“There’s no place like home.”

Just as Dorothy in The Wizard of Oz merely wanted to return to the peace and comfort of her home in Kansas, aren’t we all hoping to ‘get home?’

What is home and how do we get there? Home is a sense of economic stability and future prosperity achieved by ‘following the yellow brick road.’ If it were only that easy.

Many believe The Wizard of Oz is not simply a whimsical child’s story. Having been written in the late 1800s, does the story represent a populist message? A progressive message? Is the yellow brick road a symbol of the ‘gold standard?’ I will defer to literary historians who are far more schooled than me on these topics.

What about ‘the grand and wonderful wizard’ Ben Bernanke? Are we merely supposed to disregard that ‘man behind the curtain?’ Well, folks, we’re not in Kansas anymore and if we are ever going to ‘get home’ then we had better start promoting an increased level of transparency and accountability along the way.

I am not here to impugn Mr. Bernanke. I do not question his character or his intentions. In fact, I think he is a far better Fed chair than his predecessor Alan Greenspan. However, is Ben Bernanke and the Federal Reserve all-knowing and all-powerful? I think not. Is the economic future of the United States of America so dependent on one man and one institution to determine an accurate and timely path for monetary easing and tightening? Whether we like it or not, our economic system is totally dependent on the Fed. Read what the ‘wonderful wizard’ thinks about The Fed’s Exit Strategy in today’s WSJ.

The risks involved in our dependence upon the Fed are far too great. What needs to be done?

The Federal Reserve must be audited. What is on the Fed’s books? What are all of the assets and the liabilities? What are the Fed’s short term and long term risks? The need for transparency in our economy has never been greater. The least transparent entity within our economic sphere is the Federal Reserve.

Two hundred and seventy five Congressmen have signed a bill, HR 1207 and S 604, sponsored by Congressman Ron Paul (R-TX) requiring an audit of the Federal Reserve. This bill is currently in the House Financial Services Committee, a very critical stage. I beseech anybody who loves our country to solicit your representatives to support this bill. Instructions for doing so are in the above link.

Do we have the brains, the heart, the courage?

LD

For a fuller understanding of the inner workings of the Federal Reserve, please review additional Sense on Cents commentary:

The All Powerful Federal Reserve
June 12, 2009

The All Powerful Federal Reserve: Part II
June 12, 2009

Don’t Call the Fed Independent
June 17, 2009

Fed Independence and the Constitution
June 24, 2009

Rep. Edolphus Towns

I commend Rep. Edolphus Towns (D-NY), Chairman of the House Committee on Oversight and Government Reform. Rep. Town’s closing statement at yesterday’s Congressional hearing culminated some riveting theatre. That said, this is not a one act play. Rep. Towns highlights the need to dig deeper in exposing what truly happened in the midst of the Bank of America takeover of Merrill Lynch. Towns finished the hearing with this Closing Statement:

At the outset of this hearing, I said that it’s time to shine some light on the events surrounding Bank of America’s acquisition of Merrill Lynch.

At this point, I would say we’ve gotten a peek, but we don’t have full sunshine yet.

I would make three observations:

1. There are significant inconsistencies between what we have been told today, what we were told two weeks ago by Ken Lewis, and what the Fed’s internal emails seem to say.

2. It is still unclear whether Bank of America was forced by the Federal government to go through with the Merrill deal, or whether Ken Lewis pulled off what may have been the greatest financial shakedown of all time; and

3. As a result of this hearing, we have learned that the SEC and FDIC played a role in this transaction.

Former Treasury Secretary Hank Paulson has agreed to appear before this Committee in July and I look forward to that hearing.

But we also need to hear from the FDIC and the SEC, so that we can better understand what happened during the dark days of last December.

Will Congress and the Obama administration look to pursue these ‘inconsistencies?’ Will the parties to these conversations collectively be brought together so these inconsistencies can be addressed? Will the American public once again be subjected to an accusation by one party to a conversation claiming the other party misremembered?

In true Joe Friday fashion, Rep. Ed Towns echoes my sentiments:

The immediate reaction to Bernanke’s testimony is less than positive. The Bank of America-Merrill Lynch ‘play’ could very well be a preview to the Fed as the uber-regulator for systemic risk. Sense on Cents strongly believes the Fed should not occupy that role. Why? Throw any concept of an independent Federal Reserve right out the window. Bloomberg addresses this prospect in, Bernanke Grilling May Weaken Case for Expanded Powers:

Bernanke failed to resolve some lawmakers’ questions on whether the Fed bullied executives and stepped over other regulators in the name of financial stability in a three-hour congressional hearing yesterday.

Criticisms by members of both parties are likely to diminish support for the Obama administration’s plan to make the Fed the single agency responsible for the largest and most interconnected financial institutions.

