Former U.S. Federal Reserve Chairman Paul Volcker speaks in New York about practices leading to the current financial market crisis, the role of the Federal Reserve in preventing and dealing with such crises and the need for changes in market regulation.
Former Federal Reserve Chairman Paul
Volcker questioned the central bank’s decision to rescue Bear
Stearns Cos. with a $29 billion loan, saying it was at "the
very edge” of its legal authority.
"The Federal Reserve has judged it necessary to take
actions that extend to the very edge of its lawful and implied
powers, transcending in the process certain long-embedded
central banking principles and practices,” Volcker said in a
speech to the Economic Club of New York.
Fed Chairman Ben S. Bernanke last month agreed to lend
against Bear Stearns securities, paving the way for JPMorgan
Chase & Co. to buy its Wall Street rival. Bernanke, who worked
with Treasury Secretary Henry Paulson to broker the bailout,
last week defended the move as necessary to prevent "severe”
damage to financial markets.
Volcker, the Fed chairman from 1979 to 1987, had implicit
criticism for U.S. regulators and market participants who
allowed "excesses of subprime mortgages” to spread into “the
mother of all crises.” The Fed’s Bear Stearns loan was unusual,
"What appears to be in substance a direct transfer of
mortgage and mortgage-backed securities of questionable pedigree
from an investment bank to the Federal Reserve seems to test the
time-honored central bank mantra in time of crisis: lend freely
at high rates against good collateral; test it to the point of
no return,” he said.
Volcker Says Fed’s Bear Loan Stretches Legal Power
John Brinsley and Anthony Massucci
Bloomberg, April 8 2008