Mr Bernanke said the Fed was committed to preventing new lending problems and had cut rates to cushion the economy amid current market turbulenceNEW YORK/LONDON - A second wave of investment bank earnings reports hit Wall Street on Thursday, revealing dramatically different degrees of success weathering turmoil triggered by the sub-prime mortgage meltdown.
Meanwhile, Federal Reserve chief Ben Bernanke testified to Congress that the central bank cut interest rates this week to brace the US economy against market turmoil, but he warned there could be more defaults on US mortgages to come.
Bear Stearns Cos, one of the Wall Street firms hit hardest by exposure to risky mortgages, reported a huge hit to earnings on bad bets on the loans, but said the worst was over.
The bank said its quarterly profit plunged 61 per cent to its lowest level in five years, hurt by challenges to fixed-income trading as well as by the sub-prime mortgage market.
Goldman Sachs, on the other hand, said betting against mortgage bonds helped it report its second-highest revenue ever in the third quarter.
Bernanke
Mr Bernanke, discussing the high-risk sub-prime mortgage debt, said the Fed was committed to preventing new lending problems and had cut rates to cushion the economy amid current market turbulence.
'With house prices still soft and many borrowers ... still facing their first interest rate resets, delinquencies and foreclosure initiations in (sub-prime) mortgages are likely to rise further,' he told a Congressional committee.
Mr Bernanke also told the House of Representatives Financial Services Committee he was open to letting Fannie Mae and Freddie Mac buy home loans being shunned by private investors provided they submit to tougher oversight.
He was echoed by US Treasury Secretary Henry Paulson, who told the committee he could support letting the two government-sponsored enterprises invest temporarily in home loans that are above their current US$417,000 limit as part of a broader regulatory overhaul.
Investors were able to take comfort on Thursday from signs that credit was starting to flow again, at least for high-quality borrowers.
Federal Reserve data on Thursday showed the US market in commercial paper, widely used by businesses to raise short-term funds, shrank for a sixth straight week.
But market participants said there have been signs of improvement, with more investors willing to buy paper with maturities beyond 24 hours.
Investors showed more enthusiasm for US corporate debt on Thursday but borrowers are still having to offer hefty interest rates to get financing done.
BOE defends its actions
Bank of England Governor Mervyn King defended the bank's decision not to pour billions into money markets when banks became reluctant to lend. Central banks should not save investors from bad decisions, he said.
'Taking the easy option, giving in in the short run without looking to the long-run consequences of those actions is damaging,' he told parliament's Treasury committee.
However, the UK central bank has already changed tack to offer the market more funds, including longer-term loans, after public confidence was hit when customers rushed to withdraw their savings from troubled lender Northern Rock.
The central bank's moves helped to bring the London interbank rate for overnight lending down to 5.82375 per cent on Thursday, closer to the BoE's 5.75 per cent benchmark rate, while the three-month sterling rate was fixed at its lowest in over a month. -- REUTERS
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