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Bernanke: 'Too big to fail' bailouts must stop

He says institutions can't be allowed to threaten the financial system, something a new law tries to address.

The Associated Press

WASHINGTON - Federal Reserve Chairman Ben Bernanke told a panel investigating the financial crisis that regulators must be ready to shutter the largest institutions if they threaten to bring down the financial system.

"If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved," Bernanke said Thursday while testifying before the Financial Crisis Inquiry Commission.

Bernanke also said it was impossible for the Fed to rescue Lehman Brothers from bankruptcy in 2008 because the firm lacked sufficient collateral to secure a loan. Lehman's former chief executive told the panel a day earlier that the firm could have been saved, but regulators refused to provide help.

The Fed chief presented his analysis of the crisis and views on potential systemwide risks as the panel approaches the end of its yearlong investigation into the Wall Street meltdown.

The new financial overhaul law gives regulators the authority to shut down firms when their collapse poses a broader threat to the system. The process resembles the one used by the Federal Deposit Insurance Corp. to close failing banks.

Bernanke said that bailing out big institutions is not a healthy solution, and great improvement will come from the new law.

"We should not imagine ... that it is possible to prevent all crises," he said. "To achieve both sustained growth and stability, we need a framework which promotes the appropriate mix of prudence, risk-taking and innovation in our financial system."