Avoid bailout of financial firms, says Bernanke

Federal Reserve Chairman Ben S Bernanke said government bailouts of large financial firms were “unconscionable” and must be ended as part of a regulatory overhaul following the worst financial crisis since the 1930s.

“It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms,” Bernanke said today in a speech in Orlando, Florida. “If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation.”  

Congress is considering a resolution mechanism for financial firms that are so large or interconnected to other institutions that their failure could damage the financial system. A plan by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, would allow the Federal Deposit Insurance Corp to liquidate a large firm after a panel of bankruptcy judges determines the company is insolvent and with approval of the Fed, FDIC and the Treasury Department.

The Fed chairman has faced criticism from Congress for bailouts that he said were intended to prevent a possible depression. Lawmakers including Dodd have criticized the Fed’s purchase of $29 billion of securities in March 2008 to facilitate the merger of Bear Stearns Cos with JPMorgan Chase & Co, and loans to keep American International Group Inc from default.  

All large financial firms rather than just big banks should be subject to stronger regulation, Bernanke told bankers gathered for the Independent Community Bankers of America convention. Shareholders and creditors should not be protected from losses in any plan, he said.

The Fed is revamping its approach to supervision of large banks, using economists and quantitative analysts to help with horizontal reviews targeting risks across the financial system, Bernanke said.