Read part 1 of the live blog here.
By Alan Rappeport, FT reporter
11:42pm – And Mr Bernanke is out of the hot seat. That concludes our blogging for today. Sheila Bair, chairman of the FDIC, will be testifying this afternoon.
11:40am – Mr Bernanke acknowledged that mark-to-market may have exacerbated rapidly falling asset prices but that does not mean it should be abandoned at the expense of accurate accounting.
11:38am – Putting his accounting cap on, Mr Bernanke said that mark-to-market accounting increased the “pro-cyclicality” of the system, but said it is important to do our best to get market prices for assets that have markets. “I’m in favour of accurate accounting but I think there are sometimes problems when markets are very illiquid.” However, he is very cautious about applying fair value accounting to long-term loans of banks.
11:32am – Mr Bernanke explains that plugging what happened with housing prices into a standard macroeconomic model would not explain the financial crisis and that the housing crisis triggered broader problems and panic that caused the economy to seize up.
11:29am – Was the crisis caused by the infection or the weakness of the body, Mr Angelides asked. Mr Bernanke, sticking with the metaphor, said e. coli got into a weakened system with defences down and brought down the economy.
11:26am – Given the innovations in finance, the Fed needs to bring in other expertise to make it a more effective supervisor. However, he reminds the commission that the Fed will never have the resources that Wall Street has to oversee everything that it does and that it will need to rely on prices and spreads to gather information from insiders.
11:23am – Mr Angelides is getting to the wrap-up questions and wants know how confident Mr Bernanke feels about the Fed having the needed resources to be an effective regulator.
11:19am – Securitisation (the other end of the originate to distribute model) was a big part of the housing market bubble because new mortgages were in demand and origination standards got weaker, Mr Bernanke said.
11:11am – Crisis fall reading list: Mr Bernanke recommends crisis followers brush up on financial collapses by perusing the work of Markus Brunnermeier of Princeton and Gary Gorton of Yale.
11:05am – Commissioner Hennessy inquires about the solvency of Bear Stearns and Lehman, wondering if the bank runs were justified. Mr Bernanke said the Fed believes it was a combination of general fear and legitimate concerns about balance sheets and longer-term viability. “They live on confidence,” Mr Bernanke said.
10:59am – The Fed is trying to strengthen trading book requirements for banks, raising capital costs to reflect underlying risks.
10:52am – Why not try the Hail Mary pass, asks Mr Holtz-Eakin, wondering why not take the chance by opening the discount window to Lehman. Mr Bernanke said that the outcome appeared to be so certain that it was not worth the risk to taxpayers even in spite of the catastrophic consequences of the bank’s failure.
10:43am – Staying on the Lehman issue, Mr Bernanke is asked if the Fed board could have adopted a resolution to monetise any good assets that Lehman had? The Fed was prepared to do that but was told that the bank had far too little collateral available to come to the discount window and get enough cash to meet liquidity demands during the run. In that case, the Fed would be left holding large amounts of illiquid collateral.
10:37am – Commissioner John Thompson asks Mr Bernanke if he wishes he had done something to save Lehman. The Fed chair was clearly stumped by the Lehman collapse. “The only way we could have saved Lehman would have been by breaking the law, and I’m not sure I would have been ready for those consequences in our system of laws. I’m willing to be creative but…,” Mr Bernanke said. “I’m not prepared to go beyond my legal authorities. I don’t think that’s appropriate.”
10:35am – “I think one of the lessons of the crisis is that innovation is not always a good thing,” Mr Bernanke said.
10:31am – Fed bears responsibility regarding underwriting standards but had no enforcement authority, Mr Bernanke said. Risk management should also have been more effective because firms did not know their own exposures to subprime mortgages.
10:28am – The Fed is developing a quantitative surveillance mechanism that will look at a variety of financial indicators and is figuring out a new way to communicate that to the public.
10:25am – Commissioner Robert Graham is questioning Mr Bernanke on the key indicators of whether tougher regulation is working. The Fed chair is keeping a close eye on the cost of capital for firms – wider risk or CDS spreads – and return on equity.
10:20am – Ideally firms should be restructured in a way that makes economic sense, combining capital surcharges for firms that are systemically critical with resolution regimes that create more market discipline, Mr Bernanke explained. That would help firms resist the temptation to become so big that they are too big to fail.
