"Nothing Fundamentally Broken on Wall Street" - Bernanke

If this is ANYTHING like the assurance that Benny gave us last year about the minimal impact of the subprime mortgage situation we'd have to conclude that the markets are probably screwed up beyond all recognition, and that a major Depression lasting twelve years and a day is on our doorstep.

THE FED
Nothing fundamentally broken on Wall Street: Bernanke
By Greg Robb, MarketWatch
Last update: 1:58 p.m. EDT April 10, 2008

WASHINGTON (MarketWatch) -- There is nothing fundamentally broken on Wall Street that a little regulation and incentives for participants to be slightly more honest couldn't fix, said Federal Reserve Chairman Ben Bernanke said Thursday. (You could have said the same thing about Ma Barker and her boys - Jesse)

Bernanke's comments put him at odds with former Fed chairman Paul Volker, who said in a speech earlier this week that the financial turmoil that began last summer showed that the "new Wall Street" hadn't passed the market test. (Our money is on Volcker. Ben is Bush-Paulson's schmendrick. Volcker is always and everywhere a no BS econo-asskicker. - Jesse)

At issue is the move by Wall Street over the past twenty years to an "originate to distribute" business model, where commercial and investment banks create new complex forms of securities and sell them to investors looking for high yield. This replaced the old "originate and hold" model. (Bring back Glass-Steagall. Bring it back today. - Jesse)

In a speech to the World Affairs Council in Richmond, Bernanke said that it is clear the originate-to distribute model "broke down at a number of key points." (No shit, Shalom. - Jesse)

But he quickly added that "these problems notwithstanding, the originate-to-distribute model has proved effective in the past and with adequate repairs could be so again in the future." (Our unquestioned nominee for Meshugener of the Year - Jesse)

This model "seems likely to remain an important component of our system of credit provision," he said. (The Wall Street three card monty system feeding bad debt to the world. These guys are like herpes. - Jesse)

The Bush administration and the Fed have poured billions of dollars into financial markets since August seeking to restore the flow of credit to consumers. (Its all about confidence, children. You can't buy back a good reputation - Jesse)

The Fed is concerned that a lack of credit is creating a vicious downward growth spiral. (That's what happens when a Ponzi scheme collapses, propeller head - Jesse)

"Healthy, well-functioning financial markets are essential to sustainable growth," Bernanke said.(Hence our almost-certain-to-be-severe recession - Jesse)

The turmoil has led some to raise fundamental questions about Wall Street. (Would y'all like that Necktie party with or without tar and feathers on a rail? - Jesse)

In a speech in New York on Tuesday, Volker said that in his view, simply stated, the bright new financial system, for all its talented participants, for all its rich rewards, has failed the test of the marketplace."

But Bernanke argued against any need for radical reform. (What would it take to require some serious reform? The dollar worth .20 euros and the Dow Industrial at parity with gold? - Jesse)

He trumpeted a recent road-map released by the President's Working Group on Financial Markets, chaired by Treasury Secretary Hank Paulson and which includes the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The PWG plan called for several steps to strengthen federal oversight of the mortgage and credit markets and a complete overhaul of the market for mortgage derivatives. (Their track record has been so outstanding, right Elliot? - Jesse)

The plan also said that credit-rating agencies must differentiate between ratings for derivatives and corporate bonds. (Grading on a curve? Let them eat CAPM model and only exchange traded products to be held by government regulated entities like banks - Jesse)

In addition, international financial market reform will be spearheaded by the Financial Stability Forum, set to release their recommendations this weekend.

Bernanke stressed that the financial crisis was not over. But he said it was not too early to draw some conclusions about the turmoil on public policy.

"We do not have the luxury of waiting for markets to stabilize before we think about the future," Bernanke said. (And we're not sure we have the luxury of waiting for you to quit being a spineless putz - Jesse)

He dismissed suggestions that markets should be left to sort the crisis out without government interference.

Bernanke, a student of the Great Depression, said that, although there are similarities between the current credit crunch and the 1930s, the U.S. "will not experience" anything like the Depression, which lasted for 12 years. (We are so fucked - Jesse)

Greg Robb is a senior reporter for MarketWatch in Washington.

