Congress Eyes Collapse of Bear Stearns

Capitol Hill is finally taking notice of the Federal Reserve and its unprecedented programs to pour liquidity into the market. As banks borrowed a staggering $19 billion a day from the Fed this week — an increase of more than 1,800% over last week — and adjusted to the fact that the Fed had helped shield Bear Stearns from insolvency, members of Congress are beginning to question the impact of these decisions.

"I've instructed my staff to delve into the details of the deal," Senator Grassley, the top Republican on the Finance Committee, said yesterday in a statement on the Bear Stearns situation. "I want to understand what the downside risk for the taxpayer is and any upside potential."

The Fed's intervention in the Bear Stearns deal — it helped negotiate JPMorgan Chase & Co.'s acquisition of the bank for $2 a share and agreed to extend up to $30 billion to facilitate the sale — is riling both Republicans and Democrats, experts say.

Republicans are concerned about the precedent it could set for other financial institutions facing insolvency, while Democrats are hoping the Fed's intervention with Bear Stearns will give them greater leverage in their efforts to spur a government guarantee of mortgages.

Treasury Secretary Henry Paulson and the Bush administration have so far resisted efforts by two Democrats, Rep. Barney Frank, chairman of the House Committee on Financial Services, and Senator Dodd, Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, to stave off foreclosures through broad government support for homeowners who can no longer afford their mortgages.

"There has been a tug of war over how much the government should be involved in mortgage foreclosures, and it may be difficult now for the government to say it is okay to help wealthy investment bankers but not middle income Americans who are poised to lose their homes," a resident scholar at the American Enterprise Institute, Norman Ornstein, said.

The administration is "going to have to live with helping Wall Street and doing nothing for Main Street," a spokesman for Mr. Frank, Steven Adamske, said. "The only way to fix this is solve housing crisis."

At a speech yesterday, Mr. Frank laid out several proposals to bolster the markets, including greater regulation of investment banks. These investment banks, which are not as closely regulated as commercial banks, are now empowered to borrow from the Fed under a new liquidity program; traditionally, only federally-regulated commercial banks have been able to access these funds.

"The banks have been given access to the discount window, but with none of the responsibilities that come with that regulation," Mr. Adamske said.

Mr. Frank, who is hoping to start scheduling hearings on this by early summer, also called for consolidation of some regulators, and to reassess the capital requirements of financial institutions.

But not everyone is convinced that Congress, which is responsible for oversight of the Fed, will have much impact.

"I assume they are simply interested in garnering some publicity for themselves—I can't imagine them really doing anything," a senior fellow at the Cato Institute, Daniel Mitchell, said. "Normally we would expect the administration to have some responsibility into looking into the Fed's actions, but it is so desperate to preserve a good legacy for Bush they will just put on Band-Aids until after he leaves."

There is a growing stable of politicians looking into the Bear Stearns buyout. Senator Baucus, chairman of the Senate Finance Committee, and Rep. Henry Waxman, who leads the House Oversight and Government Reform Committee, have also both been vocal in their intention to examine the deal. In addition, the Securities and Exchange Commission is reportedly investigating the Bear Stearns deal, focusing on whether investors took bets that the bank's shares would drop while simultaneously spreading rumors of its collapse.