“There’s something rotten in the cotton here — no ifs, ands or buts about it,” Representative Edolphus Towns, a New York Democrat who chairs the House Oversight Committee, told reporters after the hearing. “There was a forced situation, a shotgun wedding” and “we’re just trying to find out who had the shotgun.”

Will it be business as usual in Washington or will the American public truly learn if Ben Bernanke and possibly Hank Paulson abused their powers.

Don’t recall? Misremembered? Just the facts, please!

LD

The intrigue behind the acquisition of Merrill Lynch by Bank of America may never be known. Will Congress pursue total transparency and integrity to compel all pertinent parties to be fully forthcoming? Would Congress go so far as to appoint an independent investigator with powers to subpoena Ben Bernanke, Ken Lewis, John Thain, Hank Paulson, Larry Summers, and Tim Geithner? Does the rule of law apply in our country only when convenient? Bloomberg provides a peek into this intrigue, Republicans Say Fed Set Late Report of Merrill Loss:

House Republican staffers said the Federal Reserve tried to control the timing of disclosures of rising losses at Merrill Lynch & Co. in the weeks leading up to its takeover by Bank of America Corp., according to a memo obtained by Bloomberg.

The memo, prepared by staffers for Republican lawmakers at a House Oversight Committee hearing tomorrow, cites what it identifies as excerpts from internal Fed e-mails to support the conclusion. Fed Chairman Ben S. Bernanke is scheduled to testify at tomorrow’s hearing in Washington.

The e-mails show that the Fed “engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other Federal Regulatory agencies,” Representative Darrell Issa, the panel’s senior Republican, said in an e-mailed statement.

Strong words by Representative Issa.

Cover-up? Who was negatively impacted by not revealing information on losses at Merrill Lynch? Existing Bank of America shareholders, who may very well have voted against this deal.

Hiding details from other Federal regulatory agencies? Such as? The SEC. The OCC. The FDIC, which would assume a significant percentage of losses on assets purchased by Bank of America. How did FDIC chair, Sheila Bair, feel about that prospect?

“Dear Ben, Strong discomfort with this deal at the FDIC, for all the reasons you and I have discussed,” Bair said in a Jan. 14 e-mail, according to the memo. “My board does not want to do this and I don’t think I can convince them to take losses beyond the proportion of assets coming out of the depository institutions.”

Who else was clearly reluctant to finalize this transaction? Bank of America chairman and CEO, Ken Lewis. He testified in February to New York State authorities about being pressured by Bernanke and Paulson. Lewis hedged his statement about Bernanke’s and Paulson’s pressuring him, if not outright threatening him, under questioning by Congress earlier this month.

Will we learn more today from Bernanke or will this chapter close without a full accounting of what truly happened? Will Congress pass the Obama administration’s proposal to make the Federal Reserve the uber-regulator to stem systemic risk? Might shareholder rights be trampled in the process? Do the ends justify the means? Do laws mean anything? Can one be a well-intended crook? So many questions.

LD

1. cutting the Federal Funds rate to a range of 0-.25%.

2. backstopping a wide array of short term funding operations, including the Commercial Paper market, Money Market funds, and Swaps market.

3. opening the Federal Reserve discount window for investment banks prior to their conversion to commercial banks.

4. utilizing a massive Quantitative Easing program to purchase government, mortgage-backed, and government agency securities in an attempt to bring interest rates down and jumpstart borrowing by consumers and corporations.

5. working in concert with the Treasury and FDIC to implement the TARP (Troubled Asset Recovery Program), TALF (Term Asset-Backed Lending Facility) and PPIP (Public-Private Investment Program).

In the process of implementing all of these activities, this genie, the Federal Reserve, in the person of chairman Ben Bernanke, has gone places no genie has ever gone before.

The question before the court is whether the free market can ever get the genie back in the bottle. Additionally, aside from getting the genie back in the bottle, these wishes granted by the genie aren’t exactly free. How so?

The Federal Reserve’s balance sheet has expanded so rapidly that many investors are concerned as to the potential cost of that expansion. When will investors lose confidence in the genie? When will investors discount the powers of the genie? When will investors view the genie as less magician and more human?

Given that the largest underpinning in any market is “confidence”, these questions in regard to the genie are being asked on a very regular basis. The genie, Ben Bernanke, and his sidekick, Donald Kohn, responded to these questions the other day. Bloomberg reports:

Chairman Ben S. Bernanke said yesterday in Charlotte, North Carolina that the Fed must retain the flexibility to withdraw its record cash injections to restrain prices. Vice Chairman Donald Kohn said in Wooster, Ohio, “the trick will be unwinding this balance sheet in a timely way to avoid inflation.”

I find it very interesting that Kohn actually uses the term “trick” to address this issue. These maneuvers have never been practiced prior to this time, so the “how to ” manual has never been written.

