By Brai Odion-Esene

WASHINGTON (MNI) – The existence of financial institutions that are
considered “too big to fail” is bad for the financial system, Federal
Reserve Chairman Ben Bernanke told students Tuesday, underlining the
Fed’s intent to firmly implement new Dodd-Frank rules for the biggest
banks.

He also defended the Fed’s actions during the 2008 financial
crisis, laying out the reasons behind the decision to save ailing AIG
while allowing Lehman to go under during a lecture at George Washington
University.

“One of the main goals of financial reform is to get rid it
(too-big-to fail), because it’s bad for system, it’s bad for the firms,
it’s unfair in many ways and it would be a great accomplishment to get
rid of too-big-to fail,” Bernanke said.

“It’s not something we advocate or support in any way,” the Fed
chief said.

“We are looking very seriously at this,” Bernanke said, not just to
identify risks to the system, but also to identify those firms that
“need to be carefully supervised and maybe hold extra capital because of
the potential risks that they bring to the system.”

Going forward, Bernanke highlighted the various rules being crafted
by regulators to reduce the risk posed by very large firms, such as the
Basel III capital standards, and stricter rules for mergers.

“The Fed now, when it approves a merger of two banks, has to
evaluate whether the merger creates a systemically more dangerous
situation,” he said.

“The science of doing this is progressing,” Bernanke added,
although it remains in its infancy.

The third lecture in a four-part series, Tuesday’s talk focused on
the crisis and the Fed’s response. Bernanke said during the meltdown,
the Fed was forced into a situation where it had to choose “the least
bad of a number of different options.”

Bernanke defended the Fed’s decision to step in and rescue Wall St.
giants like AIG and Bear Stearns, arguing that rather than it being a
doctrine of the central bank, “These firms proved too big to fail in the
context of a global financial crisis. That was a judgment we made at
the time based on their size, their complexity, their interconnectedness
and so on.”

“It was not something that we ever thought was a good thing,” he
added.

Bernanke said the decision on which banks received assistance was
made on a case-by-case basis, and the Fed tried to be “as conservative
as possible.”

In the case of insurer AIG, he said there was no much doubt that
action was necessary. Although Lehman Brothers was also too-big-to fail
— with its failure having an enormous impact on the global financial
system — “we were helpless because it was essentially an insolvent
firm. It didn’t have enough collateral to borrow from the Fed, we can’t
put capital into a firm that’s insolvent.”

And the Troubled Asset Relief Program, which allowed the U.S.
Treasury to purchase assets and equity from financial institutions to
strengthen the financial sector, was not signed into law until October
3, 2008, meaning there were no legal means to provide assistance.

“I think if we could have avoided that we would have done so,”
Bernanke said.

The decision to intervene in AIG, and Bear Stearns earlier that
year, “was pretty clear,” he argued, especially given the environment of
fear at the time.

The final lecture by Bernanke will be at 12:45 p.m. ET Thursday

** MNI Washington Bureau: 202-371-2121 **

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