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Archive for the ‘Bernanke’ Category

Will The Fed Use Stress Tests To Determine If A Bank Needs Capital?

The head of the Federal Reserve System, Ben S. Bernanke told lawmakers at a ‘Senate Banking Committee’ hearing yesterday that he strongly rejects the suggestion that officials could use the reviews of a bank’s balance sheet as a pretext for government takeovers of the nation’s largest lenders.

“I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary. The Treasury will buy convertible preferred stock in the nineteen largest U.S. banks if stress tests determine they need more capital to weather a deeper than forecast recession. The shares would be converted to common equity stakes only as extraordinary losses materialize. How much more we’ll have to do depends on the state of the banks, it depends on how the economy evolves and it depends on the margin of safety we think we want to have”.

In answer to a question from Senator Bob Corker, a Tennessee Republican, Bernanke replied that, “the so called stress tests will look at the balance sheets and the capital needs of each of our nineteen largest $100-billion-dollar-plus banks over the next two-year horizon”.

The Standard & Poor’s 500 Banks Index climbed 14.8 percent following Bernanke’s comments suggesting that his remarks had somewhat calmed very concerned investors who had feared that the Treasury’s capital-injection was a forerunner to nationalization and Marshall Front, who oversees a $500 million fund as chief executive officer of ‘Front Barnett Associates’ in Chicago said, “There’s a bit of relief that that’s not going to happen. Today at least there seems to be a growing sense of relief that nationalization was de-emphasized and put into perspective”.

Whereas investors might feel a little reassured by the Fed’s intended action, a private survey that was released yesterday indicated that confidence among U.S. consumers fell to 25 this month making it a record low since 1967.

Reacting to ongoing criticism that characterize the major U.S. banks as zombie firms that are only kept alive by federal programs, Bernanke responded that, “They have substantial franchise value”.

Reactions to ‘Treasury Secretary’ Timothy Geithner’s guidelines that were announced yesterday ranged from ‘well meaning’ to ‘toothless’ which in essence is exactly what guidelines are and only time will tell whether banks and other companies will adhere to some or any of them.

What Are The Suggested Guidelines?

• A joint public-private sector fund that will buy as much as $1 trillion of illiquid bank assets.
• A $1 trillion program that will offer new credit to consumers and businesses.
• Banks must be more transparent and accept additional restrictions on acquisitions, dividends and executive pay.
• The administration will inject additional taxpayer funds into banks.

Geithner’s announcement included the following,

“Our plan will help restart the flow of credit, clean up and strengthen our banks, and provide critical aid for homeowners and for small businesses. As we do each of these things, we will impose new, higher standards for transparency and accountability. Banks that negotiate exceptional assistance deals with Treasury, such as the targeted relief provided to Citigroup Inc. last November or to Bank of America Corp. in January, will be required to show how every dollar of capital they receive is enabling them to preserve or generate new lending”.

His suggested cap on executives salaries and bonuses is $500,000 but additional compensation in the form of restricted stock would be permitted, which would open a very big door, very wide!

Reactions to his announcement include,

“The new conditions are all sensible, but the proof is in the pudding and the real question will be how tightly these regulations are going to be put into effect” – Robert Reich, who was an informal adviser to Obama during his campaign.

“Geithner didn’t put it in writing and unless the government has the power to remove executives, there’s no chance here of success. Other than Fannie Mae and Freddie Mac, which the government seized in September, the Treasury so far hasn’t publicly forced a management change at any financial institution” – Ralph Nader

Thus far, more than 360 banks have signed up for cash injections that range from $1 million to $25 billion but few if any restrictions were imposed although the recipients did have to agree to additional oversight.

Under pressure at a ‘House Financial Services Committee’ hearing yesterday, Fed Chairman Ben S. Bernanke implied that the central bank might disclose more information about emergency lending programs that have added to about $2 trillion to the Fed’s balance sheet.

Bernanke said he’d “initiated a review, to be led by Vice Chairman Donald Kohn”, “with a presumption that the public has a right to know and that nondisclosure of information must be affirmatively justified by clearly articulated criteria for confidentiality”.