“When Big Ben Speaks….”
By Larry Doyle on January 14, 2009 at 9:40 PM in American Consumers, Banking Institutions, Ben Bernanke, Citigroup, Current Affairs, Economic Stimulus, Economy, TARP, Tax stimulus package
(bumped up from early today by Susan)
Against the backdrop of the frozen tundra, numerous members of the storied Pittsburgh Steelers franchise have reached 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 clocktower.
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 clocktower 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 here at NQ 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:
http://www.globalresearch.ca/index.php?context=va&aid=11236
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 Adminsitration 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**
http://online.wsj.com/article/SB123197132814683053.html?mod=testMod
“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%.
We will continue to try to stay ahead of the curve for you here at NQ.
In an attempt to tie this piece together, I recommend “take the Steelers, lay the points, and go with the under.”
LD
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By Sarah Palin (Release date: November 17. 2009)
Great article, Larry. I never could understand why the big players weren’t worried about Dubya’s economy. It seems like a crash was inevitable. I don’t like to know that we have to support the “bad banks.” Where will all this government come from?
meant to say “government money” come from
The printing press at Treasury is going to be running overtime. Obama is right about one thing. We will have trillion dollar deficits for as far as the eye can see. Ultimately that has to lead to higher long term interest rates in both the government and corporate markets. The rates within the corporate market probably reflect a fair amount of the “current” dislocations.
Thanks for the plug.
Why on earth would anyone want the crumbling equity of failed institutions, even at bargain basement prices? Is this because we need to save those companies which make bad (or illegal) decisions, in order to restore trust in the market? Or do we have to buy this bad debt to see the extent of buffoonery these past years?
All that’s left is next to nothing after they split out the good stuff for their private use. We (the taxpayers) will be holding the bag.
We don’t need this toxic refuse. They need to be written off as bad assets against the companies and (risk)investors. There are banks and bankers who where prudent and honest. Let’s find out who they are.
Hillary’s suggestion should have been followed. She also addressed the solution on the floor of the senate. John McCain agreed with heer, Obama opposed the idea. The video and link are below:
In response, Senator Clinton outlined a series of proposals to address the problem:
· Create a new entity to buy up and quarantine toxic mortgage securities that are dragging down the markets which would allow the markets to stabilize. Last spring Senator Clinton was among the first to call for a new entity modeled after the successful Depression-era Home Owners’ Loan Corporation (HOLC) or the Resolution Trust Corporation (RTC) created after the Savings and Loan crisis.
http://clinton.senate.gov/news/statements/details.cfm?id=303208&&
Tick Tock…Captian Hook you say?
Does this outlook take into account the way the Feds do the books?
As the last US Comptroller has indicated, there is a lot of debt “off shored” by way of funky accounting practices.
Great read LD.
What happened with Big Ben-the Clock Tower? I must have missed that important news. lol Ok, kidding.
…but….GO ROETHLISBERGER!!!
sorry, but as most know, once from Pittsburgh, ALWAYS FROM PITTSBURGH. So much community and so much history and we don’t shy away from any of it, even if Mr. O’shit1 likes to piss on all those small towns.
And I would like to see Pitt’s Steelers against Zonie’s Cardinals. uh ha! so many ex pittsburghians in Arizona, that should be interesting to hear the supporters at the game.
OK, now the other Ben. So he is confirming what most of us were saying. No more HANDOUTS, you need meaningful change to secure the financial markets so it doesn’t keep happening and invest WISELY…oh no wait, SMART Investments
(SHOTS) to really get the economy going. You know, like rebuilding America maybe, use the money to lower high mortgages to stop foreclosures and secure banks. Done
Next.
The only remark that one of the media outlets mentioned was this one — your last remark:
“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.”
Thanks again for explaining clearly what the heck is happening (or not happening).
Big Ben Speak Translated at both Mish’s site and at Denninger’s site. The Market Ticker teaser: Big Ben looked like he was sitting on a rhino horn.
Ah, yes. Don’t miss the truth, in translation from both sites.
http://market-ticker.denninger.net/
http://globaleconomicanalysis.blogspot.com/
Thanks Larry, I always look forward to your contributions to the new “bizarro world” of economics.
I think you make great comments here Larry, but those of us in Baltimore
think Big Ben and Ben Bernake are both overrated, and us little guys, AKA
Baltimoreans as well as US citizens in both cases get no respect, as you can see
from both the ” BENS” personally I’d never listen to either of them , as I am
here respectfully “Wacco for Flacco” AND THINK “Benanke is broken”
and well Go Underdogs- Go RAVENS.
Great “play” on words!!
I second that - GO RAVENS! Who would have thought at this time last year the Ravens would find a strong and steady leader in a young rookie quarterback named Joe Flacco. Joe Flacco for President in 2012!
Living here in Pittsburgh, one of the country’s most livable cities, #6 on the Top Ten Cities with good jobs list, one of the most stable housing markets in the country, I’d say the folksy small-town community with loads of history must be doing something right!
Go Steelers!
Thanks LD
Thanks for this piece! I swear this situation baffles me no end. This helped. Where does this government money come from? Does it even really exist?
If we just xerox dollars won’t dollars became worthless?
I think that there is a very real chance that we will see a real devaluation of a number of currencies around the world, includng the greenback, the euro, the British pound. The Japanese yen will most likely outperform.
