Bear Stearns rescue hot topic on Hill

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NEW YORK (CNNMoney.com) -- Congress on Thursday will scrutinize JPMorgan Chase's controversial acquisition of Bear Stearns and quiz top executives from both firms as well as the regulators who helped engineer the rescue.

Among those scheduled to testify before the Senate Banking Committee are Jamie Dimon, chairman and CEO of JPMorgan Chase (JPM, Fortune 500), and Alan Schwartz, chief executive of Bear Stearns (BSC, Fortune 500). Neither has spoken publicly on the details of the deal since it was announced on March 16.

The two bank chiefs will be joined Ben Bernanke, chairman of the Federal Reserve; Timothy Geithner, president of the Federal Reserve Bank of New York; and Christopher Cox, chairman of the Securities and Exchange. Robert Steel, the undersecretary of the Department of Treasury, is also due to testify. The committee had asked Treasury Secretary Henry Paulson to appear.

Much of the focus of Thursday's hearing is expected to center on the coordinated effort by the Fed, Treasury Department and the SEC to extend a $29 billion loan to facilitate JPMorgan's acquisition of Bear Stearns as the company teetered on the brink of collapse.

Bernanke endured a barrage of questions about the deal Wednesday during his appearance before the Joint Economic Committee of Congress. He defended the Fed's participation in the orchestrated marriage of Bear Stearns and JPMorgan.

"We did not bail out Bear Stearns," Bernanke told lawmakers. "We did what we did because we felt it was necessary to preserve the integrity and viability of the American financial system, which in turn is critical for the health of the economy."

Critics have charged that the purchase amounted to a government bailout of Wall Street, at a time when American homeowners continue to struggle with the fallout from the housing market.

"It's appropriate to do for a large investment bank; isn't it just as appropriate to do it in the housing market?" asked Sen. Charles Schumer, D-N.Y., during Wednesday's hearing. "That's the dichotomy many of us are troubled about."

Lawmakers have also expressed concerns about the impact the Fed's loan would have on taxpayers.

In a letter issued last month to witnesses invited to Thursday's hearing, Sen. Christopher Dodd, D-Conn., who chairs the Senate Banking Committee, said the hearing was "not only warranted, but necessary" because the deal put public funds at risk.

"Had the merger between JPMorgan Chase and Bear Stearns been a routine transaction between two private entities, such an event might not merit public examination," Dodd wrote.

In his letter, Dodd also asked for a "thorough accounting" of the assets that the Fed agreed to guarantee, including how they were selected and valued.

Under the terms of the deal, JPMorgan will bear the risk of the first $1 billion of losses if Bear Stearns' assets go bad. The Federal Reserve Bank of New York will cover the risk for the remaining $29 billion, with Bear Stearns' assets serving as collateral.

The rescue of Bear Stearns was widely viewed as an unorthodox move by the Federal Reserve, which traditionally has been responsible for setting monetary policy, not regulating investment banks.

But after Treasury Secretary Henry Paulson suggested broadening the Fed's powers earlier this week in a detailed proposal aimed at remedying problems in the nation's financial system, the role of the Fed going forward could be a subject for discussion for lawmakers as well on Thursday.

Meanwhile, Sen. Charles Grassley R-Iowa, the top GOP member of the Senate Finance Committee, issued a letter to the inspector general of the Securities and Exchange Commission Wednesday asking why the regulator sought no enforcement action against Bear Stearns for improperly valuing its mortgage-related investments.

Grassley and Sen. Max Baucus, D-Montana, have also been closely following the Bear Stearns deal. Last week the pair issued letters to top federal regulators as well as execs at Bear Stearns and JPMorgan Chase for details on the merger.