Bonds News

TEXT-UPDATE 1-Bernanke's comments on asset auction process

(Adds comments, paragraph 3 to end)

WASHINGTON, Sept 23 (Reuters) - The following is the text of remarks Federal Reserve Chairman Ben Bernanke made on the Treasury’s proposed asset purchase program in his opening comments before the Senate Banking Committee. The remarks were not included in his prepared remarks.

“Let me come to the critical point: I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.

“First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down. Second, liquidity should begin to come back to these markets. Third, removal of these assets from balance sheets and better information on value should reduce uncertainty and allow the banks to attract new private capital. Fourth, credit markets should start to unfreeze. New credit will become available to support our economy. And fifth, taxpayers should own assets at prices close to the hold-to-maturity values, which minimizes their risk.

“Now how to make this work. To make this work, we do need flexibility in design of mechanisms for buying assets and from whom to buy. We do not know exactly what the best design is. That will require consultation with experts and experience with alternative approaches.

“Second, understanding the concerns and the worries of the committee, we cannot impose punitive measures on the institutions that chose to sell assets. That would eliminate or strongly reduce the participation and cause the program to fail.

“Remember the beneficiaries of this program are not just those who sell the assets, but all market participants in the economy as a whole.

“But finally and very importantly, this is not to say the financial institution should not be reformed. It should be, it’s critical. I agree with the Treasury secretary, the Federal Reserve will give full support to fundamental reform of the financial industry.

“But whatever reforms the Congress makes should apply to the whole industry, whether they participate in this program or not. So in summary, I believe that under the Treasury authority being requested, a program can be undertaken that will help establish reasonable hold-to-maturity prices for these assets.

“Doing that will restore confidence and liquidity to financial markets and help the economy recover without an unreasonable fiscal burden on taxpayers. So I urge you to act as soon as possible. Thank you.”