I am glad that the piece helped you make some sense of this madness. I would strongly encourage you to read the other pieces I reference.
“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.””
complex credit products that seems no one, not even their creators, really understood their flaws, or probably did not even bother to understand them in context of the bigger financial picture…just saw short term gain. oh well.
Mr. Doyle, when the economy becomes so large and complicated the only solution the Fed and Treasury Dept can come up with is to spend the money of future generations, it’s time for some common sense. It may not be as simple as black and white, but from our perspective (and the same from everyone we know)when the bailout of Bear Sterns failed to produce the promised result and then our government comes out with a plan to spend another $700Bil, Washington has gone completely over the edge and so clearly doesn’t understand real life. Forget the wall on the border. What we need is a wall around Washington to keep them separated from normal people. We understood the money was to be spent to stop foreclosures by helping primary resident owners from losing their homes and re-negotiating loans at a lower interest hence making existing loans held by banks to be secured, turning bad loans into good loans. All of a sudden everyone has their hand out including the big three companies which are failing due to sloppy management and retro thinking in the type of cars they manufacture. Sorry, but I’m not buying this trash they’re talking and I want accountability. They should be forced to publish an accounting of where every cent goes, a reasonable explanation of why and no more talking over the heads of the American people with a lot of obsfucation.
Elise,
I feel your pain and frustration. I hope that my writing is able to provide some semblance of framework for peopel to understand the dynamics at work in the economy and markets.
While neither Bernanke nor Paulson nor any other represenative in Washington wants to say it, with another $750 billion to $1 trillion in losses yet to be recognized without more capital in the banking system we will see many more bank failures, a rapid ripple effect across a slew of other businesses, and an economy that moves from a deep recession to ….
I am not now nor would I ever try to create fear but this situation is truly severe.
Just my opinion but based on my experience this is how I see it.
I am in your camp as far as being very upset about this mess but our alternatives are few and far between.
Mr. Doyle, it isn’t comforting when our PE is on the news everyday talking about how bad things are and congress is divided over how this “package” will or will not work. I know you would not deliberately create fear or mislead, but I don’t have the same faith in politicians. I read a book last year by Naomi Klein, The Shock Doctrine, and that book scared me more than anything you can say because it is her theory governments use or “create” disasters simply in order to make changes they otherwise would not be able to pull off. It feels like what we have been getting from Bush et al for the last seven years except his topic is the “War On Terror”. The result is the same. Americans have given our approval to the trashing of our Constitutional rights so forgive me if I’m a little paranoid at this point. I’ve always wondered why Thomas Jefferson hated banking and warned against it so many times. Sincerely, thanks for the information in this and your other posts. When Bernake or Paulson talk, I don’t even bother to listen because I can’t understand what they’re saying and wouldn’t believe a word if I could.
Yep. And many in Congress know this and are beginning to stand up and fight back.
Chase just discontinued their wholesale lending. Wells Fargo now owns Wachovia, a once strong bank with strict guidlines for lending until they got in bed and merged with World’s Savings who issued the “pick-a-payment” loans or commonly known as negative am loans. Wells will soon discontinue their wholesale lending I think and just do retail lending. Commercial has taken a huge hit and may be the last to bounce back. The wheels of progress stop when thier is no money to lend. And where prey tell will that Trillion dollars go to? To big biz again?
Check out that female Rep. in congress from Ohio. (forgot her name) She has got it going on. She has some huge ovaries and is slamming the tarp funds and wall street bailout. Oh the picture she paints is one hell of a straight forward jab. She says wall street keeps running back to mama for more funds at the expense of the taxpayer.
Oh and she says, “Stay in your home. Don’t leave. No one knows who owns your note, so no one can kick you out.” That’s some ovaries.
I bet it is Rep. Kaptur (sp) from OH. She had some great arguments during the first bailout.
Dear LD, What do you think of Ron Paul’s stance–in particular to abolish the Fed…? I am seriously thinking of joining the Campaign for Liberty even though such solemn platforms have no ‘hope’ of ever getting a candidate elected. His ideas make great sense to me although they would involve truly radical change.
Also, noting a comment you made to Elise above, do you think the stock market will go further down, or is this more about layoffs and later inflation?
I do think that our markets will retest the lows seen on November 20th. Those lows are approximately 8-10% below yesterday’s close.
Given how quickly things are developing it is very possible that they actually take out those lows. In fact I think we will move to DJIA 7000 which was last seen in 2003. That would be approximately 15% below yesterday’s close.
Please understand though that I am not a professional financial planner nor promoting day trading activities. Every individual needs to address their own overall financial situation, assess their comfort with risk, their short term cash needs, their long term goals, their time horizon (meaning age), and then determine what to do.
I hope this helps.
Thank you very much for both your replies. It is very helpful to get many different opinions and yours are always thoughtful.
Sonic Ninja…I will say that whenever I listen to Ron Paul, I come away thinking that he makes a lot of sense. I do believe that he wants to promote real FISCAL COURAGE, which we need now more than ever.
Regrettably too much of our political process in this country is rooted in excessive money supporting incumbents.
I do think we need a strong and viable third party.
Indeed the dollar will take a long slow dive in value. Let the printing presses roll. {snark}
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[...] “When Big Ben Speaks . . .” (January 14, 2009) 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!” [...]