Citigroup, Wells Fargo To Lend Less After Downgrades

Bank holding companies including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. have the thinnest safety cushion against losses in seven years.

Falling below a regulatory benchmark that is intended to maintain a minimum level of capital to protect depositors against losses would subject banks to more scrutiny from regulators than they have ever experienced.

``This is a nightmare for the country,'' said William Isaac, who was chairman of the FDIC from 1981 to 1985. Banks will ``raise what capital they can, then they'll slow down their growth and stop lending, and what should be a mild recession becomes a much more serious one.''

The biggest danger to the economy is that to preserve their ratios, banks will cut off the flow of credit, causing a decline in loans to companies and consumers. Banks have already raised $136 billion in capital, based on data compiled by Bloomberg, and cut dividends.

The credit crunch has already cost the world's biggest financial companies about $232 billion and forced a government bailout of New York-based Bear Stearns Cos., the fifth-largest U.S. investment bank. The International Monetary Fund said last week that banks were in the worst financial crisis since the Great Depression.

Washington Mutual Inc., the largest U.S. savings and loan, got $7 billion capital injection today from a group led by private equity firm TPG Inc., the Seattle-based company said today. The Seattle-based institution's total risk-capital ratio was 12.35 percent.

The holding companies for Citigroup, Bank of America and Wells Fargo have the lowest ratios in at least the five years that the Federal Reserve has been tracking the data.

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Washington Mutual Saves Itself By Raising $7 Billion

The nation’s largest savings and loan, Washington Mutual, said Tuesday morning that it had raised $7 billion in capital through an investment group led by private equity firm TPG. It also said that it would slash its quarterly dividend.

Washington Mutual also said that it would reduce its quarterly dividend to a penny from 15 cents and that it would stop buying mortgages from brokers. In addition, it plans to close all of its freestanding loan offices.

Shares of the bank fell $1.42 cents, to $11.73 in afternoon trading on Tuesday.

“We’re very pleased that TPG and these major investors have expressed their confidence in WaMu’s underlying value and its growth potential,” the chief executive, Kerry Killinger, said.

The need to raise capital represented a remarkable turnabout for Washington Mutual, whose once-highflying stock has swooned along with home prices. Under Mr. Killinger, Washington Mutual grew rapidly in recent years by lending aggressively, particularly to low- and middle-income borrowers, and by buying smaller competitors. But it has been struggling with higher mortgage delinquencies and defaults among homeowners.

But during the last year, Washington Mutual’s stock price has plunged more than 67 percent as the mortgage crisis has spread through the financial markets. The stock closed up $2.98 at $13.15 on Monday.

The new funds are expected to help offset losses on par with levels last seen during the savings-and-loan crisis of the early 1990s.

Washington Mutual is the latest financial institution to go hat-in-hand to outside investors. Since the sharp downturn in the credit and housing markets last summer, Wall Street giants like Citigroup, Merrill Lynch and UBS have raised tens of billions of dollars. But Main Street lenders have been hit hard, too. Many have slashed their dividends, and investment bankers say several are looking to raise money or are seeking out acquisitions.

Washington Mutual has been hit hard by losses stemming from mortgages made to borrowers with risky, or subprime, credit. The thrift pushed hard into products like interest-only and so-called negative amortization loans, which are now among the most toxic.

The lender also has significant exposure to California and Florida, where property values have declined the most.

And after acquiring Providian Financial’s subprime credit card business in 2005, Washington Mutual now expects a sharp increase in loan charge-offs. In response, Washington Mutual has cut its dividend, eliminated several thousand jobs and raised $3.7 billion in a separate preferred stock offering. Still, its stock price has continued to plummet.

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Schwartz Disagrees With Bernanke, Bear Stearns Could Have Been Saved

Bear Stearns' CEO Alan Schwartz told the U.S. lawmakers that the firm may not have failed if the Federal Reserve had opened its discount window to investment banks earlier.

During the testimony to Senate Banking Committee, some experts had suggested that the Fed could have opened the discount window when fears first emerged about the health of Bear Stearns instead of doing it immediately after the deal.

