Steel Testifies Before the Senate Committee on Banking, Housing and Urban Affairs

by Mike Godfrey, for LawAndTax-News.com, Washington

04 April 2008

US Treasury Under Secretary for Domestic Finance, Robert K. Steel, on Wednesday testified before the Senate Committee on Banking, Housing and Urban Affairs.

Representing US Treasury Secretary Henry Paulson, Mr Steel reiterated Paulson's assertion that:

"A strong financial system is vitally important – not only for Wall Street, not only for bankers, but for all Americans. When our markets work, people throughout our economy benefit – Americans seeking to buy a car or buy a home, families borrowing to pay for college, innovators borrowing on the strength of a good idea for a new product or technology, and businesses financing investments that create new jobs."

He went on to state that:

"For several months, our financial markets have gone through periods of turbulence, followed by periods of improvement. A great deal of de-leveraging is occurring, which has created liquidity challenges for financial institutions and thereby compromised our credit markets' ability to help be an engine of economic growth."

"It took a long time to build up the excesses in our markets, and we are now working through the consequences. Market participants are adjusting, making disclosures, raising capital, and re-pricing assets," he added.

Mr Steel then approached the subject of the recent, taxpayer-backed sale of the failing Bear Stearns investment firm to JPMorgan Chase, about which several senior lawmakers have expressed concern, explaining that:

"The funding condition of Bear Stearns had deteriorated rapidly, and by March 13, 2008 had reached such a critical stage that the company would have faced a bankruptcy filing on March 14, 2008 absent an extraordinary infusion of liquidity."

"During this period, regulators were continuously communicating with one another, working collaboratively, and keeping each other apprised of the changing circumstances."

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

"We weighed the multiple risks, such as the potential disruption to counterparties, other financial institutions, the markets, and the market infrastructure. These risks warranted a very careful review and thorough consideration of potential implications and responses."

Mr Steel went on to add that:

"Upon assessing the Bear Stearns' situation, the Federal Reserve decided to take the very important and consequential action of authorizing the Federal Reserve Bank of New York to institute a temporary program for providing liquidity to primary dealers."

"Recent market turmoil has required the Federal Reserve to adjust some of the mechanisms by which it provides liquidity to the financial system. Its response in the face of new challenges deserves praise."

"At the Treasury Department, we will continue to monitor market developments. We remain focused on the issues surrounding the recent developments, including the important responsibility of safeguarding government funds," he reassured the Committee.

Ending his speech, Mr Steel concluded that:

"Recent events underscore the need for strong market discipline, prudent regulatory policies, and robust risk management."

"The Treasury Department and our colleagues comprising the President's Working Group on Financial Markets are addressing the current and strategic challenges, and are doing all we can to ensure high quality, competitive, and orderly capital markets."

"We seek to strengthen market discipline, mitigate systemic risk, enhance investor confidence and market stability, as well as facilitate stable economic growth."

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