SP 500 Bear Market Update - Daily Charts - April 10

In this comparison of the SP 500 declines in the bear markets of 2000-3
and 2007-9 we perform a more precise time comparison.

In each chart the end point is exactly 183 days from the top.

US Losses Likely to Top $1 Trillion - IMF and Soros

Worst from credit crisis yet to come; losses likely to top US$ 1 trillion
10 Apr, 2008, 1020 hrs
The Economic Times

SHANGHAI: The credit crisis is far from over, billionaire financier George Soros warned Thursday, urging regulators to move faster to contain damage from the collapse of the housing finance markets.

``I think the situation is more serious than the authorities admit or recognize,'' Soros told journalists in a conference call. Measures taken so far to slash interest rates and stimulate the economy were ``necessary but not sufficient,'' he said.

``Because of that, I think the situation is going to get worse before it gets better.'' Soros is promoting a new book, ``The New Paradigm for Financial Markets: The Credit Crisis and What It Means.'' He has urged regulators to move more aggressively to improve market oversight to curb risks from excessive reliance on debt for financial speculation.

He said he agreed with the International Monetary Fund's estimate of more than US$1 trillion (euro640 billion) in losses linked to the collapse of mortgage-backed securities. Losses disclosed by financial institutions so far are related only to the decline in value of those financial instruments, Soros said.

``They do not reflect in any way a possible decline in the value of the loans held by the banks,'' he said. ``We have not yet seen the full effect of the possible recession.''


Soros pointed to the potential for massive losses from complex investments linked to the U.S. subprime mortgage market, such as credit default swaps, or CDS, which allow investors to put bets on the likelihood that companies will default on bond payments.

He described as a ``Sword of Damocles'' the US$45 trillion (euro29 trillion) worth of credit swaps. ``That's more than five times the entire government bond market of the United States. It's almost equal to the entire household wealth of the United States,'' Soros said. ``This US$45 trillion market is totally unregulated,'' he said.

What's In Ben's Wallet: Roll the Printing Presses and The Fed Panics

Not to worry about the Fed's Balance Sheet as reported in The Dollar Is Being Devalued. As suspected, the Treasury and Fed have plans to print plenty of money in case the bankers feel the need, as outlined in the WSJ story below.

Will there be austerity plans on Wall Street? Besides the inevitable layoffs-- the Street always eats its young. Thinner bonuses? Get real. More banks cutting the dividend? F-- the shareholders, but don't touch the options. Johnnie Walker Black instead of Johnnie Walker Blue for après-fraud? Oh all right. K instead of coke? Damn. Cabs instead of limos? Ouch. Scandals instead of Scores? Oh the humanity!

Sacrifices must be made, and all you rubes must do your part. Perhaps CNBC can host a telethon: PigAid.

Not to put too fine a point on this, but since about ninety-nine out of a hundred readers will not understand the implications of "the Plan," let's just say that IF the Fed and Treasury actually go through with this as described, depending on how its structured our fiat currency has just kicked it up a notch and the money machine is switched to "on." And for what? Bonuses for the uber rich?

No, afraid not. There's a more likely possibility. Its worse, MUCH worse than they are letting on. The US financial system is teetering on the edge of a nasty fall, and the Fed and Treasury are in a panic. They are concerned as the word of how bad this is reaches the global public awareness, and not for stocks per se. The stock market is an important player, but the Bond and the Dollar are the franchise.)


Fed Weighs Its Options In Easing the Crunch
By GREG IP
April 9, 2008; Page A3

WASHINGTON -- The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.

Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed's name rather than the Treasury's; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.

• The Issue: The Fed has sold or committed a lot of its Treasury portfolio to support markets. Some worry it will soon run out of room to do more.
• The News: The Fed is considering several contingency plans for getting more lending capacity so that won't happen.
• The Bottom Line: The Fed has lots of firepower left before it has to turn to these contingencies.

No moves are imminent because the Fed still has plenty of balance sheet room for additional lending now. The internal discussions are part of a continuing effort at the Fed, similar to what is under way at foreign central banks, to determine its options if the credit crunch becomes even more severe. Fed officials believe the availability of such options largely eliminates the risk of exhausting its stockpile of Treasury bonds and thus losing its ability to backstop the financial system, as some on Wall Street fear.