"It was not at all obvious to me it would have been sufficient to prevent their bankruptcy," said Fed chief Ben Bernanke.

Disagreeing with Bernanke's remarks, Schwartz commented, "It's my strong belief that by every measure that I can think of that our balance sheet, our capital ratios, our risk profile lined up well with all of our leading competitors."

"So I do believe that if as a policy measure the discount window had been open to investment banks for their high-quality collateral, I think it's highly, highly unlikely in my personal opinion that we'd be in the position that we find ourselves in today."

Schwartz's comments appeared to also contradict New York Federal Reserve Bank President Timothy Geithner, who said that he would have been "very uncomfortable lending to Bear, given what we knew at that time, if you could walk back the clock and think about what would happen if that facility had been in place before."

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Senate Grills Bernanke, Dimon, Schwartz On Bear Stearns Deal

The Senate took a long, hard look at JPMorgan Chase's planned purchase of Bear Stearns on Thursday, grilling both executives and federal regulators who helped shepherd the controversial deal. Members of the Senate Banking Committee, digging into the terms of the extraordinary tie-up at a five-hour hearing, pulled back the curtain on a merger that many critics have argued amounts to a bailout of Wall Street.

Federal Reserve Chairman Ben Bernanke, making his second straight appearance before lawmakers this week, was among those who defended the 11th-hour deal. Bernanke argued that preventing the collapse of Bear Stearns, the nation's fifth largest investment bank, staved off a run on other investment banks, damage to the broader American financial system and the U.S. economy.

"The truth is that the benefactors of our actions were not Bear Stearns or principally Wall Street - it is Main Street," said the central bank chief.

Those remarks were echoed by other witnesses, including Timothy Geithner, president of the Federal Reserve Bank of New York, one of the chief architects of the deal, and JPMorgan Chase Chairman and CEO Jamie Dimon and Bear Stearns CEO Alan Schwartz.

"One thing I can say with confidence: if the private and public parties before you today had not acted in a remarkable collaboration to prevent the fall of Bear Stearns, we would all be facing a far more dire set of challenges," JPMorgan's Dimon said.

Thursday's hearing marked the first time the two Wall Street execs have spoken publicly on the merger since the deal was announced on March 16.At the time, JPMorgan agreed to buy Bear Stearns for $236 million, or only $2 a share. A little over a week later, JPMorgan raised its bid for the investment bank to $10 a share amid anger from both shareholders and employees over the deal.

To pull off the purchase, however, the Federal Reserve Bank of New York agreed to take control of $30 billion of Bear Stearns' assets. As a result, JPMorgan will now bear the risk of the first $1 billion in losses were Bear Stearns assets to go bad. The New York Fed would cover the remaining $29 billion.

The Fed's unusual maneuver drew the scrutiny of lawmakers, who questioned the central bank's decision to put public funds at risk by essentially agreeing to back Bear Stearns' portfolio, which included those same mortgage-backed securities that have plummeted in value since the housing market took a nosedive.

"We've heard other financial institutions say that they, in fact, can't truly verify the full value of their securities," said Sen. Robert Menendez, D-N.J. "So, if we don't have a valuation of these securities, how are we so confident?"

Thursday's hearing provided a glimpse into how the deal came about after Bear Stearns revealed to the SEC, the Fed and JPMorgan that it was facing severe liquidity issues. At the time, Bear Stearns' Schwartz was facing an exodus of both customers and business partners following rampant speculation that its underlying health was in jeopardy.

Despite securing a short-term loan from JPMorgan on Friday, March 14, the Bear Stearns' liquidity position continued to weaken. By the end of the day, Schwartz said the company faced two choices: finding a buyer or face the possibility of filing for bankruptcy the following Monday. Even though Bear Stearns attempted to court other partners, only JPMorgan was willing to commit, according to Schwartz.

One question that occupied lawmakers' attention was how the initial $2 asking price for Bear Stearns was reached and if regulators were involved in determining that price. "We did not set or negotiate the price," said New York Fed President Geithner. Geithner said the agreement was guided by twin principles: averting default by Bear Stearns but at the same time not sending the message that the government would bail out other firms when their business goes bad.

