bank run blog

Speaking to members of Congress today, Federal Reserve Board Chairman Ben S. Bernanke delivered a message of cautious optimism about the US economy, saying that modest growth may be possible later this year. The Associated Press reports :

“Federal Reserve Chairman Ben Bernanke told Congress Tuesday the economy should start growing again later this year, his most optimistic assessment of the country’s financial health since the recession struck with force last year.”

Bernanke sees reasons for renewed hope that the economy may be on the rebound :

“’We continue to expect economic activity to bottom out, then to turn up later this year,’ he told lawmakers. ‘We expect that the recovery will only gradually gain momentum.’

Recent data suggest the recession may be loosening its grip on the country, Bernanke said.

‘The pace of contraction may be slowing,’ he said. It was similar to an observation the Fed made last week in deciding not to take any additional steps to shore up the economy.”

If the tenor of Bernanke’s economic prognosis sounds familiar, it’s only because you’re paying attention. Here’s what the Fed chairman told an audience of distinguished academics and policymakers at the International Monetary Conference in Barcelona in June, 2008 :

“We may see somewhat better economic conditions during the second half of 2008, reflecting the effects of monetary and fiscal stimulus, reduced drag from residential construction, further progress in the repair of financial and credit markets, and still solid demand from abroad. This baseline forecast is consistent with our recently released projections, which also see growth picking up further in 2009.”

Today’s guardedly upbeat remarks were made in Congressional testimony before the Joint Economic Committee. Bernanke told the same committee in March, 2007 :

“Growth in consumer spending should continue to support the economic expansion in coming quarters. In addition, fiscal policy at both the federal and the state and local levels should impart a small stimulus to economic activity this year.”

Bernanke’s forecast for 2007 concluded :

“Overall, the economy appears likely to continue to expand at a moderate pace over coming quarters. As the inventory of unsold new homes is worked off, the drag from residential investment should wane. Consumer spending appears solid, and business investment seems likely to post moderate gains.”

Keenly sensing a “cooling” of the US housing market in 2006, USA Today reported that Bernanke was expecting a “soft landing” :

“The housing market, after flying high for five years, has lost altitude but appears headed for a safe landing, Federal Reserve Chairman Ben Bernanke said Thursday.

‘It seems pretty clear now that the U.S. housing market is cooling,’ Bernanke said in a question-and-answer session following a speech he delivered on banking in Chicago.

He noted that home sales and construction are slowing.

‘Our assessment at this point … is that this looks to be a very orderly and moderate kind of cooling,’ Bernanke said.”

A former professor of economics at Princeton, with degrees from Harvard and MIT, it is certain that Bernanke is one of the best and brightest of his generation. The question is, at what?

Associated Press : Bernanke: Economy should grow again later in 2009

Federal Reserve Board : Remarks by Chairman Ben S. Bernanke at the International Monetary Conference, Barcelona, Spain (via satellite), June 3, 2008

Federal Reserve Board : Prepared Testimony of Chairman Ben S. Bernanke Before the Joint Economic Committee, U.S. Congress, March 28, 2007

USA Today : Bernanke: Housing market is headed for a soft landing (May 18, 2006)

It appears from testimony being leaked by New York Attorney General Andrew Cuomo’s office that former Treasury Secretary Henry Paulson told Bank of America CEO Ken Lewis that he would be fired if he did not go through with the Merrill Lynch deal after Lewis discovered huge losses at the once-esteemed investment bank. Lewis also alleges that he was instructed by federal regulators to remain silent about the deal.

In an irony that anyone following the three-year (and counting) financial fiasco can appreciate, the New York Times reports that it looks like Bernanke told Lewis to keep quiet, while Paulson told him to play dumb :

“The head of Bank of America changed his mind about trying to pull out of its deal to buy Merrill Lynch after Henry M. Paulson Jr., the Treasury secretary at the time, suggested that the bank’s management and board could be removed if that happened, Attorney General Andrew M. Cuomo of New York said in a letter to Congress made public on Thursday.

