April 3 (Bloomberg) -- Bear Stearns Cos. Chief Executive Officer Alan Schwartz said the fifth-largest U.S. securities firm might have survived if the Federal Reserve had acted earlier to lend money directly to investment banks.

Schwartz discussed such a change in Fed lending rules with Senate Banking Committee Chairman Senator Christopher Dodd at a meeting ``some months ago,'' the senator said at a congressional hearing today where Schwartz, 58, testified. Dodd, a Connecticut Democrat, didn't say whether the idea was proposed to the central bank then.

The Fed agreed to provide emergency funding to New York- based Bear Stearns on March 14 after a run on the company put it on the verge of bankruptcy. Two days later, after brokering an agreement for JPMorgan Chase & Co. to buy Bear Stearns, the central bank said it would start lending to securities firms directly for the first time since the Great Depression.

``Had the discount window been opened to investment banks for their high-quality collateral, I think it is highly, highly unlikely in my personal opinion that we would be in the situation we find ourselves in today,'' Schwartz told members of the Senate Banking Committee.

Fed loans to investment banks have averaged about $38.1 billion a day for the past week, according to the central bank.

Schwartz said the Fed's rescue effort on March 14 didn't help, partly because it exposed the troubles at Bear Stearns. Schwartz added that it might have been too late at that point to save his company.

Didn't Seek Capital

Bear Stearns didn't seek new capital to strengthen the firm as markets were under pressure because it didn't have the billions of dollars in writedowns some competitors did, Schwartz said. Analysts, including David Hendler of Creditsights Inc., have suggested such a move might have pre-empted the concerns about Bear Stearns's financial health.

Citigroup Inc., Merrill Lynch & Co. and 15 other financial institutions have raised more than $142 billion of fresh capital since July.

Bear Stearns helped trigger a Wall Street credit crunch after two of its hedge funds, which had invested in securities linked to subprime mortgages, collapsed in July. Bear Stearns's fourth-quarter loss of $854 million was the first in its 85-year history.

``The reason Bear Stearns failed was because they invested in highly risky subprime investments,'' said Lynn Turner, a former U.S. Securities and Exchange Commission chief accountant. ``While the Fed making a loan available sooner might have helped, it wouldn't have resolved what caused the failure of this institution.''

Management's Responsibility

Schwartz, responding to a question from Senator Richard Shelby, an Alabama Republican, said `` a management team can never say it bears no responsibility. The buck stops here, and our shareholders paid a price.''

Schwartz agreed to sell Bear Stearns to JPMorgan for $10 a share last month, a fraction of its week's earlier market value. He blamed false rumors about a cash shortage for triggering a run on the company.

``It looked like there were people that wanted to induce panic,'' Schwartz told the Senate panel. ``There are lots and lots of reasons why people can have a financial motivation to induce panic.''

Investments banks' ability to borrow from the Fed should become permanent to prevent a similar run on a firm, Schwartz said. Securities firms need to have the same access as commercial banks because the repeal of the Glass-Steagall Act in 1999 removed barriers between the two industries, he said.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net; Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: April 3, 2008 19:07 EDT