JPMorgan's Dimon added that the price also took into account the risk that it was taking by purchasing Bear Stearns on such short notice. "We literally had 48 hours to do what normally takes a month," said Dimon.

Still, lawmakers wondered whether Bear Stearns could have been saved. After JPMorgan announced plans to acquire Bear Stearns, the Federal Reserve took the drastic move of opening its discount window to investment banks and brokerages to calm jittery markets about liquidity. Some experts have suggested that the Fed could have opened the discount window when fears first emerged about the health of Bear Stearns. "It was not at all obvious to me it would have been sufficient to prevent their bankruptcy," said Fed chief Bernanke.

Bear Stearns' Schwartz disagreed. "It is highly, highly unlikely we'd be in situation we found ourselves in today," he said.

The unorthodox rescue of Bear Stearns by the Fed has been a hot topic on Capitol Hill. On Wednesday, members of the Joint Economic Committee of Congress grilled Federal Reserve Chairman Ben Bernanke about the Fed's role in engineering a deal between the two firms.

At the same time, the top two lawmakers on the Senate Finance Committee - Sens. Charles Grassley, R-Iowa, and Max Baucus, D-Mont. - have also been pushing for further details on the controversial deal.

On Wednesday, the pair sent a letter to Schwartz and Dimon requesting details about any compensation or severance arrangements as part of the merger. In addition, the two lawmakers asked the Securities and Exchange Commission Thursday why the regulator sought no enforcement action against Bear Stearns for improperly valuing its mortgage-related investments.

While Thursday's hearing provided few answers about what actions should be taken, both witnesses and lawmakers urged change. "If we continue to react to situation after they happen, where are we going to be?" asked Sen. Richard Shelby, R-Ala., the ranking GOP member of the committee.

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Fannie Mae Tightens Credit Rules For Mortgages

Fannie Mae has told lenders that it will require a minimum credit score for the loans it buys, tightening mortgage standards to protect itself from record foreclosures sweeping the country.

Lawmakers have been pressuring the largest US home funding company, along with its rival Freddie Mac, to more aggressively buy home loans in a bid to lower mortgage rates and prop up housing. However, the two government-chartered companies are battling their own problems as home loans sour. In response to soaring mortgage defaults, they are increasing fees, restricting the loans they purchase and trying to preserve and raise capital.

The latest steps are part of amended underwriting practices for loans Fannie Mae buys, aimed at adjusting prices to reflect heightened housing market risk and protecting the company's capital, Fannie Mae spokesman Brian Faith said in a statement on Wednesday. Fannie Mae will require a minimum score of 580 for most loans, adding it will still acquire loans with lower credit scores in certain circumstances. Credit scores generally range between 300 and 850 and are used by lenders to predict a borrower's ability to pay on time. Mortgages with credit scores below 620 made up less than 6 percent of Fannie Mae's conventional single-family business volume in 2007, according to the company's annual report. It didn't provide further breakdown in the report.

Fannie also said it will lengthen the period needed for borrowers to reestablish their credit history after a foreclosure to five years from four years. It will allow shorter recovery periods for borrowers with "documented extenuating circumstances" which caused the foreclosure, the company said. "Given the current state of the mortgage and housing markets, it is critical for our company to conservatively manage our business and risks through prudent pricing and underwriting, while providing sustainable liquidity to our lender customers and stability to the markets as part of our core mission," Faith said in the statement.

Fannie Mae has extended forbearances for struggling homeowners in another move intended to ease stress on the company's capital. The move allows temporary suspensions or reduced payments by borrowers for up to six months, up from four months, Jason Allnutt, a vice president for credit loss management at Fannie Mae in Dallas, told Reuters on Tuesday.

Giving homeowners greater leeway will help Fannie Mae limit the costly process of buying bad loans out of the $2.5 trillion in mortgage-backed securities it guarantees. Under standard accounting rules, buying mortgages out of MBS trusts forces the company to revalue the loans at market levels, which last year boosted fair value losses sevenfold to $1.4 billion. Greater flexibility for homeowners eases the strain on Fannie Mae's capital, which is at the crux of the company's struggle to balance its role to support housing and staunch losses.

