VOL. 125 | NO. 39 | Friday, February 26, 2010
Fed Looking Into Insurance Contracts on Greek Debt
JEANNINE AVERSA | AP Economics Writer
WASHINGTON (AP) - Federal Reserve Chairman Ben Bernanke told lawmakers Thursday that the central bank is examining arrangements Goldman Sachs and other Wall Street firms have with Greece involving high-risk financial instruments.
Bernanke said the Fed is looking into companies' use of credit default swaps, a form of insurance against bond defaults. Bernanke made the comments at the start of a Senate Banking Committee hearing. It marked the second day where 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," Bernanke said. "We'll certainly be evaluating what we can learn from the activities of the (bank) holding companies that we supervise here in the U.S," he added.
The panel's chairman, Sen. Christopher Dodd, D-Conn., cited reports that financial companies are using credit default swaps to bet that Greece will default on its debt. He's 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 private gain," Dodd said.
Dodd wondered whether there ought to be limits on the use of credit default swaps to prevent "the intentional creation of runs against governments."
U.S. Securities and Exchange Commission spokesman John Nester wouldn't say whether or not his agency is specifically looking into the credit default swap arrangements between Wall Street firms, including Goldman Sachs, and Greece.
"As an agency, we have been examining potential abuses and destabilizing effects related to the use of credit default swaps and other opaque financial products and practices," Nester said in a statement.
SEC Chairman Mary Schapiro has advocated bringing the financial instruments under government regulation.
Goldman Sachs earlier this week defended currency swap deals it undertook with Greece to reduce that country's debt, saying the impact of the transactions was minimal and within the rules.
On another topic, Bernanke said that the snowstorms and bad weather that have recently affected the country will likely 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," Dodd said.
Senators pressed 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.
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, 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 lasts and to help relieve high unemployment.
And, 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."
Doing so would deprive the Fed of information that factors into the setting of interest rates to influence overall economic activity, he said. Bernanke also argued that the Fed would lose insights into the health of not only individual banks but also of the entire banking system.
Dodd has wanted to rein in the Fed's power and remove it from overseeing banks as part of a broader legislative revamp of the nation's financial structure. That conflicts with the Obama administration's stance as well as the approach taken by House lawmakers in their financial overhaul bill.
On another subject, Bernanke said Congress needs to tackle the thorny issue of how to overhaul Fannie Mae and Freddie Mac, which were seized by the government in 2008 as they faced mounting losses from mortgage defaults.
"Right now, we're kind of in no-man's land. Fannie and Freddie are in conservatorship. They are part of the government's efforts to maintain the housing market, because there really is no other source of mortgages at this point or mortgage securitization. But, certainly, this is not a sustainable situation," Bernanke said. An overhaul is needed to eliminate this "platypus kind of – you know, neither fish nor fowl status that those firms have now," he added.
U.S. Treasury Secretary Timothy Geithner said Wednesday that the Obama administration will wait until 2011 to propose a revamp of the mortgage companies.
AP Business Writer Marcy Gordon contributed to this report.
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