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When Big Ben Speaks….

Posted by Larry Doyle on January 14, 2009 9:40 PM |

Against the backdrop of the frozen tundra, numerous members of the storied Pittsburgh Steelers franchise have reached

Chairman of Federal Reserve, Ben Bernanke

Chairman of Federal Reserve, Ben Bernanke

legendary status. Included in this family are such greats as Jack Lambert, Mean Joe Greene, Terry Bradshaw, Rocky Bleier, Franco Harris, John Stallworth, Lynn Swann, Chuck Noll, and the longtime owner Art Rooney. For lovers of the NFL, these men are true giants. The current Steelers franchise is led by budding legend and All-Pro quarterback Ben Roethlisberger. When “Big Ben” leads, Pittsburgh follows. You can discuss this “Big Ben” tonight and every Wednesday night at 9PM on “No Topic Taboo . . . Everything Else with Jay.”

With all due respect to Mr. Roethlisberger, though, there are two other “Big Bens” that crossed paths just yesterday and hold much greater sway and impact in world affairs. I speak of Ben Bernanke and the famous London clock tower.

While the NFL is a great diversion, we ultimately return to the real world and need to deal with the realities it presents. Fed chairman, “Big Ben” Bernanke, presented chilling testimony yesterday in the shadows of the famous clock tower at the London School of Economics.

Understand that every message delivered by a Fed chairman is very carefully scripted. In years past, the Fed was much less transparent than it is today. That said, the Fed chairman speaks carefully so as not to unsettle markets but also to provide an outline as to future policy. In so doing, the general public is often hard pressed to decipher what he is saying and what it means. The general media typically does not capture the nuances and subtleties offered by the Fed. To that end, our work here at No Quarter looks to fill that void.

Before deciphering “Big Ben” Bernanke’s message, I find it somewhat uncanny that his speech was delivered near the famous clocktower. Why? Simply because we have tried to highlight that our economy and markets need an extended period of time to recover. We tried to convey that very message last week in our piece, “Time, Why You Punish Me?…

“Big Ben” set the stage for his immediate outlook by providing a rather lengthy review of the landscape in 2008 and actions taken. He offered, “financial institutions have seen their capital depleted by losses and writedowns and their balance sheets clogged by complex credit products and other illiquid assets of uncertain value.” He further added, “markets for securitized assets, except for mortgage securities, have shut down.”

These losses and the shutdown of the these markets for securitized products were the major topics of our pieces “Where’s The Money” (on December 29th) and “The Wall Street Model is Broken…and Won’t Soon Be Fixed” (on November 12th).

We have addressed at length these very topics, their implications for our markets and economy, and most importantly why we thought credit would not flow. From my very first piece on October 14th, I wrote of the government rescue package:

this injection of capital will not necessarily flow through to the economy. The banking system here in the United States likely has $1 trillion in embedded losses. This plan is trying to buy time for the system to recognize those losses. The recognition of those losses will curtail future growth for the banking system and the economy as a whole.

In light of the regular onslaught of criticism from Congress, the incoming administration, and the general media, “Big Ben” is most assuredly sending a message highlighting the actions taken and the results generated. While the sandbags have been piled high enough to currently protect our populace, rest assured the waters are still rising and time marches on.

“Big Ben” goes into real detail about the specifics of each step taken and the impact they had in stabilizing our markets. For our purposes, we do not need to review this material. We will again provide the link that provides transparency into these programs:

Just as “Big Ben” is trying to provide a historical context for his outlook for the economy and markets, I provide links to all of those past stories for our newer readers and passengers that we are picking up along the way. I beg the indulgence of our longer term readers in the process.

As the clocktower ticks, what does “Big Ben” see in our future? He offers: 

the incoming Administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity. In my view, however, fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system. History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively.

This statement is a major shot across the bow for the incoming administration and Congress as they deal with the prospects of allocating the next $350 billion in TARP money and beyond that. “Big Ben” is stating that the embedded losses and growing losses within our banking system must be addressed, recognized, and alleviated before we can start to truly move forward.

“Big Ben” further adds:

the worsening of the economy’s growth prospects, continued credit losses and asset markdowns may maintain for a time the pressure on the capital and balance sheet capacities of financial institutions. Consequently, more capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.

Goldman Sachs just yesterday released that they believe the global banking system will ultimately realize $1.8 trillion in losses. Only slightly more than half of those losses have been realized to date.

What does this mean? The banks need more money along with government guarantees against further losses from their deteriorating portfolios. To wit, Citigroup is selling divisions to raise capital. How will those government guarantees be structured? Potentially the nationalization of a banking institution, like Citi, or the splitting of Citi and perhaps other banks into “good banks” and “bad banks”. The “good banks” will house the day to day operations, while the “bad banks” will house the toxic and deteriorating assets and will be capitalized by, you guessed it, “Uncle Sam!”

**U.S Government Negotiating with Bank of America To Provide More Capital To Facilitate Purchase of Merrill Lynch**

“Big Ben” says as much: 

another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad banks.

In finishing his speech, “Big Ben” addresses the fact that these issues are truly global in nature and as such the world will need to develop a global regulatory system.

Market reaction to the revealing of these realities is decidedly negative this morning, as equities are down 3-4%.

In an attempt to tie this piece together, I recommend “take the Steelers, lay the points, and go with the under.”


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