Bernanke: Shut banks imperiling system

WASHINGTON - Federal Reserve Chairman Ben Bernanke told a panel investigating the financial crisis that regulators must be ready to shutter the largest institutions if they threaten to bring down the financial system.

"If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved," Bernanke said Thursday while testifying before the Financial Crisis Inquiry Commission.

Bernanke also said it was impossible for the Fed to rescue Lehman Brothers from bankruptcy in 2008 because the Wall Street firm lacked sufficient collateral to secure a loan. Lehman's former chief executive told the panel a day earlier that the firm could have been saved but that regulators refused to provide help.

The Fed chief presented his analysis of the crisis and views on potential systemwide risks as the panel approaches the end of its yearlong investigation into the Wall Street meltdown.

The financial-overhaul law enacted this summer gives regulators the authority to shut down firms when their collapse poses a broader threat to the system. The process resembles the one used by the Federal Deposit Insurance Corp. to close failing banks.

FDIC Chairman Sheila Bair told the panel "the stakes are high" for regulators to effectively exercise their new powers.

Panel Chairman Phil Angelides said the new law will be an enormous test of will of the regulators.

Bair and Bernanke said tougher rules and market pressures will lead huge firms to voluntarily shrink themselves. Executives can no longer count on the government to bail them out if they veer toward failure, they said. Bernanke said that bailing out these institutions is not a healthy solution and that great improvement will come from the new law.

Bernanke led the economy through the financial crisis and the worst recession since the 1930s. The Federal Reserve took extraordinary measures to inject hundreds of billions into the battered financial system.

Former Lehman CEO Richard S. Fuld Jr. testified Wednesday that the firm could have been rescued. But the regulators refused to help - even though they later bailed out other big banks.

Bernanke disagreed. He said bailing out Lehman would have cost taxpayers billions.

by Marcy Gordon Associated Press Sept. 3, 2010 12:00 AM




Bernanke: Shut banks imperiling system