Bernanke: Fed had little choice but to rescue Bear

WASHINGTON (Reuters) - The U.S. Federal Reserve saw no choice but to orchestrate a dramatic rescue of Bear Stearns last month after the investment bank warned bankruptcy was imminent, Fed Chairman Ben Bernanke said on Wednesday.

In a speech to the congressional Joint Economic Committee, Bernanke sought to explain the U.S. central bank's controversial decision to offer backing of as much as $30 billion in government money through JPMorgan Chase to prevent a sudden collapse of Bear Stearns.

He said the Fed was worried that a sudden collapse of Bear could have inflicted serious pain on already limping financial markets, with dangerous implications for the broader economy.

It was Bernanke's first testimony since the rescue, and he faced tough questioning from some members of Congress who worried that taxpayers' money was unjustifiably put at risk to bail out a Wall Street bank.

On March 13, the day before the Fed and JPMorgan announced an emergency funding deal, Bear informed the Fed and other government agencies that it would have to file for Chapter 11 bankruptcy protection the next day unless alternative sources of funds became available, Bernanke said.

"This news raised difficult questions of public policy," Bernanke said in his speech on Wednesday.

On March 16, JPMorgan agreed to buy Bear for a fire-sale price of $2 per share in a Sunday night announcement that shocked financial markets because Bear's stock had traded above $60 per share just the week before. The offer has since been raised to $10 per share.

"Normally, the market sorts out which companies survive and which fail, and that is as it should be," Bernanke said. "However, the issues raised here extended well beyond the fate of one company."

In his opening statement, Sen. Charles Schumer, the New York Democrat who chairs the committee, said the Bear Stearns rescue provided "some much-needed breathing room" for financial markets but also raised many troubling questions.

He noted that Bear was an early victim of the subprime mortgage mess when two of its hedge funds that bet heavily on such risky loans failed last summer, which perhaps should have served as an early warning about the bank's troubles.

"How far ahead did you know about Bear's problems?" Schumer asked. "Where was the SEC? Was this deal done on an ad hoc basis? Is the Fed going to set rules as to when they do this in the future? What criteria will you use? Are you and the SEC going to be more proactive in monitoring risk?"

Sen. Sam Brownback, a Kansas Republican, said he was concerned "when taxpayers' money becomes the skin in the game" to salvage a bank that took on risky investments.

Bernanke said that because the financial system is so interconnected, the sudden failure of Bear Stearns could have led to a "chaotic unwinding of positions" that could have shaken already fragile investor confidence and further undermined the economy.

A disorderly collapse could also have cast doubt on the financial positions of other firms that did business with Bear, he added.

"Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain," Bernanke said.

"Moreover, the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability."

(Reporting by Emily Kaiser; Editing by James Dalgleish)