Kenneth D. Lewis, the bank’s chief executive, also testified in that he was told by Mr. Paulson to keep quiet about the deal’s new developments, even after it was clear that the bank was going to absorb much bigger-than-expected losses in buying Merrill, according to a transcript that Mr. Cuomo released Thursday.

In his letter, Mr. Cuomo said his investigation into the Bank of America-Merrill merger had raised questions about the government’s financial bailout program, ‘as well as about corporate governance and disclosure practices at Bank of America.’”

The Wall Street Journal notes that the release of this testimony will only fuel criticism of the government’s secretive handling of the crisis :

“Mr. Lewis’s statements highlight a lack of public disclosure that has accompanied the financial crisis since its inception. The crisis has roots in the fact that Wall Street banks didn’t adequately disclose the true prices of the toxic mortgage-related assets they held. The government has also been criticized for offering limited disclosure of the details or rationale of some of its bailout strategies, from the forced sale of Bear Stearns Cos., to the $173 billion injection into American International Group Inc.”

New York Times : Treasury Pushed BofA to Close Merrill Deal, Cuomo Says

Wall Street Journal : Lewis Testifies U.S. Urged Silence on Deal

The US government made a significant purchase overnight, with Henry Paulson shrewdly picking up $138 billion of liabilities from a bank that was poised to report a huge loss.

Paulson was reportedly honoring a secret promise he made to Bank of America CEO Ken Lewis in December to come up with cash to cover the Merrill Lynch deal. Lewis is the financial wizard who arranged the purchases of deflated powerhouses Countrywide and Merrill, every step of the way assuming that federal dollars would be available to offset 100 percent of the losses.

Lewis is also the public relations expert who claimed in October that his bank didn’t really need any TARP money, as Paulson “forced” Bank of America to accept the first $25 billion. Reuters reports :

“Bank of America Corp (BAC.N), posted its first quarterly loss in 17 years on Friday and slashed its dividend, hours after winning a multibillion-dollar lifeline from the U.S. government to help absorb Merrill Lynch, which lost a record $15.31 billion in the quarter.

The dismal results came as the largest U.S. bank faced mounting pressure from investors who questioned how well it will absorb a tidal wave of soured loans in an economy showing no signs of escaping a deep recession. Bank of America cut its quarterly dividend to a penny from 32 cents.

‘It is difficult to focus on what is going right at this time,’ a clearly downbeat Chief Executive Kenneth Lewis said on a conference call. ‘The economy and subsequently the credit markets literally hit a wall starting in September and culminating late in December, with the greatest impact of my almost 40 years in banking.’”

The pattern that seems to be emerging is that enormous cash infusions immediately precede announcements of staggering losses. After receiving further guarantees of emergency funding from the Treasury and the Fed, the flamboyantly insolvent CitiGroup announced its fifth consecutive multi-billion dollar quarterly loss. From the Associated Press :

“Citigroup said Friday it is splitting into two businesses as it reported a fourth-quarter net loss of $8.29 billion — its fifth straight quarterly loss.

In Citigroup’s reorganization, one business, Citicorp, will focus on traditional banking around the world, while the other, Citi Holdings, will hold the company’s riskier assets.

CEO Vikram Pandit’s move will allow Citigroup to sell or spin off the Citi Holdings assets to raise cash. It also reveals the company’s growing focus on back-to-basics lending and deposit-gathering, and dismantles the “financial supermarket” created a decade ago.

Shares rose about 4 percent in pre-market trading.

Some investors have been calling for a breakup of Citigroup for years, as the bank struggled to keep up with its Wall Street peers. Those calls grew louder as the mortgage crisis caused the company’s troubles to mount.

There has been harsh blame for Citigroup’s woes directed at the board, too — and the company said Friday it plans to get rid of more board members after the recent departure of long-time director and former Treasury Secretary Robert Rubin.”