Fannie Mae and rival Freddie Mac support home ownership by raising money from investors to support combined investments of $1.4 trillion, and guarantee loans that are repacked into mortgage securities which then they sell. Fannie Mae and Freddie Mac under an agreement with their federal regulator are expected to raise at least $6 billion in fresh capital to stabilize the market with new investments.

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UBS Losses Continue To Mount

Embatteled Swiss banking giant UBS said yesterday it suffered new losses of about $US 19 billion. It will end the quarter with a total loss of 12 billion Swiss francs.

The chairman of Switzerland's largest bank, Marcel Ospel, will not stand for re-election later this month and will be replaced by Peter Kurer, it said in a statement.

"I had wanted to be re-elected for a one-year mandate to pull UBS from its current difficult situation," Mr Ospel was quoted as saying in the statement.

UBS had come under fresh pressure on the stock market on Monday as it began to lower valuations of so-called auction-rate securities generally viewed as safe investment vehicles. The bank's share price has plummeted in recent months after it reported losses of $US18 billion dollars in 2007 in the US sub-prime crisis.

While the bank's sub-prime investments have garnered most attention, the focus is shifting to auction-rate securities as rumours abound that further huge writedowns are looming. Auction-rate securities are long-term bonds that could be sold at auctions every few weeks.

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Treasury - Bear Stearns Was Facing Bankruptcy

Bear Stearns was facing bankruptcy on March 14 without a major liquidity injection and U.S. regulators acted to save the company with the broader market in mind, a senior Treasury official will say on Thursday to Senate Banking Committee at Capitol Hill.

In the days before the Wall Street giant was bought by JP Morgan Chase "regulators were continuously communicating with one another, working collaboratively, and keeping each other apprised of the changing circumstances," Treasury Undersecretary for Domestic Finance Robert Steel will tell the Committee.

"Our focus was not on this specific institution, but on the more strategic concern of the implications of a bankruptcy," he said. "The failure of a firm that was connected to so many corners of our markets would have caused financial disruptions beyond Wall Street."

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Complete Testimony Of Federal Reserve Chairman Ben Bernanke

Chairman Schumer, Vice Chairman Maloney, Representative Saxton, and other members of the Committee,

I am pleased to appear before the Joint Economic Committee. In response to deterioration in the near-term outlook for the economy and intensified strains in financial markets, in recent months the Federal Reserve has eased monetary policy substantially further and taken strong actions to increase market liquidity. In my remarks today, I will first offer my views on conditions in financial markets and the outlook for the U.S. economy, then discuss recent actions taken by the Federal Reserve.

Although our recent actions appear to have helped stabilize the situation somewhat, financial markets remain under considerable stress. Pressures in short-term bank funding markets, which had abated somewhat beginning late last year, have increased once again. Many lenders have been reluctant to provide credit to counterparties, especially leveraged investors, and have increased the amount of collateral they require to back short-term security financing agreements. To meet those demands, investors have reduced their leverage and liquidated holdings of securities, putting further downward pressure on security prices.

Credit availability has also been restricted because some large financial institutions, including some commercial and investment banks and the government-sponsored enterprises (GSEs), have reported substantial losses and writedowns, reducing their available capital. Several of these firms have been able to raise fresh capital to offset at least some of those losses, and others are in the process of doing so. However, financial institutions' balance sheets have also expanded, as banks and other institutions have taken on their balance sheets various assets that can no longer be financed on a standalone basis. Thus, the capacity and willingness of some large institutions to extend new credit remains limited.

The effects of the financial strains on credit cost and availability have become increasingly evident, with some portions of the system that had previously escaped the worst of the turmoil—such as the markets for municipal bonds and student loans—having been affected. Another market that had previously been largely exempt from disruptions was that for mortgage-backed securities (MBS) issued by government agencies. However, beginning in mid-February, worsening liquidity conditions and reports of losses at the GSEs, Fannie Mae and Freddie Mac, caused the spread of agency MBS yields over the yields on comparable Treasury securities to rise sharply. Together with the increased fees imposed by the GSEs, the rise in this spread resulted in higher interest rates on conforming mortgages. More recently, agency MBS spreads and conforming mortgage rates have retraced part of this increase, and conforming mortgages continue to be readily available to households. However, for the most part, the nonconforming segment of the mortgage market continues to function poorly.

