Regulators say Bear collapse showed weaknesses

By Patrick Rucker

WASHINGTON (Reuters) - The collapse and forced sale of Wall Street giant Bear Stearns BSC.N exposed the dangerous interconectedness of financial markets and the faulty oversight now in place, U.S. regulators said in prepared congressional testimony on Thursday.

Bear Stearns collapse came in only a matter of days and despite the firm having more than enough capital to meet existing tests of soundness, regulators were to tell the Senate Banking Committee, according to an advance text of the remark obtained by Reuters.

"Up to and including the time of its agreement to be acquired by JP Morgan Chase, Bear Stearns had a capital cushion well above what is required to meet the Basel standards," Securities and Exchange Commission Chairman Christopher Cox said in prepared remarks to the Senate Banking Committee.

The Basel capital framework sets reserve standards for the world's largest banks and Cox has said those guidelines may need to be tightened.

Despite those strong capital reserves, regulators said they worked together to facilitate a JP Morgan Chase (JPM.N) buyout of Bear Stearns to save financial markets from turmoil.

"Our focus was not on this specific institution, but on the more strategic concern of the implications of a bankruptcy," Treasury Undersecretary for Domestic Finance Robert Steel said in remarks prepared for delivery to the committee on Thursday.

"The failure of a firm that was connected to so many corners of our markets would have caused financial disruptions beyond Wall Street."

Cox said his agency had never contemplated a situation, which Bear faced, of not being able to obtain loans with strong collateral.

No SEC models take into account "the possibility that secured funding, even that backed by high-quality collateral such as U.S. Treasury and agency securities, could become unavailable," Cox said in the prepared remarks.

(Reporting by Patrick Rucker; Editing by Walker Simon)