as the first week of March, Bear Stearns had access to $21 billion in capital. As investors withdrew money and partners shunned the firm, however, that total slipped to $12.4 billion a week later.
On March 13, the wheels came off. By day's end, Bear Stearns was left with $2 billion in accessible capital.
JPMorgan Chase was already Bear Stearns' bank and had previously worked out what Schwartz thought was a 28-day loan from the Fed to ensure its solvency. This loan, Schwartz said, may have been what sparked the run on Bear Stearns, because it was tailored to one specific Wall Street player.
This, he suggested, put a bull's-eye on Bear Stearns, inciting the multitude of players on the other side of business deals with Bear Stearns to fear that its finances were worse than advertised.
However, Bear Stearns had been a concern to financial markets since last summer, when two of its hedge funds - pooled investment funds for the very wealthy - collapsed.
On another matter that is now in dispute, Schwartz testified that there were other financial players who might have been willing to pay more for Bear Stearns, but the Fed forced a quick sale.
"I think all of the leverage went out the window when a deal had to happen over the weekend" before Asian markets opened for trading, he said.
Dimon disputed that there was interest from other financiers, and defended the low sales price as well as his demand that taxpayers' money be put at stake, too.
"We had literally 48 hours to do what normally takes a month," he said of the unusual deal, in which the Fed put up $29 billion in a loan that accepted some risky assets as collateral, including mortgage bonds that are precisely what roil Wall Street today.
Federal regulators testified yesterday that they indeed were concerned and had acted swiftly to prevent runaway panic, which could shake Wall Street and Main Street.
"For the first time, a major investment bank that was well-capitalized and apparently fully liquid experienced a crisis of confidence that denied it not only unsecured financing, but short-term secured financing," said Christopher Cox, head of the Securities and Exchange Commission. Bear Stearns could not borrow, no matter what it offered as collateral.
Fed Chairman Ben S. Bernanke testified that standing by was not an option.
"The sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence," he said, suggesting that a market collapse could have ensued. "The company's failure could also have cast doubt on the financial position of some of Bear Stearns' thousands of counterparties" - parties it does business with - "and perhaps of companies with similar businesses."
The Fed's action was accompanied by an equally unprecedented decision by the Fed to provide emergency short-term lending to major investment banks that it does not regulate directly.
"If you want to say we bailed out the market in general, I guess that is true," Bernanke testified, saying that he did so in the interest of the U.S. economy.