In corporate debt markets, yields and spreads on both investment-grade and speculative-grade corporate bonds rose through mid-March before falling more recently. Issuance of investment-grade bonds by both financial and nonfinancial corporations has been quite robust so far this year, but issuance of new high-yield debt has stalled. Strains continue to be evident in the commercial paper market as well, where risk spreads remain elevated and the quantity of commercial paper outstanding, particularly asset-backed paper, has decreased. Commercial and industrial loans at banks grew in January and February, but at a considerably slower pace than in previous months.

These developments in financial markets—which themselves reflect, in part, greater concerns about housing and the economic outlook more generally—have weighed on real economic activity. Notably, in the housing market, sales of both new and existing homes have generally continued weak, partly as a result of the reduced availability of mortgage credit, and home prices have continued to fall.

Starts of new single-family homes declined an additional 7 percent in February, bringing the cumulative decline since the early 2006 peak in single-family starts to more than 60 percent. Residential construction is likely to contract somewhat further in coming quarters as builders try to reduce their high inventories of unsold new homes.

Private payroll employment fell 101,000 in February, after two months of smaller job losses, with job cuts in construction and closely related industries accounting for a significant share of the decline. But the demand for labor has also moderated recently in other industries, such as business services and retail trade, and manufacturing employment has continued on its downward trend. Meanwhile, claims for unemployment insurance have risen somewhat on balance, and surveys indicate that employers have scaled back hiring plans and that jobseekers are experiencing greater difficulties finding work. The unemployment rate edged down in February and remains at a relatively low level; however, in light of the sluggishness of economic activity and other indicators of a softer labor market, I expect it to move somewhat higher in coming months.

After rising at an annual rate of about 3 percent over the first three quarters of last year, real disposable income has since increased at only about a 1 percent annual rate, reflecting weaker employment conditions and higher prices for energy and food. Concerns about employment and income prospects, together with declining home values and tighter credit conditions, have caused consumer spending to decelerate considerably from the solid pace seen during the first three quarters of last year. I expect the tax rebates associated with the fiscal stimulus package recently passed by the Congress to provide some support to consumer spending in coming quarters.

In the business sector, the pullback in hiring that I noted earlier has been accompanied by some reduction in capital spending plans, as weaker sales prospects, tighter credit, and heightened uncertainty have made business leaders more cautious. On a more positive note, the nonfinancial business sector remains financially sound, with liquid balance sheets and low leverage ratios, and most firms have been able to avoid unwanted buildups in inventories. In addition, many businesses are enjoying strong demand from abroad. Although the prospects for foreign economic growth have diminished somewhat in recent months, net exports should continue to provide considerable support to U.S. economic activity in coming quarters.

Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly. We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions. However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.

Inflation has also been a source of concern. The price index for personal consumption expenditures rose 3.4 percent over the twelve months ending in February, up from 2.3 percent over the preceding twelve-month period. To a large extent, this pickup in inflation has been the result of sharp increases in the prices of crude oil, agricultural products, and other globally traded commodities. Additionally, the decline in the foreign exchange value of the dollar has boosted some non-commodity import prices and thus contributed to inflation. However, the so-called core rate of inflation—that is, inflation excluding food and energy prices—has edged down recently after firming somewhat late last year.

We expect inflation to moderate in coming quarters. That expectation is based, in part, on futures markets' indications of a leveling out of prices for oil and other commodities, and it is consistent with our projection that global growth—and thus the demand for commodities—will slow somewhat during this period. And, as I noted, we project an easing of pressures on resource utilization. However, some indicators of inflation expectations have risen, and, overall, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully in the months ahead.


• • •


I turn now to the Federal Reserve's policy responses to these financial and economic developments.

Well-functioning financial markets are essential for the efficacy of monetary policy and, indeed, for economic growth and stability. To improve market liquidity and market functioning, and consistent with its role as the nation's central bank, the Federal Reserve has supplemented its longstanding discount window by establishing three new facilities for lending to depository institutions and primary dealers.

