Goldman Sachs (GS, Fortune 500) and other banks have been in the news over reports they secretly helped raise $1 billion in credit for Greece, in a way that was off the balance sheet and helped hide Greece's big debt woes from European Union regulators.
The New York Times reported recently that some of these same banks were also now making side bets that Greece defaults on loans it owes U.S. banks and hedge funds. By betting in favor of default, the U.S. banks and hedge funds win whether Greece pays off its loans or not.
Dodd asked whether Bernanke thought there should be limits on the use of these types of bets to prevent firms from creating intentional runs against government.
"The rising price of these contracts contribute to an atmosphere of crisis, making it even more difficult for the Greek government, in my opinion, to borrow," Dodd said.
Bernanke said that while such bets are an important financial tool to help mitigate risk, the Fed planned to look into reports that the financial bets were made.
0:00/00:58Goldman Sachs under global scrutiny"Obviously, using these instruments in a way that intentionally destabilizes a company or a country is -- is counterproductive, and I'm sure the SEC will be looking into that," Bernanke said. "We'll certainly be evaluating what we can learn from the activities of the holding companies that we supervise here in the U.S."
The kinds of financial bets that regulators are concerned about are credit default swaps, which are insurance contracts -- the same kind of contracts that pushed the insurance giant American International Group (AIG, Fortune 500) to the brink of collapse.
During the real estate boom, investment firms were buying and selling securities backed by pieces of mortgages. The firms also paid AIG to back up the investments if they turned sour.
When all the real estate investments went bad at the same time, AIG didn't have enough money to pay back all the promises it had made.
Later in the hearing, Bernanke noted the similarity of the situation of banks making bets to hedge against Greek debt to banks that made bets to hedge against real estate debt, which imploded AIG.
"The poster child for that would be the capital arrangements that banks took out for AIG," Bernanke said. "Derivatives have a legitimate purpose, but if they're used to distort accounting results or regulatory ratios, that needs to be addressed."
Congress is considering legislation to make such financial bets more transparent in its regulatory overhaul package. The Senate has yet to pass a bill on that subject.
Bernanke’s audit olive branchList of problem banks grows
