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WASHINGTON (Thomson Financial) - Federal Reserve Board Chairman Ben Bernanke told senators debating whether to approve a $700 bln bill to bail out financial companies stuck with illiquid mortgage-backed securities that failure to take this step would lead to continued mortgage defaults and job losses.

"The economy will just not be able to recover in a normal, healthy way" without passage of the bill, Bernanke told the Senate Banking Committee today.

Bernanke added that he believes financial market conditions will get worse unless the government is given the authority to buy up as much as $700 bln in mortgage-backed securities, but said even if things did not worsen, the continued holding of these securities by financial institutions would continue to be a "major drag" on the economy.

Bernanke said the request for $700 bln in purchasing authority is "intended to be enough" to reduce the risks in the market, an indication that he does not believe more would be needed. Bernanke noted that $700 bln is 5 pct of the value of all outstanding mortgages.

He also said the authority should not be seen as $700 bln in expenditures, but rather a $700 bln investment by taxpayers, much of which could be recouped at a later date once the assets become tradeable again.

pete.kasperowicz@thomsonreuters.com

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