US Officials Defend Bear Stearns Actions

In his testimony Wednesday, Bernanke said the Fed and other government agencies were informed on March 13 that without help Bear Stearns would have to file for bankruptcy the next day.

He said that "the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain."

As part of marathon negotiations over the weekend of March 15-16, the Fed originally agreed to take $30 billion in securities off the books of Bear Stearns to facilitate the acquisition of the firm by JP Morgan Chase & Co. for an original price of around $2 a share. A year ago, Bear Stearns was trading at around $150 a share.

After an uproar over the terms of the sale, the share price was boosted to around $10 and JP Morgan agreed to assume the risks for the first $1 billion in losses that might occur, lowering the Fed's potential risk to $29 billion.

Bernanke said he did not believe the central bank would lose money on the deal and could in fact make money. He said he did not consider the transaction a bailout because of the losses sustained by Bear Stearns shareholders.

"We did what we did because we felt it was necessary to preserve the integrity and viability of the American financial system, which in turn is critical for the health of the economy," Bernanke said.

The Fed's regional bank in New York hired BlackRock Financial Management Inc. to manage the $30 billion portfolio of securities the Fed obtained from Bear Stearns. Bernanke said BlackRock was "reasonably confident that we will be able to recover the full amount if we dispose of these assets on a measured basis, rather than sell them all at once."

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