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

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REP. BRAD SHERMAN (D-CA): Thank you, Mr. Chairman.

Mr. Bernanke, we see what happens when there is a lot of risk to financial institutions. We all want to reduce that risk. Would allowing financial institutions, including commercial banks, go into real estate, brokerage, or other lines of commerce, increase the financial risks we bear?

MR. BERNANKE: Well, the issue you are referring to of course is under Gramm-Leach-Bliley we can -- the Treasury and the Fed are empowered to allow banks or bank holding companies to enter activities that are incidental to financial activities.

The law will require us to make a determination as to whether that's incidental or not. But Congress obviously had concerns about this, and therefore, Congress intentionally prevented us from even making that determination. So we have not attempted to determine whether it meets the statutory test, nor have we done extensive analysis on the systemic implications of such a move.

So for the time being it seems to be pretty much a mute question.

REP. SHERMAN: So with Congress making the stance, you haven't even investigated whether you have the legal right to let that happen, and then having not determined the legal right you haven't done the economic analysis to see whether it would be a wise move, but in general, I would think that the greater you expand the rights of banks to engage in all kinds of non-financial commerce, the greater the risks that they face.

My other question is, Black Rock gets the contract to administer this portfolio. It was a no-bid contract. Will you provide us with a copy of that contract? And now that the immediate crisis has past, will you put asset management out to bid, or will Black Rock receive a long-term no-bid contract that would last until the portfolio is disposed of?

MR. BERNANKE: We will certainly provide you with all the important information, relevant information, associated with our contract with Black Rock. They are one of a relatively few number of firms that could address the needs that we have. And given the exigencies of the weekend, it was obviously beneficial that we could get their services in that very short -- short term notice.

We will be reviewing these conditions and terms, and trying to ascertain whether any additional steps are necessary. Again, at this point, I guess at this point there is not an immediate plan to change the company, since they have been working very effectively for us, and we think that we have a good arrangement with them.

REP. SHERMAN: Now that there's not a crisis situation, wouldn't you want competitive bidding on such an important contract?

MR. BERNANKE: We'll look into it.

REP. SHERMAN: Okay. I now have quite a number of questions for the record because I realize my time is limited, and I look forward to getting responses.

The first is whether off-balance sheet financially engineered instruments pose a risk to the major corporations of this country.

The second is whether we have moved to a system of capitalism for the poor and socialism for the rich. The pizzeria in my district goes out of business, they're not going to get any kind of bailout from the Fed, and the subordinated debt holder, namely, the guy's uncle who lent him money to start the place, he isn't going to get anything either.

I understand why the Fed acted in an emergency situation. But now we're no longer in an emergency situation. And the question is, what are we doing to make sure that those who should've borne the risk, the shareholders, the subordinated creditors, who are going to come out of this thing whole even though they bought subordinated debt, and the regular debtors of Bear Stearns are not contributing, and paying for, this $30 billion worth of risk that the taxpayers have borne.

Should we -- and I'd like both Treasury and the Fed to respond to this -- be looking to impose a tax on subordinated creditors, on the shareholders, to recapture for the Federal government a fair fee for the incredible risk that the federal government is assuming? Or should we just make this huge gift that no private sector company would ever engage in to those who are thought on Wall Street to be so important, something we'd never consider doing for a pizzeria in my district.

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