Buffett backs Fed over Bear Stearns

OMAHA, Nebraska (Reuters) - Warren Buffett on Saturday said the U.S. Federal Reserve was correct in deciding to bail out Bear Stearns BSC.N, the Wall Street investment bank that faced imminent bankruptcy before agreeing in March to be acquired by JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz).

The central bank, led by Chairman Ben Bernanke, helped broker the bailout, and agreed to guarantee $29 billion (14.7 billion pounds) of Bear's assets. JPMorgan, the third-largest U.S. bank, agreed to pay $10 per share for Bear.

"I think the Fed did the right thing in stepping in on Bear Stearns," Buffett said at the annual meeting of his Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research, Stock Buzz) (BRKb.N: Quote, Profile, Research, Stock Buzz) insurance and investment company. "Just imagine the thousands of counterparties around the world having to undo contracts."

Buffett said the episode illustrates how a few investment banks and some commercial banks may have grown too large to effectively manage risk, though they will most of the time.

"The big investment banks, a number of them, and big commercial banks, I think they're almost too big to manage effectively from a risk standpoint in the way they've elected to conduct their business," he said. "You need someone at the top whose DNA is very, very much programmed against risk."

(Reporting by Jonathan Stempel; editing by Jackie Frank)