"It's very important for us to put out the fire first and then think about the fire code. Going forward we have to look at the code of regulation for the financial system."

From the Q&A session, as reported by the Telegraph

As I have noted, I believe that the Federal Reserve's actions to facilitate the acquisition of Bear Stearns, thereby preventing its bankruptcy and the disorderly liquidation of positions by its counterparties and creditors, were necessary and warranted to head off serious damage to the U.S. financial system and our economy. That said, the intended purpose of Federal Reserve lending is to provide liquidity to sound institutions. We used our lending powers to facilitate an acquisition of a failing institution only because no other tools were available to the Federal Reserve or any other government body for ensuring an orderly liquidation in a fragile market environment. As part of its review of how best to increase financial stability, and as has been suggested by Secretary Paulson, the Congress may wish to consider whether new tools are needed for ensuring an orderly liquidation of a systemically important securities firm that is on the verge of bankruptcy, together with a more formal process for deciding when to use those tools. Because the resolution of a failing securities firm might have fiscal implications, it would be appropriate for the Treasury to take a leading role in any such process, in consultation with the firm's regulator and other authorities.

From a regulatory and supervisory perspective, the investment banks and the other primary dealers raise some distinct issues. First, as I noted, neither the firms nor the regulators anticipated the possibility that investment banks would lose access to secured financing, as Bear Stearns did. Second, in the absence of countervailing regulatory measures, the Fed's decision to lend to primary dealers--although it was necessary to avoid serious financial disruptions--could tend to make market discipline less effective in the future. Going forward, the regulation and supervision of these institutions must take account of these realities. At the same time, reforms in the oversight of these firms must recognize the distinctive features of investment banking and take care neither to unduly inhibit efficiency and innovation nor to induce a migration of risk-taking activities to institutions that are less regulated or beyond our borders.

Fed-SEC cooperation is taking place within the existing statutory framework with the objective of addressing the near-term situation. In the longer term, legislation may be needed to provide a more robust framework for the prudential supervision of investment banks and other large securities dealers. In particular, under current arrangements, the SEC's oversight of the holding companies of the major investment banks is based on a voluntary agreement between the SEC and those firms. Strong holding company oversight is essential and thus, in my view, the Congress should consider requiring consolidated supervision of those firms, providing the regulator the authority to set standards for capital, liquidity holdings, and risk management.

So how do we strengthen market discipline? Today's priority is clearly market stability. However, looking beyond the immediate turmoil, we need to design carefully and put in place a stronger capacity for resolution and crisis intervention that reinforces market discipline....

To address the perception that some institutions are too big to fail, we must improve the tools at our disposal for facilitating the orderly failure of a large complex financial institution. As former Federal Reserve Chairman Greenspan often noted, the real issue is not that an institution is too big or too interconnected to fail, but that it is too big or interconnected to liquidate quickly.

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As I have continually noted, the financial landscape has changed, and non-bank financial institutions play a significantly greater role. We need to consider broadly the resolution regime in light of these changes. It is clear that some institutions, if they fail, can have a systemic impact, so we must give regulators the authorities to limit that impact and facilitate an orderly failure. In my view, looking beyond the immediate market challenges of today, we need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm. To do this, we will need to give our regulators additional emergency authority to limit temporary disruptions. These authorities should be flexible and -- to reinforce market discipline -- the trigger for invoking such authority should be very high, such as a bankruptcy filing. And as part of this process we should consider ways to ensure that costs are imposed on creditors and equity holders. Any commitment of government support should be an extraordinary event that requires the engagement of the Executive Branch.

In our Blueprint, we suggested an optimal regulatory structure for the long term in which the Federal Reserve would take on a different but important role as market stability regulator focused exclusively on the market as a whole. We raised for debate whether it was optimal to have a regulator that serves as the system's lender of last resort and also focuses on the safety and soundness of individual institutions. We questioned whether these sometimes conflicting responsibilities should be separated in order to better channel market discipline. We also noted that where the system was at risk additional regulatory authority to complement market discipline would be needed.

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We should evaluate whether the resolution, or winding down, process for large complex institutions should be modified to help mitigate disruption to the financial system and improve market discipline. This requires addressing a number of difficult questions, including whether we need to assign a particular regulatory agency to oversee resolutions and how any potential intervention is justified and explained.

Finally, we must review the emergency authorities of the Federal Reserve, Treasury and other financial regulators, and update them to reflect the current financial system. To be effective in the future, our regulatory system needs an overhaul.

Clearly, these are difficult questions. They will not be resolved quickly. Nor will they be resolved in one single reform effort. The solutions will evolve, as regulators and market participants consider the issues. Recent events have revealed the disconnect between the ever-evolving financial system and our outdated regulatory framework. Dedicated and innovative regulators have found ways to address current issues within the bounds of authorities created when the financial system was markedly different.

Given its focus on fundamental reform, the recommendations of the Treasury blueprint are mostly intended to be undertaken in the longer term. In that respect, it is an important first step, and we look forward to working with the Congress and others in developing a framework that modernizes our financial and regulatory architecture. The analysis of the PWG [President's Working Group] that I will be discussing today is more sharply focused on recent events, and its recommendations are intended to be part of the near-term and medium-term effort to restore more normal functioning of financial markets and to improve the operation of the current system.

KENNEDY:  Let me ask you, just finally, toys and drugs are regulated, a great many other kinds of factors are regulated. Shouldn't we make sure that financial products are safe for consumers? Should we consider having a new agency that's going to review unsafe financial products on the market?

BERNANKE: Senator, that's extremely important. The Treasury blueprint, for what it's worth, has an agency in it that would do that.  In the current situation, the Federal Reserve has responsibilities along those lines.