Bear Stearns deal sparks Senate probe
WASHINGTON --Bear Stearns shareholders aren't the only ones questioning the bargain-basement buyout of the investment bank.
Top lawmakers want more information about the government's role in propelling the sale of
Sen. Christopher Dodd, D-Conn. called top officials at the Federal Reserve, Treasury Department and Securities and Exchange Commission to testify at a hearing next Thursday examining the government's role in the Bear Stearns sale.
Dodd, chairman of the Senate Banking Committee, said in a statement that the deal "raises serious public policy questions" about the role of government agencies in encouraging the deal.
He also called the chief executives of Bear Stearns and JPMorgan to join Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke at the hearing.
Also Wednesday, Sens. Max Baucus, D-Mont., and Charles Grassley, R-Iowa, the chairman and senior Republican on the Senate Finance Committee, sent letters to at Bear Stearns, JPMorgan, the Fed and Treasury asking for a detailed set of documents on the deal by Friday.
The Federal Reserve is providing $29 billion in backing for that deal, raising concerns that the Fed, and ultimately U.S. taxpayers, could wind up on the hook. Supporters of the Fed's role say it was needed to prevent a panic from spreading on Wall Street that could have derailed the overall economy, but some lawmakers are skeptical.
"Americans are being asked to back a brand-new kind of transaction, to the tune of tens of billions of dollars," Baucus said in a statement, adding that lawmakers want to "pin down just how the government decided to front $30 billion in taxpayer dollars for the Bear Stearns deal."
Grassley said lawmakers want to examine "whether the taxpayers will lose money here, what kind of precedent this sets for federal involvement when other firms overextend themselves." He added that the deal raises questions about "whether top executives will come out better than the rank-and-file workers who weren't in the room negotiating."
The new agreement calls for the Fed to assume control of $30 billion of Bear Stearns' assets, which will be managed by New York-based investment firm BlackRock Inc. If there are losses on those assets, JPMorgan will take responsibility for the first $1 billion, with the Fed absorbing the rest.
If the Fed does lose money, the central bank's payments to the government could be reduced. The 12 Federal Reserve banks paid $34.4 billion of their $41.9 billion in total income to the Treasury last year, the majority of which was earned through income on government-backed securities.
Representative of Bear Stearns and JPMorgan couldn't immediately be reached for comment. Spokeswomen for the Treasury Department and the Fed said they would respond to the senators' request.
Rep. Henry Waxman, D-Calif., who heads the House Oversight and Government Reform Committee, is also collecting information for an inquiry, a committee aide said last week.
In addition to the Bear Stearns rescue, the Fed, in the broadest use of its lending authority since the 1930s, is letting squeezed Wall Street investment houses go directly to the central bank for emergency loans. That had been a privilege reserved for commercial banks.
The near-collapse of Bear Stearns has prompted calls for tighter controls over investment banks -- including stricter cushions against losses. The Bush administration aims to soon release its own blueprint for regulatory overhaul.
"This latest episode has highlighted that the world has changed as has the role of other nonbank financial institutions and the interconnectedness among all financial institutions," Paulson said in a speech to the U.S. Chamber of Commerce, in which he said the events at Bear Stearns underscore a need to bring investment banks under the same kind of federal oversight commercial banks receive.
Rep. Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, last week unveiled a proposal to give the Fed or a new regulator the power to supervise the operations of major financial players. Critics see the current regulatory system as ineffective and unwieldy patchwork. The Fed, divisions of the Treasury Department and the Securities and Exchange Commission each have jurisdiction over different types of financial institutions.
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Associated Press Writer Jeannine Aversa contributed to this report. 