Bernanke: Government bridge bank may work for Wall St

By Karey Wutkowski

ARLINGTON, Virginia (Reuters) - Federal Reserve Chairman Ben Bernanke on Tuesday fleshed out how regulators might unwind a failing investment bank in an orderly manner, saying the current approach for dealing with insolvent commercial banks might be an appropriate model.

Bernanke's comments followed a call last week from Treasury Secretary Henry Paulson that U.S. regulators must have a way to allow investment banks to fail without threatening the stability of the broader financial system.

"Congress may wish to consider whether new tools are needed for ensuring an orderly liquidation of a systemically important securities firm that is on the verge of bankruptcy, together with a more formal process for deciding when to use those tools," Bernanke said during a mortgage lending forum sponsored by the Federal Depositary Insurance Corp.

In March, the Fed helped engineer a takeover of Bear Stearns by JPMorgan Chase & Co, and guaranteed a $29 billion loan to facilitate the transaction, out of concern that a Bear Stearns bankruptcy could trigger a financial panic.

Bernanke said on Tuesday that those actions were warranted but said the Fed only used its lending powers because no other tools were available at the time to mitigate the impact of Bear Stearns' collapse.

He said that "one possible model" is the FDIC's authority to act as a receiver for an insolvent commercial bank and to set up a so-called bridge bank to liquidate it in an orderly manner.

"A bridge bank authority is an important mechanism for minimizing public losses from government intervention while imposing losses on shareholders and unsecured creditors, thereby limiting moral hazard and mitigating any adverse impact of government intervention on market discipline," Bernanke said.

FDIC Chairman Sheila Bair has said in recent weeks that the agency's power to take over and sell the assets of failed commercial banks serves as a good model for investment banks.