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Volcker slams Bear bailout

The Federal Reserve has been strongly criticised by a former governor for its actions in rescuing the stricken investment bank Bear Stearns last month.

Paul A Volcker said yesterday that the current incumbent, Ben S Bernanke, worked at the "very edge" of the institution's authority in the bailout.

Banking giant JP Morgan took over the investment bank last month in a Fed-engineered deal - the terms of which were so generous that they have been renegotiated since in order to placate Bear shareholders.

"Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank," Mr Volcker said.

The Fed's last chairman, Alan Greenspan, was also subject to scathing comments from Mr Volcker - who is credited with successfully tackling the inflation problem of the 1980s.

He said that the "bright new financial system" championed, and in part developed, by Mr Greenspan prior to the credit crisis last year had "failed the test of the marketplace".

Mr Volcker's comments came during a speech he gave to members of the Economic Club of New York.