Bernanke calls for new Fed power

Federal Reserve Chairman Ben S. Bernanke said Tuesday regulators should be empowered to close down investment banks like Bear Stearns that are deemed “too big to fail,” but with action by Congress unlikely this year, the Fed may have to keep providing emergency loans to Wall Street to forestall any more spectacular failures.

In a speech addressing curing the causes of the housing and mortgage crisis, Mr. Bernanke also said the Fed should have more power to regulate Wall Street firms and the complex financial products that they create, like the estimated $250 billion of credit swaps and derivatives that the Fed was forced to help guarantee in its rescue of Bear Stearns in March.

To address the serious deterioration of lending standards that contributed to the crisis, he said the Fed will give its final blessing next week to rules banning so-called “liar loans” and other loose lending practices in the future.

“Recent experience has illustrated once again that financial instability can have serious economic costs,” he said at a forum sponsored by the Federal Deposit Insurance Corp. (FDIC), noting that the credit crisis that broke out nearly a year ago has been the underlying cause of the U.S. economy’s weakness ever since.

Revisions to banking laws going back as far as 1913 are needed to ensure the Fed and other regulators are better prepared to prevent and address future crises, he said.

Jamie Dimon, chief executive of JP Morgan Chase & Co., which acquired Bear Stearns at the Fed’s behest and took on most of the firm’s extensive liabilities, said the financial markets would have faced a “catastrophe” had the Fed not engineered the extraordinary rescue.

But he too called on Congress to pass procedures that will enable regulators to close down Wall Street firms when they fail in the future, the same way the FDIC closes and liquidates insolvent banks today.

Their comments came as another major mortgage lender, IndyMac Bank, announced it was stopping its lending business and was experiencing “elevated levels” of withdrawals.

The beginning of a possible run on the bank’s deposits prompted FDIC Chairman Sheila Bair to say that she does not expect consumers to be hurt by what is expected to be a rash of bank failures this year.

“People should not worry,” she told Bloomberg Television. “Nobody’s ever lost a penny of insured deposits.”

Ms. Bair was the first one to call for new powers to close investment banks this year. Treasury Secretary Henry M. Paulson Jr. recently joined in the chorus, saying such new authorities will be critical to maintaining stability and preventing bailouts in the future.

Closing down a large investment bank would be “complicated, but we’re going to need that option,” Mr. Dimon said. “No one should be too big to fail.”

Top Wall Street firms and banks from Lehman Brothers to Citibank and Merrill Lynch have run into rumors of insolvency as they reported a seemingly endless string of credit losses totaling about $400 billion this year.

The investment banks have been borrowing heavily from the Fed’s discount window since March, and analysts say that may have prevented one or two of them from collapsing in Bear Stearns’ footsteps.

Mr. Bernanke said he may need to keep that window open until 2009, when he hopes the financial crisis will have subsided and a new president and Congress are installed.

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