Bernanke, Bair presenting views of crisis, 'too big to fail' to inquiry panel

Federal Reserve Chairman Ben Bernanke is set to appear before a panel investigating the financial crisis to give his take on the meltdown and his views on potential systemwide risks posed by large financial institutions.

Bernanke led the economy through the tumultuous months of the most severe recession since the 1930s, as the Federal Reserve took extraordinary measures to inject hundreds of billions into the battered financial system.

And he said last week the central bank is prepared to make a major new investment in government debt or mortgage securities if the economy worsened significantly or if the Fed detected deflation — a prolonged drop in prices of wages, goods and assets like homes and stocks.

Bernanke's scheduled appearance Thursday at a hearing by the Financial Crisis Inquiry Commission comes as the congressionally appointed panel approaches the end of its yearlong investigation of the roots of the economic disaster. Sheila Bair, the chairman of the Federal Deposit Insurance Corp., also is testifying before the panel.

At a session Wednesday the commission examined the danger of having banks deemed "too big to fail" and their potential to topple the financial system. The former chief of Lehman Brothers, Richard S. Fuld Jr., testified that the Wall Street titan could have been rescued in the fall of 2008, but federal regulators refused to help — even though they later bailed out other big banks.

Panel chairman Phil Angelides said there appeared to be "a conscious policy decision" by the regulators not to rescue Lehman.

Under the landmark financial overhaul law enacted in July, regulators are empowered to shut down financial institutions whose collapse could threaten the system.

Bernanke has said that a key lesson learned from the crisis is that the Fed can't focus solely on the soundness of individual banks, and must cast a watchful eye on the health of the financial system as a whole. The central bank already has moved to conduct bank examinations that take a broader-picture approach, he says.

Bernanke could be asked by panel members about the Fed's handling of the Lehman Brothers episode and Fuld's accusations. Thomas Baxter, general counsel of the New York Fed, insisted at Wednesday's hearing that the Fed lacked the legal authority to provide a government guarantee of Lehman's obligations to its trading partners or other aid the firm sought. Hundreds of billions worth of collateral would have been needed to secure a guarantee of that magnitude, and Lehman didn't have it, Baxter said.

Bair, the FDIC chief, has been one of the most vocal critics of the "too big to fail" approach that brought the government rushing in to bail out big banks in the crisis.

"Never again should taxpayers be asked to bail out a failing financial firm," Bair told community bankers in a speech in March. "It's time that the big players understand that they sink or swim on their own."

Bair took on a high profile and gained popularity outside Washington early in the crisis, as she pressed for more government intervention to help struggling homeowners. That opened a rift with then-President George W. Bush's treasury secretary, Henry Paulson.