Reuters : Bank of America posts first loss in 17 years

Associated Press : Citigroup posts loss, splits up the bank

Henry Paulson is reportedly about to unveil yet another new initiative in the evolving bankers’ bailout. According to Bloomberg :

“Treasury Secretary Henry Paulson is considering a new plan to lower mortgage rates in an effort to resuscitate the U.S. housing market, a government official said.

The Treasury, which already has a program to buy mortgage- backed securities issued by Fannie Mae and Freddie Mac, could step up those purchases to drive down interest rates on some loans to 4.5 percent, the official said on condition of anonymity. The plan is preliminary and could change.”

On the surface, it appears as if Paulson is finally moving to help consumers, heading off criticism he has received from housing groups, Congressional Democrats, and even FDIC Chair Sheila Bair.

“The Bush administration has been faulted by Democrats and consumer advocates for failing to take sufficient steps to stem record home-loan foreclosures this year. Federal Housing Finance Agency Director James Lockhart has been prodding private mortgage servicers and bond investors to cooperate with government efforts to modify or refinance loans for troubled borrowers.

Treasury ‘keeps nipping at the edges to come up with a wholesale response, but always ends up with a partial response,’ said John Taylor, president and chief executive officer of the National Community Reinvestment Coalition in Washington. ‘Regardless of whatever rhetoric Paulson keeps throwing around, foreclosures continue to go up.’“

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But if Paulson is on board, the bankers can’t be too far out of the picture. The Associated Press is reporting that Paulson, at the behest of the financial lobby, is trying to concoct a brief yield-spread bubble :

“Financial industry lobbyists are urging the Treasury Department to take steps to lower mortgage rates and help stabilize the battered U.S. housing market.

Under one proposal, Treasury would seek to lower the rate on a 30-year mortgage to 4.5 percent by purchasing mortgage-backed securities from Fannie Mae and Freddie Mac, Scott Talbott, chief lobbyist at the Financial Services Roundtable, said Wednesday.

If enacted, such a plan would be an unprecedented opportunity for anyone with good credit and a solid income who could qualify for a mortgage at the lowest rates on records dating to the early 1960s, said Keith Gumbinger, senior vice president at financial publisher HSH Associates.

‘You would have the mother of all re-fi booms,’ said mortgage industry consultant Howard Glaser.

The goal of the industry’s proposal would be to take advantage of the unusually large difference, or spread, between mortgage rates and yields on government debt. On Wednesday, the yield on the 10-year Treasury note yield sank as low as 2.65 percent, while the national average rate on a 30-year fixed rate mortgages was 5.75 percent, according to HSH Associates.”

full story

Emergency measures are announced so routinely these days, and often radically revised a short time later, that it is difficult to keep up with details of all the tinkering. Today the Fed, which is not by any measure a transparent agency, postponed the expiration of an array of liquidity programs designed to benefit banks. According to the Associated Press :

“The Federal Reserve has extended the life of key programs aimed at busting through credit clogs and restoring stability to financial markets.

The Fed said Tuesday that the programs, originally slated to last through Jan. 30, will be extended through April 30. The Fed said it was taking the action ‘in light of continuing strains in financial markets.’

The Fed’s emergency lending facility, which investment firms can tap for a ready source of cash, is covered by the decision. This category was recently broadened to include any loans that were made to the U.S. and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch.

A program that lets financial institutions temporarily swap risky investments, such as shunned mortgage-backed securities, for super-safe Treasury securities also is covered.

Another Fed program being extended makes loans to money market mutual funds — via banks — to help the funds, which have been under pressure as skittish investors demand withdrawals.”

In a story that somehow seems related, the New York Times is reporting Bailout Monitor Sees Lack of a Coherent Plan :

“The head of a new Congressional panel set up to monitor the gigantic federal bailout says the government still does not seem to have a coherent strategy for easing the financial crisis, despite the billions it has already spent in that effort.

Elizabeth Warren, the chairwoman of the oversight panel, said in an interview Monday that the government instead seemed to be lurching from one tactic to the next without clarifying how each step fits into an overall plan.”

Associated Press : Fed extends key credit programs through April 30

New York Times : Bailout Monitor Sees Lack of a Coherent Plan