By Alan Rappeport, FT reporter
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10:15am – Discussing some counterfactuals, Mr Bernanke said he does not know how to stop bank runs through “cheery words”.
10:11am – Mr Bernanke said the Fed needs a more “inter-disciplinary” approach, with more finance people, economists and lawyers to make sure it has a full picture of risk.
10:04am – Mr Holtz-Eakin brings up Mr Bernanke’s famous remarks that troubles in the housing market would not spill over into the rest of the economy. Mr Bernanke said that the loss of $300bn – $400bn in equity was not a big deal relative to the size of the world economy, but did not recognize the extent of the systems falls and weakness that would amplify the subprime shock.
10:01am – Mr Bernanke reiterates his points about over-optimism about housing prices and “sketchy” mortgage lending innovations. “Of course prices couldn’t rise forever and once prices stopped rising the whole process unwound,” he said. The Fed chair also pointed to the fact that the US has been a net recipient of global capital flows and how that demand created the incentive to devise new, complex financial products related to the housing market.
9:58am – On to questions from Douglas Holtz-Eakin, who wants to know about the causes of the housing bubble.
9:54am – “Barring a midnight re-writing of the law”, Mr Bernanke said that the Fed no longer has the ability to bail-out a systemically critical firm, so the resolution authority that is in place needs to work.
9:52am – It’s puzzling that firms that packaged toxic securities ended up being so exposed to them, Mr Bernanke notes.
9:49am – Mr Bernanke said that the Fed is working to make sure that incentive compensation contracts reflect long-run returns on activities, not short-run returns – making executives have more “skin in the game”. Returns should be risk adjusted, he said, with a longer horizon looking at how deals worked out after many years.
9:45am – There was a fundamental difference, Mr Bernanke said, between AIG and Lehman. A loan to AIG could have been paid back because it still had a very substantial business that could be used as collateral. Lehman did not.
9:42am – Mr Thomas said he and his colleagues were uncomfortable with being presented with the emergency legislation and told that if they don’t sign it “the world as you know it will come to an end” and that such demands should not be repeated. In reply, Mr Bernanke said he wishes it had not come to that.
9:39am – Mr Thomas has been concerned about whether the executive branch is a “demand centre” or a “command centre” during a financial crisis.
9:35am – Unwinding big firms is not easy, Mr Bernanke said, but “living wills” that will be required for those firms under new regulations will make life easier for the FDIC in the event of a major unwinding. He also notes that the US needs international agreements, similar to tax treaties, on how to unwind firms across borders.
9:31am – On to questions from Bill Thomas, FCIC vice-chairman.
9:27am – “As far as I know the primary consideration was the knowledge that the failure of Lehman would have catastrophic consequences,” Mr Bernanke said, noting that he resisted making that statement at the time out of fear that such words would erode confidence further.
9:25am – Mr Bernanke calls the Great Depression and financial crisis his “bread and butter” – highlighting his academic credentials – and said that he never wavered in his view that everything possible should have been done to prevent the failure of Lehman.
9:23am – Mr Angelides is probing about the demise of Lehman Brothers and wants to know the mix of policy considerations that led to the decision to let Lehman fail. “Would you have saved Lehman if you had the legal authority?” he asked.
9:19am – New regulations in place should help reduce the risk of too-big-to-fail, Mr Bernanke said.
9:16am – The Fed acknowledges a change in philosophy where regulators had to rely more on firms assessing themselves rather than outside supervision because of the growing complexity of these firms. Fears about excessive regulation and companies fleeing to London and Tokyo were also a factor that made US regulations more lenient.
9:14am – Mr Bernanke said that the Fed had no authority to consider systemic risks when looking at the soundness of institutions such as as Fannie and Freddie, the mortgage lending giants. But he agrees that supervisors around the world underestimated the risks associated with firms lacking liquidity and that there were shortcomings on the part of regulators.
9:11am – The first question is why was there no downgrading of institutions until July 2008 or red flags about systemic risk. “Why such a big miss?” Mr Angelides wants to know.
9:09am – Time for the Q&A and Phil Angelides, chair of the FCIC, wants to know more about the roots of the crisis.
9:06am – Focusing on the housing market, Mr Bernanke says that the housing bubble was not necessarily caused by the Fed’s monetary policy early in the last decade but rather was more likely the result of “innovations” in the mortgage lending market and complacency about risk that grew out of the “Great Moderation” - a time of placid economic conditions that fuelled overoptimism about the housing market and supported the notion that prices would always rise.
9:02am – Ben Bernanke, chairman of the Federal Reserve, is now getting going with his testimony and promises not to take the full 10 minutes he is allowed. His testimony outlines the causes of the crisis and points to the problem of institutions being “too big to fail” as being the biggest lesson from the crisis.
Alan Rappeport, an economics and business reporter for the FT, is providing rolling coverage of Ben Bernanke’s questioning by the Financial Crisis Inquiry Commission panel today. Coverage on this blog will start at about 2pm UK time, 9am EST.
Related reading:
Fuld criticises Fed for letting Lehman fail – Tom Braithwaite, FT
