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Bernanke: 'Too Big To Fail' Problem Must Be Fixed

11:57 A.M. UPDATE

Fed Chairman Ben Bernanke, testifying before the Senate Budget committee right now, said the "too big to fail" problem was worse than he understood going into the current financial collapse.

Asked whether it's a problem that some financial institutions, such as AIG and Citigroup, were allowed to get so big that they become "too big to fail" -- meaning that if they are not propped up by government money, their failure will take down the entire economy -- Bernanke said, yes, it is a problem.

"I think it’s a bigger problem than we thought," he said. "Dealing with the 'too big to fail' problem should be a top priority going forward."

This hints at possible legislation that would prevent companies from growing to AIG-size.

An exasperated Sen. Lindsey Graham (R-S.C.) put his finger on what a lot of lawmakers are probably feeling these days: "I don't know where nationalization, socialism or capitalism begins or ends anymore."

Graham added that the public "has just about had it with continuous capitalization," such as the federal government's $30 billion injection into AIG yesterday. He said that he thinks the public would be ready for the government to simply take over sick banks that have no hope of getting better, rather than just pouring more money into them.

"As a conservative, I'm parking my ideology," Graham said.

Bernanke wound up the two-hour testimony by saying that this crisis has made him angry and that "it isn't fair money is going to big corporations, but if we don't stabilize the financial system we have no hope of getting the economy" back to normal.

Bernanke: Citigroup Has Enough Capital To Survive

11:40 A.M.: Bernanke said that troubled mega-bank Citigroup "has enough capital."

Sen. Jim Bunning (R-Ky.) asked Bernanke: "Can you imagine Citigroup selling for $1.50 a share? Does that mean the market has miscalculated its value or is really Citigroup under more stress than the Fed realizes?" (It's actually trading at about $1.20 per share today.)

Bernanke said: "Our belief is that it has enough capital; it meets the requirement of being well-capitalized, it has plans for restructuring and we're going to work intensely to make sure Citigroup [is solvent] going forward."

Bernanke: AIG Failure Would Cost In 'Multiples of Trillions'

11:05 A.M.: Bernanke said that the cost to the world economy of AIG failing would be "in the multiples of trillions."

Bernanke just got into a little tete-a-tete with socialist Sen. Bernie Sanders (I-Vt.), who asked, sarcastically, if you have to be a "large, greedy, reckless" institution to get federal money.

Bernanke got his back up a little -- as much as he does, anyway -- and explained that the loans are "collateralized, short-term, liquid loans and we've never lost a penny doing" them.

Bernanke: We've Failed So Far On Banks

10:54 A.M.: Bernanke said that despite the billions of taxpayer dollars poured into the banking system, it's not yet working.

"With respect to the banking system, clearly we have not stabilized the situation," Bernanke said.

Bernanke: AIG 'Makes Me Uncomfortable'

10:18 A.M.: Bernake said that the multi-billion-dollar government bailouts of troubled insurance giant AIG "makes me uncomfortable."

The alternative -- letting AIG fail -- would have been worse, however, Bernanke said. He said the government would have had little chance of recovering any of its bailout money had it let AIG fail -- a real Catch-22.

Bernanke went on to call AIG "a hedge fund that was attached to a large and stable insurance company" that had "no regulatory oversight," exploited a "gap in the system" and made "huge and irresponsible" business decisions.

This is the most blunt and clear assessment The Ticker has heard Bernanke deliver of AIG.

"We had no choice but to try to stabilize the system" Bernanke said.

Bernanke said the outlook for the near-term economy remains "weak," but added that "over time, a number of factors should promote the return of solid gains in economic activity in the context of low and stable inflation."

Bernanke noted that the massive amounts of federal borrowing required for the stimulus will push the national debt from 40 percent of GDP to about 60 percent, the highest percentage since the early 1950s, when the U.S. began paying off its war debt.

"With such large near-term deficits, it may seem too early to be contemplating the necessary return to fiscal sustainability," Bernanke said. "To the contrary, maintaining the confidence of the financial markets requires that we begin planning now for the restoration of fiscal balance."

You can read the entire text of Bernanke's testimony here.

-- Frank Ahrens
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By Frank Ahrens  |  March 3, 2009; 10:18 AM ET
Categories:  The Ticker  | Tags: Ben Bernanke  
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