Sen. Schumer endorses Fed actions, sees no moral hazard

WASHINGTON (Reuters) - The chairman of the U.S. congressional Joint Economic Committee on Monday endorsed the actions of the Federal Reserve to broker JPMorgan Chase's purchase of Bear Stearns to fend off what he said was "the closest thing to a bank panic since the Great Depression."

"The Fed's move was smart, timely and threads the needle just the right way. There is no moral hazard argument here against this action," Sen. Charles Schumer, a New York Democrat, said in a statement. "This was a totally necessary move to prevent these serious problems from spreading, and to avert a possible meltdown of the financial system."

Moral hazard is the concept that investors might take greater risks on the belief that government policy will protect them from suffering losses.

Schumer said he spoke Monday morning to Federal Reserve Chairman Ben Bernanke and JPMorgan Chase Chairman and Chief Executive Jamie Dimon and urged them to come up with a solution that would allow the parts of Bear that are redundant with JPMorgan to be sold to a financial institution without those redundancy issues, "so as to mitigate job losses in New York."

Schumer also sits on the Senate Banking Committee, which has jurisdiction over issues involving the financial services sector. He said regulation of investment banks is something that needs to be considered.

"Our financial markets have evolved so that we now have three types of entities: We have banks and they are pretty well regulated. We have investment banks, which were not regulated very much; and now we have hedge funds," the lawmaker said in a separate interview on CNBC.

The U.S. Securities and Exchange Commission monitors five of the major U.S. investment banks, including Bear Stearns. The agency's supervisory program allows it to respond quickly to any financial and operational weakness in firms.

"Investment banks are getting to the point where there are such inter-relationships with regular banks and they are so large that obviously they are getting into a too-big-to-fail situation and that probably means there ought to be a greater degree of regulation, and that's something that down the road, that Congress will look at," Schumer said.

Later on a call with reporters, Schumer said it was hard to believe that major complicated credit instruments that affect the health of the financial system are opaque and unregulated.

"That does not work, so we have to do something. What that is should be explored in the next few months," he said.

"I can't tell you the degree, but if you look at history, once the banks got some kind of guarantee and access to the window, they had to put up with a little more regulation."

On Sunday, the U.S. Federal Reserve set up a new program to provide cash to a wider range of big financial firms previously unable to borrow directly from the central bank.

But Schumer said that reshaping regulation is difficult because financial markets are globally linked.

"You can't have one country treating things one way and another country treating things another way."

Schumer asserted that the Fed's actions were not a bailout and said the risk of contagion in the financial markets was too big to do nothing.

"You run the risk of a full-fledged panic by doing nothing," he said. "Once that starts, you cannot stop it."

(Reporting By Joanne Morrison and Rachelle Younglai; Editing by Leslie Adler)