Three weeks after the market crisis that prompted the rescue of Bear Stearns, federal officials and senior Wall Street executives have offered their first public account of the harrowing four days of negotiations that led to a deal to sell the investment bank to JPMorgan Chase.
In testimony before the Senate banking committee, top officials from the Federal Reserve, the Treasury Department and the Securities and Exchange Commission on Thursday also strongly defended their actions. The responded to critics who have said the government should have taken more aggressive steps months, or years, earlier to prevent the problems plaguing the financial markets. Critics have also questioned bailing out the creditors of one Wall Street investment firm possibly at taxpayers' expense.
The officials responded that they had no choice but to act for the broader good of the markets and the economy. A failure to save Bear Stearns, said Timothy Geithner, the president of the Federal Reserve Bank of New York, would have led to "a greater probability of widespread insolvencies, severe and protracted damage to the financial system and, ultimately, to the economy as a whole."
The testimony disclosed that Treasury Secretary Henry Paulson Jr. had insisted that Bear be paid a very low price for its stock by JPMorgan Chase. The testimony also offered more details about the pressures on Bear. Its chief executive, Alan Schwartz, said he thought on Friday morning that he had engineered a loan, backed by the Federal Reserve Bank of New York, that bought him 28 days to find a solution.
But Schwarz said he realized he had misunderstood the terms of the loan when the Fed decided later that day that the loan would only last through the weekend and that he had only until Sunday afternoon to find a buyer for the firm.
The testimony also disclosed that regulators were unaware of Bear's precarious health and did not know until the afternoon of March 13, a Thursday, that the firm was planning to file for bankruptcy protection the next morning.
Pummeled by market rumors of insolvency, the investment house lost more than $10 billion -or more than 80 percent - of its available cash in a single day. Only a few days earlier, the chairman of the Securities and Exchange Commission, Christopher Cox, sought to calm investors, telling reporters that "we have a good deal of comfort about the capital cushions" at Bear and other large investment houses.
By Sunday, March 16, Federal Reserve and administration officials had orchestrated a $30 billion rescue of the firm, and the firm announced that its stock, which last year had been trading at $171 a share, would be sold to Morgan Chase for $2 a share. The offer was later revised to $10.
Under questioning by Senator Christopher Dodd, the committee's chairman, both Ben Bernanke, the chairman of the Fed, and Geithner said they played no role in setting the price, which was one of the most controversial elements of the deal.
"We had no interest or no concern about the stock price that was evaluated," Bernanke testified.
But in response to the same question, the Treasury under secretary Robert Steel, said his boss, Paulson, had said in the negotiations that the price should be low because the deal was being supported by a $30 billion taxpayer loan. He said a lower price was desirable to make the broader point to the markets that by rescuing the bank, the government did not want to encourage risky behavior by other large institutions, a concept known as "moral hazard."
"There was a view that the price should not be very high or should be toward the low end" Steel said.
"With regard to the specifics, the actual deal was negotiated, or transaction was negotiated, between the Federal Reserve Bank of New York and the two parties. It was our perspective, as I said, that moral hazard wanted to be protected as much as possible, and so therefore a lower price was more appropriate and there were lots of terms and conditions."
Bernanke and Geithner said that in exchange for the $30 billion loan, the Federal Reserve Bank was given investment grade securities and collateralized mortgage obligations, the majority of which come from government-sponsored institutions like Freddie Mac.
They said that under the terms of the deal, an investment manager retained by the Federal Reserve Bank would have 10 years to dispose of the assets. That condition would eliminate the need to sell the assets quickly in a fire sale. Moreover, JPMorgan Chase later agreed to absorb the first $1 billion of any loss that might occur on the loan.
The testimony also disclosed that regulators were unaware of Bear's precarious health and did not know until the afternoon of March 13, a Thursday, that the firm was planning to file for bankruptcy protection the next morning.
Pummeled by market rumors of insolvency, the investment house lost more than $10 billion -or more than 80 percent - of its available cash in a single day. Only a few days earlier, the chairman of the Securities and Exchange Commission, Christopher Cox, sought to calm investors, telling reporters that "we have a good deal of comfort about the capital cushions" at Bear and other large investment houses.
By Sunday, March 16, Federal Reserve and administration officials had orchestrated a $30 billion rescue of the firm, and the firm announced that its stock, which last year had been trading at $171 a share, would be sold to Morgan Chase for $2 a share. The offer was later revised to $10.
Under questioning by Senator Christopher Dodd, the committee's chairman, both Ben Bernanke, the chairman of the Fed, and Geithner said they played no role in setting the price, which was one of the most controversial elements of the deal.
"We had no interest or no concern about the stock price that was evaluated," Bernanke testified.
But in response to the same question, the Treasury under secretary Robert Steel, said his boss, Paulson, had said in the negotiations that the price should be low because the deal was being supported by a $30 billion taxpayer loan. He said a lower price was desirable to make the broader point to the markets that by rescuing the bank, the government did not want to encourage risky behavior by other large institutions, a concept known as "moral hazard."
"There was a view that the price should not be very high or should be toward the low end" Steel said.
