WASHINGTON — Former Treasury Secretary Henry Paulson said Thursday the U.S. government-brokered rescue sale of Wall Street firm Bear Stearns to JPMorgan Chase & Co. in March 2008 held off the financial crisis for much of that tumultuous year.
WASHINGTON — Former Treasury Secretary Henry Paulson said Thursday the U.S. government-brokered rescue sale of Wall Street firm Bear Stearns to JPMorgan Chase & Co. in March 2008 held off the financial crisis for much of that tumultuous year. "If Bear had not been rescued and it had failed, then the meltdown we began to see after Lehman had gone would have started months earlier, and we would have really been in the soup," Paulson said. He testified at a hearing of the Financial Crisis Inquiry Commission, which is investigating the 2008 crisis and the so-called "shadow" banking system. Paulson cautioned that overreaching on financial overhaul legislation now being debated in the Senate could stifle innovation in the markets. Paulson helped engineer the buyout of Bear Stearns as it veered toward collapse. The Federal Reserve provided a $29 billion federal backstop to JPMorgan Chase in the deal. Paulson said the Bear Stearns rescue highlighted weaknesses in the regulatory system, but officials were unable to fix them before Lehman Brothers collapsed six months later. "No one had the authority to guarantee investment bank liabilities or to put in capital," Paulson said, adding that officials lacked the power to wind down big firms. With no suitor available to rescue Lehman, there was no choice but to allow it to fail, Paulson recounted. Critics have said Lehman should not have been allowed to fail, and the decision not to rescue it set off the panic that nearly froze global lending markets. Architects of the federal bailout, including Paulson and the current Treasury secretary, Timothy Geithner, have said they simply didn’t have the power to save the company without private sector help. Addressing the market for so-called repurchase agreements, which banks depended on for massive daily loans from other financial companies — Paulson said no one had recognized its danger as it grew. "It grew like topsy-turvy," he said. "The system didn’t keep up, the infrastructure didn’t keep up … and the participants got sloppy in their credit decisions." A hearing by the inquiry panel on Wednesday highlighted the role of the so-called "repos" in Bear Stearns’ collapse: the firm had been borrowing $50 billion to $60 billion in repos on a daily basis from rival Wall Street banks. Paulson also criticized Wall Street credit rating agencies that gave unrealistically high ratings to securities before the crisis. He said he supports legislation that would force them to disclose more and subject them to more scrutiny from regulators. Laws and regulations should no longer make specific references to ratings provided by Fitch, Moody’s and Standard & Poor’s, Paulson said. "I don’t want the rating agencies to be held up as the font of all truth," he said. He said investors should "do some thinking for themselves." Asked about the complex investments arranged by banks that have been criticized as dangerous betting in the aftermath of the housing crisis, Paulson said "That business, I think, is a very beneficial business, a very legitimate business." But he said it must be conducted with high standards and integrity. For two years before he became Treasury secretary, Paulson headed Wall Street powerhouse Goldman Sachs, which sold to investors tens of billions of collateralized debt obligations — pools of securities tied to mortgages or other types of debt. The Securities and Exchange Commission has accused Goldman of civil fraud in connection with its disclosures to investors on one of the CDOs. Paulson said he did not recall the specifics of the Goldman transactions. Geithner, who was scheduled to appear later before the panel, says a root cause of the financial crisis was Congress’ failure to give regulators enough power to rein in risk-taking by financial firms operating outside traditional rules. As president of the New York Federal Reserve in 2008, Geithner was one of the key architects of the government’s response to the crisis and the federal bailout. Copyright 2010 The Associated Press.
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