Wednesday, March 26, 2008

Bear Stearns Sale to JPMorgan to Be Probed by Senate

By Ryan J. Donmoyer and Alison Vekshin

March 26 (Bloomberg) -- The Senate Banking and Finance committees are probing the government-backed sale of Bear Stearns Cos. to JPMorgan Chase & Co., voicing concerns about the risk posed to taxpayers from federal involvement in the deal.

Senate Banking Committee Chairman Christopher Dodd today asked Bear Stearns Chief Executive Officer Alan Schwartz, JPMorgan CEO Jamie Dimon, Federal Reserve Chairman Ben S. Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox to testify at an April 3 hearing on the issue.

Separately, the Senate Finance Committee asked the company chief executives, Bernanke, New York Fed President Timothy Geithner and Paulson to provide details on how the buyout was negotiated.

``While it is imperative to maintain the orderly structure of our markets, the sale agreement between JPMorgan Chase and Bear Stearns raises serious public-policy questions regarding the role played by'' the three agencies ``as facilitators of this agreement,'' Dodd, a Connecticut Democrat, said in a statement.

The committees' inquiries may herald a broader congressional backlash against the agreement, which Senate Majority Leader Harry Reid of Nevada has described as a ``bailout.''

The Fed, in an emergency action earlier this month, authorized a $29 billion loan against illiquid mortgage-and asset-backed securities from Bear Stearns to help the company avert bankruptcy. JPMorgan contributed $1 billion.

Letters Sent

Finance Committee Chairman Max Baucus, a Montana Democrat, and Iowa Senator Charles Grassley, the panel's top Republican, today sent letters to those involved in the deal.

The senators are trying to determine whether the arrangement sets a precedent ``for federal involvement when other firms overextend themselves'' and ``whether taxpayers will lose money here,'' Grassley said in a statement.

``Americans are being asked to back a brand new kind of transaction, to the tune of tens of billions of dollars,'' Baucus said in a statement. ``With jurisdiction over federal debt, it's the Finance Committee's responsibility to pin down just how the government decided to front $30 billion in taxpayer dollars'' for the deal, Baucus said.

Dodd said he scheduled the hearing to explore the ``policy rationale'' behind the Fed's action, the impact of the original and new sale agreements on investors and the markets, and the implications for U.S. taxpayers and regulation of U.S. financial markets.

`Warning Shot'

``It's some pushback from Congress to send a warning shot to the Fed to not use taxpayer resources to bail out Wall Street,'' said Andy Laperriere, managing director at International Strategy & Investment Group in Washington. ``If there is a significant negative response from Congress, it would deter the Fed from doing this in the future,'' Laperriere said.

Baucus and Grassley said in their letter that they want to know the names of all negotiators and lawyers involved in the transaction as well as all the steps taken, their specific dates and a list of steps yet to be taken.

Baucus and Grassley want a description of the assets to be secured by the Federal Reserve, including their value and the types of mortgages underlying the assets. The senators asked for all copies of documents that will be filed with the U.S. Securities and Exchange Commission.

The senators asked for a response no later than March 28.

Taking On `Risk'

``The question is how much of a risk has the government taken in extending this loan, and that's fully dependent on the value of the collateral,'' said Gilbert Schwartz, a partner at the law firm of Schwartz & Ballen in Washington and a former Fed lawyer.

``The signal is they want more transparency,'' Schwartz said. ``Given the unusual nature of the transaction, it seems to me appropriate that the public find out what happened.''

Finance Committee spokeswoman Carol Guthrie described Baucus and Grassley as ``quite serious'' about the inquiry, saying they were determined to ``look out for taxpayers.'' The panel doesn't have plans to hold hearings ``as yet,'' she said.

Treasury spokeswoman Jennifer Zuccarelli said the department would work with the panel to respond to the request. Federal Reserve spokeswoman Susan Stawick said the central bank has received the letter and will respond to it.

JPMorgan spokesman Joseph Evangelisti declined to comment on the Finance Committee request. Bear Stearns spokesman Russell Sherman didn't return a call and e-mail seeking a comment.

The Bear Stearns arrangement has divided Senate Democratic leaders. While Reid said the transaction is unfair to taxpayers, Senator Charles Schumer of New York, the No. 3 Democratic leader, has praised it, calling the Fed's role ``smart'' and ``totally necessary'' to avert a broader meltdown of financial institutions.

To contact the reporters on this story: Ryan J. Donmoyer in Washington at; Alison Vekshin in Washington at

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