"With regard to the specifics, the actual deal was negotiated, or transaction was negotiated, between the Federal Reserve Bank of New York and the two parties. It was our perspective, as I said, that moral hazard wanted to be protected as much as possible, and so therefore a lower price was more appropriate and there were lots of terms and conditions."
Bernanke and Geithner said that in exchange for the $30 billion loan, the Federal Reserve Bank was given investment grade securities and collateralized mortgage obligations, the majority of which come from government-sponsored institutions like Freddie Mac.
They said that under the terms of the deal, an investment manager retained by the Federal Reserve Bank would have 10 years to dispose of the assets. That condition would eliminate the need to sell the assets quickly in a fire sale. Moreover, JPMorgan Chase later agreed to absorb the first $1 billion of any loss that might occur on the loan.
The testimony also disclosed that regulators were unaware of Bear's precarious health and did not know until the afternoon of March 13, a Thursday, that the firm was planning to file for bankruptcy protection the next morning.
Pummeled by market rumors of insolvency, the investment house lost more than $10 billion -or more than 80 percent - of its available cash in a single day. Only a few days earlier, the chairman of the Securities and Exchange Commission, Christopher Cox, sought to calm investors, telling reporters that "we have a good deal of comfort about the capital cushions" at Bear and other large investment houses.
By Sunday, March 16, Federal Reserve and administration officials had orchestrated a $30 billion rescue of the firm, and the firm announced that its stock, which last year had been trading at $171 a share, would be sold to Morgan Chase for $2 a share. The offer was later revised to $10.
Under questioning by Senator Christopher Dodd, the committee's chairman, both Ben Bernanke, the chairman of the Fed, and Geithner said they played no role in setting the price, which was one of the most controversial elements of the deal.
"We had no interest or no concern about the stock price that was evaluated," Bernanke testified.
But in response to the same question, the Treasury under secretary Robert Steel, said his boss, Paulson, had said in the negotiations that the price should be low because the deal was being supported by a $30 billion taxpayer loan. He said a lower price was desirable to make the broader point to the markets that by rescuing the bank, the government did not want to encourage risky behavior by other large institutions, a concept known as "moral hazard."
"There was a view that the price should not be very high or should be toward the low end" Steel said.
"With regard to the specifics, the actual deal was negotiated, or transaction was negotiated, between the Federal Reserve Bank of New York and the two parties. It was our perspective, as I said, that moral hazard wanted to be protected as much as possible, and so therefore a lower price was more appropriate and there were lots of terms and conditions."
Bernanke and Geithner said that in exchange for the $30 billion loan, the Federal Reserve Bank was given investment grade securities and collateralized mortgage obligations, the majority of which come from government-sponsored institutions like Freddie Mac.
They said that under the terms of the deal, an investment manager retained by the Federal Reserve Bank would have 10 years to dispose of the assets. That condition would eliminate the need to sell the assets quickly in a fire sale. Moreover, JPMorgan Chase later agreed to absorb the first $1 billion of any loss that might occur on the loan.
"Our system has many strengths," Geithner said. "But to be direct about it, I think we've suffered a very damaging blow to confidence in the credibility of our financial system."
Cox, the chairman of the Securities and Exchange Commission, testified that Bear's failure on March 13 and 14, Thursday and Friday, to obtain financing even though it had what he called "high-quality collateral" was "an unprecedented occurrence."
Cox strongly suggested in response to questions by several senators that the commission was investigating whether there might have been unlawful manipulation of Bear's stock price in the days leading up to the run on Bear.
The Thursday afternoon alert to the commission led to a round of evening and early morning negotiations, and at 5 a.m. on Friday, members of the Federal Reserve voted over the telephone to grant a loan, through JPMorgan Chase, to Bear Stearns.
Schwartz, Bear's chief executive, said he thought the action had bought him 28 days to raise cash or find a buyer.
"We believed at the time that the loan and corresponding back-stop from the New York Fed would be available for 28 days," Schwartz said. "We hoped this period would be sufficient to bring order to the chaos and allow us to secure more permanent funding or an orderly disposition of assets to raise cash, if that became necessary."
But by the end of the day, with continuing problems surfacing and the downgrading of the firm's credit rating, he said he was told by the Federal Reserve of New York that he had misunderstood the terms of the deal. He was told that the loan would expire on Sunday and that he had to find a buyer for the bank by then - before the Asian markets opened. The decision, Schwartz testified, left him with no negotiating leverage as talks proceeded with JPMorgan Chase.
"On Friday night, we learned that the JPMorgan credit facility would not be available beyond Sunday night," Schwartz said.
"The choices we faced that Friday night were stark: find a party willing to acquire Bear Stearns by Sunday night or face what my advisers were telling me could be a bankruptcy filing on Monday morning, which could likely wipe out our shareholders and cause losses for certain of our creditors and all of our employees."
Schwartz said his misunderstanding of the agreement was "an honest disagreement as to the words" of the loan.
"Everything happened on a very, very short time frame," he said.
Asked about the adequacy of the price paid to Bear Stearns, Schwartz said he had no alternative.
"All the leverage went out the window when we were told we had to have a deal done by the end of the weekend," he said.
James Dimon, the chairman and chief executive of JPMorgan Chase, offered a slightly different view on the question.
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