The lending facilities now in place offer depository institutions and primary dealers two complementary alternatives for meeting funding needs. One pair of facilities—the discount window for depository institutions and the Primary Dealer Credit Facility for primary dealers—offers daily access to variable amounts of funding at the initiative of the borrowing institution. A second pair of facilities—the Term Auction Facility for depository institutions and the Term Securities Lending Facility for primary dealers—makes available predetermined aggregate amounts of longer-term funding on pre-announced dates, with the interest rate and the distribution of the awards across institutions being determined by competitive auction. Although these facilities operate through depository institutions and primary dealers, they are designed to support the broad financial markets and the economy by facilitating the provision of liquidity by those institutions to their customers and counterparties.

The Primary Dealer Credit Facility was put in place in the wake of the near-failure of Bear Stearns, a large investment bank. On March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for Chapter 11 bankruptcy the next day unless alternative sources of funds became available. This news raised difficult questions of public policy. Normally, the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company. Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets. With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence. The company's failure could also have cast doubt on the financial positions of some of Bear Stearns' thousands of counterparties and perhaps of companies with similar businesses. Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain. Moreover, the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability. To prevent a disorderly failure of Bear Stearns and the unpredictable but likely severe consequences of such a failure for market functioning and the broader economy, the Federal Reserve, in close consultation with the Treasury Department, agreed to provide funding to Bear Stearns through JPMorgan Chase. Over the following weekend, JPMorgan Chase agreed to purchase Bear Stearns and assumed Bear's financial obligations.

The Federal Reserve has taken additional measures to improve market liquidity. We have initiated a series of twenty-eight-day single-tranche term repurchase transactions with primary dealers, expected to cumulate to $100 billion outstanding, in which dealers may offer any of the types of collateral that are eligible for conventional open market operations. We have also expanded and extended reciprocal currency arrangements ("swap lines") with the European Central Bank and the Swiss National Bank. Using these swap lines, the participating central banks are providing dollar liquidity to financial institutions in their jurisdictions, which should improve the functioning of the global market for dollar funding. These facilities and programs will be kept in place as long as conditions warrant their ongoing use. We are working closely with the Securities Exchange Commission to monitor the financial conditions and funding positions of primary dealers who might seek Federal Reserve credit.

To date, the recent liquidity measures implemented by the Federal Reserve seem to have been helpful in addressing some of the strains in financial markets. Funding pressures on primary dealers appear to have eased somewhat, and liquidity seems to have improved in several markets, including—as noted earlier—the market for agency mortgage-backed securities. To the extent that these measures improve market functioning, they will have favorable effects on the ability and willingness to make credit available to the broader economy. More-liquid markets also increase the efficacy of monetary policy, which in turn improves our ability to meet the goals set for us by the Congress—namely, to promote maximum employment and price stability.

As you know, in response to the further weakening of economic conditions, the Federal Reserve has continued to ease the stance of monetary policy. The FOMC reduced its target for the federal funds rate by a total of 125 basis points in January and by an additional 75 basis points at its March meeting, leaving the current target at 2-1/4 percent—3 percentage points below its level last summer. As the Committee noted in its most recent post-meeting statement, we anticipate that these actions, together with the steps we have taken to foster market liquidity, will help to promote growth over time and to mitigate the risks to economic activity.

Clearly, the U.S. economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and to respond to diverse challenges. Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year. I remain confident in our economy's long-term prospects.

Thank you. I would be pleased to take your questions.

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Congress To Grill Bear, JPMorgan, Federal Reserve

The architects of one of the biggest deals to ever hit Wall Street are due on Capitol Hill Thursday morning, when the Senate Banking Committee hosts a hearing on the JPMorgan Chase takeover of Bear Stearns.

A day after Federal Reserve Chairman Ben Bernanke explicitly acknowledged the possibility of a recession in front of the congressional Joint Economic Committee, he will be back in Washington to discuss the deal which the Fed was instrumental in bringing to fruition.

