Hearing of the House Financial Services Committee - Systemic Risk and the Financial Markets

REP. AL GREEN: I think this is a most important hearing, and I greatly appreciate that you decided to have this hearing.

Chairman Bernanke, I want to thank you. I think it took great courage to do some of what you've done. You're in a tough position, and you've made some very difficult choices, and you've done it I think with the notion that you were doing it in the best interests of the country.

I thank you, Secretary Paulson, for some of the things that you've done. I've read some of your messages at home and abroad, and I think that the two of you understand that it is time for us to act, and I greatly appreciate.

Mr. Chairman, you indicated that because you did not have, and I'm paraphrasing, restraints imposed upon you, you felt it appropriate to move forward with the Bear Stearns for want of better terminology deal. Given that these things are always going to be different, and probably will not be a cookie-cutter approach to dealing with a Bear Stearns scenario, given this, and given that you have to act sometimes expeditiously because you have exigent circumstances, systemic problems, system failures that may erupt, do we need to clarify this area of law if you will such that there won't be any question whether you can act? And you indicated unless Congress said no you would move forward. But is there a need for some clarity in this area so that you can act without reservation or hesitation?

MR. BERNANKE: Well, the tool that we used was our 1303 authority which allows us to lend to individuals, partnerships and corporations so long as there are not other credit accommodations available. That was set up by Congress with the intention of creating a very flexible instrument that could be used in a variety of situations, and it allowed us to address the situation, which we did not anticipate, which we've not seen before. And so in that respect, having that flexibility I think was very valuable.

That being said, both in the short term, I think it'd be entirely appropriate for us to have discussions, as I have discussed personally with congressional leadership about what the will of the Congress and how we should be approaching these types of situations.

In the longer term, as Secretary Paulson's proposed, it'd be better if we had a more formal mechanism that created some hurdles for decision-making, that set a high bar in terms of when these kinds of powers would be invoked, and provided more than just lending tools. It's really not well suited in some cases to address systemically important failures.

So I think the ITC authority is an important authority, and has important flexibility. But I certainly agree that ultimately it's Congress' decision about, you know, in terms of advice, and in terms of legislation, about how they want their -- what the authorities addressing these kinds of situations.

REP. GREEN: For the short term, you are comfortable with the 1303 authority?

MR. BERNANKE: Well, we've needed it; we've used it in several contexts, and it does give us a lot of flexibility. I think prior to putting any constraints on that it would be important to provide some substitutes, alternative methods or approaches. We are dealing with systemically relevant failures.

REP. GREEN: Thank you. I appreciate the way you have approached dealing with some of these large financial institutions in terms of commenting on their strength or lack thereof, because perception has a lot to do with reality, and we don't want to create perceptions that can infringe upon reality.

With this understanding, as you approach, or as we approach trying to draft or craft the regulations that can have the policy impact we desire, we I think have to be very careful that we don't create the perception with the institution that there is something imminent about to occur. And I don't -- quite frankly know all of what we can do to prevent that perception from developing. I just know how important it is to prevent it.

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