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Senators grill Fed’s Ben Bernanke over bank bailouts

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Now, the Senate and House are considering legislation to revise the way banks are regulated. It's possible that the Fed will come out of the process with expanded power, despite what critics see as lax supervision of large banks before the crisis. It's unclear, moreover, whether the reforms will prevent bailouts the next time a credit boom goes bust.

"The only way to [solve 'too big to fail'] is to find a way to let those firms fail," Bernanke said.

He said legislation could achieve this end, by creating a resolution process for large institutions, much as the Federal Deposit Insurance Corp. now does with smaller banks that get into trouble.

Sometimes this FDIC process involves closing banks down in a controlled way or selling them to new owners after stripping out bad loans.

Bernanke said creditors and shareholders of large and complex firm could be forced to take losses under this new system, without disrupting the financial system.

However, some financial experts are skeptical that the legislation now under review will truly result in what Rep. Barney Frank (D) of Massachusetts has called "death panels" for large banks. They say the reform under consideration also leaves open the possibility that banks will expect bailouts again in the future.

Concern about bailouts

A range of lawmakers raised concerns about bailouts at the hearings.

"Many of the Fed's responses [to the crisis] greatly amplified the problem of moral hazard stemming from too big to fail treatment of large financial institutions," Sen. Richard Shelby (R) of Alabama said. "Taxpayers simply should not be subjected to possible losses from private risks."

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