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Fed's Bernanke says congressional action on bailout bill 'urgently required'

Tue, Sep 23 2008, 13:29 GMT
http://www.afxnews.com

WASHINGTON (Thomson Financial) - Federal Reserve Board Chairman Ben Bernanke has warned Congress it must act quickly on legislation permitting the government to hold illiquid mortgage-backed securities, since allowing the market to continue to fail for much longer could have drastic consequences on the broader economy.

"Action by Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy," Bernanke told the Senate Banking Committee.

Congress is negotiating a bill with the administration that would allow the government to buy as much as $700 billion of illiquid assets that have clogged the financial system and made it increasingly difficult for financial institutions to operate. Both parties are optimistic a bill can be passed this week, although Congress has been asking for additions to the language that would limit CEO compensation for firms that are helped by the bill.

Bernanke said moving illiquid assets onto the government's books would be a big step toward allowing financial markets operate normally.

"Removing these assets from institutions' balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth," he said.

Bernanke also warned the broader US economy could be put at risk if markets continue to lurch from crisis to crisis.

"If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse," he said.

Bernanke said government assistance to troubled financial companies should only be offered with "the greatest of reluctance", but said recent government bailouts of Fannie Mae, Freddie Mac and insurance giant AIG were needed because there was no private-sector solution.

In AIG's case in particular, he added: "A disorderly failure of AIG would have severely threatened global financial stability and, consequently, the performance of the US economy."

pete.kasperowicz@thomsonreuters.com

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