Joining Bernanke on the hot seat will be Bear Stearns CEO Alan Schwartz, JPMorgan Chase CEO James Dimon, NY Fed President Tim Geithner, and Treasury Secretary Henry Paulson.

After congressmen grilled Bernanke Wednesday on whether the central bank had advanced knowledge of the impending failure of Bear Stearns, expect more of the same Thursday, as the committee's senators look to discover any hidden details of the deal.

Shares of Bear Stearns gained 1 cent Wednesday, rising 0.1%, to $10.86, while JPMorgan lost 38 cents, or 0.8%, to $46.24, ahead of the executive testimony. Financial stocks are likely to be moving in early trading Thursday, with the hearing scheduled for 10 a.m. in Washington.

The dollar weakened Wednesday on Bernanke's recession comments, to $1.5675 against the euro, giving commodity prices a boost. Crude was up $3.85 to $104.83 after a drop in gasoline stockpiles overwhelmed a substantial rise in crude inventories in the minds of traders. Gold gained $12.40 to $900.20.

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Fed Reserve Chief Forsees US Economy Recession

Federal Reserve Chairman Ben S. Bernanke acknowledged for the first time that a U.S. recession is possible because homebuilding, employment and consumer spending will deteriorate.

"It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly," Bernanke told Congress's Joint Economic Committee today. He also said the Fed's emergency loan to Bear Stearns Cos. followed a March 13 warning by the firm that it would have to file for bankruptcy the next day.

Bernanke, making his first extensive public comments since the Fed's decisions two weeks ago to back the takeover of Bear Stearns and lower interest rates by 0.75 percentage point, is trying to fend off criticism of the deal while struggling to prevent a deeper economic slump. He said he thought "long and hard" about the decision, and doesn't anticipate the need for a similar rescue of another company.

While the Fed expects the economy to return to its long- term growth pace in 2009, "in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside," he said.

The Fed, in an emergency decision on Sunday, March 16, voted to authorize a loan against $29 billion of Bear Stearns assets, including mortgage-backed securities, so JPMorgan Chase & Co. would buy the company.

Bernanke, questioned by lawmakers about putting taxpayer money at risk, expressed confidence the Fed won't lose money on the Bear Stearns deal. The Fed last week said JPMorgan will shoulder the first $1 billion of any losses.

"I feel reasonably confident that we'll be able to recover all the principal and indeed some interest, and there is some chance of even upside beyond that," Bernanke said.

The Fed chief also said the central bank's investment adviser, BlackRock Inc., has gone "through those assets, and they are confident, or at least reasonably confident, that we will be able to recover the full amount if we dispose of these assets on a measured basis, rather than to sell them all at once."

The central bank also expanded its powers last month by opening up lending directly to Wall Street investment banks. In addition, the Fed cut the interest rate on loans to banks, and now securities firms, by a quarter point.

The Fed agreed to the emergency Bear Stearns loan to "prevent a disorderly failure" of the company and the "unpredictable but likely severe consequences of such a failure for market functioning and the broader economy," Bernanke said.

The Senate's banking and finance committees have started separate inquiries into the transaction, raising questions about the role of the regulators in facilitating it.

"With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions" and "could have severely shaken confidence," the Fed chief said.

The U.S. economy grew at an annual pace of 0.6 percent from October to December. Growth probably slowed to a 0.2 percent annual rate in the first quarter, according to the median estimate of analysts surveyed by Bloomberg News.

Bernanke said that inflation "has also been a source of concern," with higher commodity prices and the weaker dollar. At the same time, he said the Fed expects inflation to "moderate in coming quarters," echoing the FOMC statement. A "leveling out" of commodity prices and slower global growth will help, Bernanke said.

The Fed's preferred inflation gauge, which excludes food and energy costs, has increased at least 2 percent from the year earlier, the upper end of officials' long-term projections, for five straight months through February. Bernanke said the rate "has edged down recently."

Senator Charles Schumer, the New York Democrat who chairs the House-Senate panel, said today that the Fed's actions on Bear Stearns "provided some much-needed breathing room to the financial markets.""But there are many legitimate, looming, and unanswered questions about what happened both before and after the Bear Stearns action," Schumer said.

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