Paulson defends the rescue of Bear Stearns

The Fed rescued Bear Stearns Co. Friday
March 16, 2008 12:00:00 AM PDT
Treasury Secretary Henry Paulson on Sunday defended the Federal Reserve's decision to help rescue Bear Stearns Co., the teetering Wall Street investment bank. "The right decision here, I am convinced, was the decision that the Fed made, which was to do things, work with market participants to minimize the disruptions," Paulson said.

The central bank on Friday stepped in to keep Bear afloat and prevent more damage to the nation's financial system if Bear's problems caused other financial firms to fall.

"When you go through a period like this," he said in a broadcast interview, "policymakers need to balance various consequences."

The Fed, using a Depression-era procedure, raced to Bear Stearns' aid along with JPMorgan Chase & Co. Bear. Bear Stearns had made a fortune in mortgage-backed securities but faced a possible collapse after those investments soured. Wall Street nose-dived as fears spread about whether other big firms were in jeopardy.

Some critics contend that the Fed's move was akin to a government bailout - something the Bush administration has repeatedly said it is against.

"Well, every situation is different. We have to respond to the circumstances we're facing today," Paulson said. "And my concern is to minimize the impact on the broader economy as we work our way through this situation, and again, the stability of our financial situation."

Asked whether other financial companies may be in a situation similar to Bear Stearns', Paulson did not directly answer. He did seek to strike a confident tone.

"Well, our financial institutions, our banks and investments banks are very strong," he said. "And I'm convinced that they're going to come out of this situation very strong."

Paulson's comments come as a growing number of economists believes the spreading fallout from a severe credit crisis has pushed the country into its first recession since 2001. The situation has led to record-high home foreclosures, forced financial companies to take multibillion losses from bad mortgage-linked investments and rocked Wall Street.

Consultations about the Bear Stearns situation continued through the weekend among representatives from the Fed, Treasury Department, financial institutions and others.

President Bush planned to meet on Monday with his advisory panel on financial markets, whose members include Fed Chairman Ben Bernanke and Paulson. The panel on Thursday recommended stricter regulation of mortgage lenders as part of a broad effort to prevent a repeat of a credit crisis threatening to drive the country into recession.

Paulson appeared on ABC's "This Week," the first of three scheduled talk show appearances Sunday.


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