Fed to look at high-risk contracts on Greek debt

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Federal Reserve Chairman Ben S. Bernanke told lawmakers Thursday that the central bank is looking into the use by Goldman Sachs and other Wall Street firms of high-risk financial instruments to make bets that Greece would default on its debt.

Mr. Bernanke said the Fed is examining companies’ use of credit default swaps, a form of insurance against bond defaults. Mr. Bernanke made the comments at the start of a Senate Banking Committee hearing. It marked the second day that the Fed chief testified on Capitol Hill about the state of the economy.

“Obviously, using these instruments in a way that intentionally destabilizes a company or a country is counterproductive,” Mr. Bernanke said, adding that the Securities and Exchange Commission probably will be looking into this matter as well.

“We’ll certainly be evaluating what we can learn from the activities of the holding companies that we supervise here in the U.S,” Mr. Bernanke said.

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The panel’s chairman, Sen. Christopher Dodd, Connecticut Democrat, said he is troubled that this practice could worsen Greece’s debt crisis.

“We have a situation in which major financial institutions are amplifying a public crisis for what would appear to be for private gain,” Mr. Dodd said.

Mr. Dodd wondered whether there ought to be limits on the use of credit default swaps to prevent “the intentional creation of runs against governments.”

On another topic, Mr. Bernanke said that the snowstorms and bad weather that recently have affected the country likely will have a short-term — but not permanent — impact on unemployment and layoffs. He said policymakers will “have to be careful about not overinterpreting” upcoming data.

Even though the economy is growing once again, senators on both side of the aisle worried about high unemployment — now at 9.7 percent — rising home foreclosures and difficulties people and businesses have in getting loans.

“The state of our economy as a whole may be improving, but if we’re talking about the situation of ordinary American families, I think I can sum up this recovery in three words: not good enough,” Mr. Dodd said.

Senators pressed Mr. Bernanke for ideas about what Congress can do to help out, especially in bringing down unemployment. The Senate on Wednesday approved a package aimed at generating jobs by giving companies a tax break for hiring the unemployed.

Mr. Bernanke shied away from providing recommendations but did say that if additional stimulus measures are approved, it would be “very constructive” to pair them with a plan on how the government intends to lower record-high deficits down the road.

On the economy, Mr. Bernanke repeated the message he delivered Wednesday to the House Financial Services Committee: that record-low interest rates are still needed to make sure that the budding economic recovery is lasting and to help relieve high unemployment.

And, Mr. Bernanke again argued against Senate efforts to strip the Fed of its powers to regulate banks, saying such a move would be a “grave mistake.”

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