Bernanke grilling likely to weaken case for Fed as risk regulator

Written by Bloomberg | Updated: Jun 28 2009, 04:34am hrs
Chairman Ben S Bernankes grilling by legislators over Federal Reserve conduct in Bank of America Corps takeover of Merrill Lynch & Co may reduce the odds the central bank will win new powers in a regulatory overhaul.

Bernanke failed to resolve some lawmakers questions on whether the Fed bullied executives and stepped over other regulators in the name of financial stability in a three-hour congressional hearing on Thursday. Republicans asserted the Fed interfered with commercial decisions, and Democrats said it should have wrung more concessions in return for taxpayer aid.

Criticisms by members of both parties are likely to diminish support for the Obama administrations plan to make the Fed the single agency responsible for the largest and most interconnected financial institutions. The proposal, part of a broad revamp of bank regulation, would give the Fed power to dictate standards on capital, liquidity and risk management.

It may be more important for us to find another systemic risk regulator, Representative Paul Kanjorski, a Pennsylvania Democrat and member of the House Oversight Committee where Bernanke appeared, said in a Bloomberg Television interview after the hearing. Congress should hesitate to put any more authority on the back of the Federal Reserve, he said.

Representative Darrell Issa, the ranking Republican on the House panel, said the Feds actions ought to be a note of caution to those who want to dramatically increase its power and authority.

Bernanke told the House Oversight Committee that Fed actions helped avert a financial meltdown that would have produced a Depression-like environment even more severe than the current recession. It acted with the highest integrity in talks on Bank of Americas acquisition of Merrill, he said. His performance wasnt enough to convince some lawmakers.

Theres something rotten in the cotton hereno ifs, ands or buts about it, Representative Edolphus Towns, a New York Democrat who chairs the House Oversight Committee, told reporters after the hearing. There was a forced situation, a shotgun wedding and were just trying to find out who had the shotgun.

Still, no congressional leader has drawn a connection to prospects for Bernankes renomination, and Robert Gibbs, the White House press secretary, on Thursday said President Barack Obama has confidence in the Fed chief. Obama said in a news conference earlier in the week that the Fed chief has done a fine job under very difficult circumstances. He declined to answer a question about whether he would reappoint Bernanke, whose term ends in January.

Issa also said, referring to Bernanke in a Bloomberg Television interview, that on monetary policy I think he will be judged fairly.