British and Swiss central banks also are contemplating contingency plans. For now, the European Central Bank is reluctant to consider options that require substantial modifications of its standard tools. (The ECB should thank God for the German memory of Weimar - Jesse)

The Fed, like any central bank, could print unlimited amounts of money, but that would push short-term interest rates lower than it believes would be wise. The contingency planning seeks ways to relieve strains in credit markets and restore liquidity without pushing down rates. (more like break the bill and strain the acceptability of US debt to all but captive subordinate financial entities like US taxpayers [and client states like the Saudis and Japan] - Jesse)

The Fed is reluctant to heed calls from some Wall Street participants and foreign officials for the Fed to directly purchase mortgage-backed securities to help a market that still is not functioning normally. (reluctant but could be persuaded, no? Those strumpets. LOL - Jesse)

Before the credit crunch began in August, the Fed had $790 billion in Treasury securities on its balance sheet, about 87% of its total assets. Since then, it has sold or lent about $300 billion. In their place, the Fed has made loans to banks and securities firms to assist them in financing holdings of mortgage-backed and other securities. Some on Wall Street say the potential for further declines in Fed treasury holdings could leave it out of ammunition.

The Fed holds assets to manage the nation's money supply and influence the federal-funds rate, which banks charge each other on overnight loans. When the Fed buys Treasuries or makes loans directly to banks, it supplies financial institutions with cash; in effect, it prints money. The cash ends up as currency in circulation or in banks' reserve accounts at the Fed.

Since reserves earn no interest, banks lend cash that exceeds their required minimum. That puts downward pressure on the federal funds rate, currently targeted by the Fed at 2.25%. The Fed could purchase securities and make loans almost without limit, expanding its balance sheet. That would cause excess reserves to skyrocket and the federal funds rate to fall to zero. The Fed would contemplate such "quantitative easing" only in dire circumstances. The Bank of Japan took this step this decade after years of economic stagnation.

Weighing the Possibilities

So the Fed is seeking ways to expand its balance sheet without causing the federal funds rate to drop. The likeliest option, one the Fed and Treasury have discussed, is for the Treasury to issue more debt than it needs to fund government operations. The extra cash would be left on deposit at the Fed, where it would be separate from bank reserves on deposit and thus would have no impact on interest rates. The Fed would use the cash to purchase an offsetting amount of Treasuries in the open market; for legal reasons, it generally cannot buy them directly from Treasury. (that's a bookkeeping nicety at best. The Fed is trying to get a little bit pregnant, to keep it from showing. - Jesse)

Treasury's principal constraint is the statutory limit debt. Treasury debt was $453 billion below the limit Monday. In the past, Congress always has responded to administration requests to raise the limit, sometimes only after political theatrics. (they also have another constraint, the value of the US dollar in world trade - Jesse)

Fed officials also are investigating the feasibility of the Fed issuing its own debt and using the proceeds to purchase other assets or make loans. It has never done so; the legality is unclear. Some foreign central banks, such as the Bank of Japan, do so.

Another possibility is seeking congressional approval to pay interest on banks' reserves immediately instead of waiting until a 2006 law permits that in 2011. If the Fed paid, say, 2% interest on reserves, banks would have no incentive to lend out excess reserves once the federal funds rate fell to that level. (as opposed to raising the minimum reserve requirements and tightening the rules on sweeps? - Jesse)

Congress put off the effective date because paying interest on reserves reduces the Fed profits that are turned over to the Treasury each year, widening the budget deficit. Although preliminary explorations suggest Congress would be open to accelerating the date, the Fed is leery of depending on action by Congress.

The Fed is inclined to use any additional maneuvering room to lend through its existing and recently expanded avenues. Officials are reluctant to buy mortgage-backed securities directly. They worry that such purchases would hurt the market for MBS that the Fed is not permitted to buy: those backed by jumbo and subprime and alt-A mortgages, which are under the greatest strain.

Moreover, the Fed is not operationally equipped to hold MBS and would probably have to outsource their management. Such holdings wouldn't help avert foreclosures much, since the Fed would have little control over the mortgages that comprise MBS.

Write to Greg Ip at greg.ip@wsj.com1