Congress to Probe U.S. Role in Bear Stearns Sale
Thursday, March 27, 2008
Two Senate committees said yesterday that they will investigate the government's role in the sale of investment bank Bear Stearns to J.P. Morgan Chase.
The Federal Reserve helped orchestrate the sale about two weeks ago, rescuing the Wall Street giant from bankruptcy, and pledged billions of dollars to back the firm's risky securities. While the bank's collapse could have shaken the world's financial system, the deal has been criticized by lawmakers from both parties as a government "bailout" that rewards financial mistakes by removing the consequences of failure.
Senate Finance Committee Chairman Max Baucus (D-Mont.) and ranking Republican Charles E. Grassley (Iowa) yesterday requested details of the sale in a letter sent to Bear chief executive Alan Schwartz, J.P. Morgan chief executive James Dimon, Treasury Secretary Henry M. Paulson Jr., Federal Reserve Chairman Ben S. Bernanke and New York Federal Reserve President Timothy F. Geithner. The senators did not say whether they would hold a hearing on the matter.
"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. "Economic times are tight on Main Street as well as on Wall Street, and we have a responsibility to all taxpayers to review the details of this deal."
Separately, Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) asked the same executives and government officials, as well as Securities and Exchange Commission Chairman Christopher Cox, to appear at a hearing on the deal next Thursday.
"While it is imperative to maintain the orderly structure of our markets, the sale agreement between JPMorgan Chase and Bear Stearns raises serious public policy questions," Dodd said in a statement.
The central bank originally put up public money to guarantee $30 billion of risky securities owned by Bear Stearns. Then on Monday, the deal between the investment banks was reworked with the sale price jumping to $10 a share from $2, appeasing angry Bear Stearns stockholders.
In the revised deal, J.P. Morgan agreed to cover the first $1 billion in losses if the value of Bear Stearns's securities fell, with the Fed responsible for losses beyond that up to $29 billion.
In their inquiries, Baucus and Grassley asserted the Finance Committee's oversight responsibilities concerning the use of public money.
The senators asked for a memorandum detailing all steps regarding the deal, a memorandum describing the assets to be secured by the Fed, copies of all documents the parties intend to file with the SEC or other regulatory bodies, the names of all negotiators who represented each party and the names of lawyers, accountants, employees and other professionals involved in the transaction.
Similarly, Dodd said it was the Banking Committee's responsibility to review the transaction because public funds had been put at risk.
The Treasury, Fed and a J.P. Morgan spokesman said they would work with the committees. A Bear Stearns spokesman did not return a call seeking comment.
The Treasury and Fed may want to limit how much information they disclose because the deal between J.P. Morgan and Bear Stearns is still pending and there is already shareholder litigation against the Bear Stearns board for agreeing to the low sale price.
Bernanke is scheduled to appear in front of the Congressional Joint Economic Committee on Wednesday and is likely to be asked about the Fed's role in the sale.
Staff writers Neil Irwin and David Cho contributed to this report.