Will the powers of the genie spin out of control? Will the markets deem the genie to be less magical and actually more warlock? Will this genie, Bernanke and his helper, Kohn, be challenged by the partygoers (market participants) for ever greater tricks only for the parents of the partygoers to get so concerned that the party has gotten totally out of control? Bloomberg offers:

“They have two significant challenges — one is figuring out when to unwind,” said Christopher Low, chief economist at FTN Financial in New York, referring to U.S. central bankers. The second challenge is how, and that’s made tougher by “so many unwieldy positions. Nothing is as liquid as it used to be” on the Fed’s balance sheet, he said.

The U.S. central bank has effectively printed money to buy or lend against a range of assets to alleviate the credit crunch and revive the economy. Bernanke’s speech yesterday detailed steps that the Fed can take to remove that liquidity, including soaking up cash by the issuance of special bills.

The Fed normally raises interest rates by selling Treasuries on its balance sheet, draining reserves from the banking system. That task is tougher with the Fed’s commitment last month to buy more than $1 trillion in mortgage-backed securities, which are harder to sell quickly without roiling markets or potentially attracting political scrutiny.

Bernanke, 55, speaking at a conference hosted by the Richmond Fed bank, hailed last month’s joint statement with the Treasury that spelled out the principles underlying the central bank’s work with the Treasury to revive credit.

While the Fed has implemented “unconventional” measures and taken some “extremely uncomfortable” steps, it’s critical that the efforts “do not interfere with the independent conduct of monetary policy,” Bernanke said.

While these challenging times are certainly no party, the unwinding of the genie’s tricks represents very real issues for all involved. The price of not timely and effectively getting this genie back inside the bottle is massive inflation, if not hyper-inflation.

The only trick the genie knows to deal with that problem is dramatically increasing short term interest rates. While this current period is certainly no party, a rapid increase in short term interest rates is akin to a sentence in the pain chamber.

LD

I have previously stated that firms that were truly bailed out by the government should be subject to strict government compensation controls. A number of firms – such as Northern Trust, JP Morgan, Wells Fargo, and Goldman Sachs – were compelled to take government funds. If employees of these firms are subject to this tax, it will be a travesty and injustice of unprecedented proportions. I believe that Congress is unknowingly escalating class warfare amidst a facade and charade of protecting the public. I believe we will see public outrage from employees at these firms (JP Morgan, Northern Trust, Goldman, Wells Fargo) that can only be rivaled by our forefathers back in the 1770s. This tax is another means of promoting the income redistribution upon which Obama ran his campaign. Taxation without representation is tyranny!!!

Amidst the smoke and mirrors emanating from Washington, make no mistake this legislation passed today is an attempt to cover the incompetence and ineptitude of these legislators. This smokescreen is further displayed as Nancy Pelosi Blames Bernanke Over AIG Bonus Fiasco.

In my opinion, public outrage would be mollified to a much larger extent by payments from our politicians in addition to the AIG employees and others. I am referring to the grotesque sums paid by Wall Street firms (banks, insurance companies, hedge funds, accounting firms) in the form of campaign contributions and lobbyist dollars to curry favor with Washington.

I called on the return of these payments from politicians on March 9th in How Wall Street Bought Washington. Well, the WSJ has picked up on this theme and is making the same point in highlighting Critics Got Donations from Insurer. If the government plans to take employee bonuses, let’s have the political crowd exposed for their greed and incompetence as well. At that point, perhaps we may really start to make some progress.

Yesterday, as President Obama informed the press that the buck stops at his desk, a reporter asked him whether he would return the $104k his campaign received from AIG in 2008.

He ducked the question.

Change? Sounds like more of the same to me!!

LD

***Cross-posted from my blog, Sense on Cents. Come by and visit!

Ben Bernanke’s testimony over the past two days gives us our best clue yet about where the administration and the Fed are going with bank rescue. And the answer seems to be … nowhere.

Simon Johnson and James Kwak read it the same way I do:

This is another sign of the serious brainpower that has been expended on finding ways to avoid or minimise government ownership of banks, and to avoid the slightest possibility of offending shareholders – shareholders whose shares have positive value primarily because of the expectation of a further government bail-out.

And The Economist’s Free Exchange puts it bluntly:

At this stage, I joked, I’d be just as happy with them just saying, “We have a strategy, we will continue to inject capital to prop up zombie banks indefinitely. That’s pretty much the whole plan and we’re counting on it bringing the financial sector back to life someday, somehow”. Is it just me or is that pretty much what Ben Bernanke said yesterday?

No, it’s not just you.

Well, that’s good to know. I mean, it seems like a whole bunch of us have been saying this makes no sense, and we don’t want our hard-earned taxpaying dollars going down the drain, but we felt like voices crying out in the wilderness. Perhaps we are not alone afterall:

I’d add a political-economy point. Here’s Noam Scheiber, in the new TNR economics blog:

Yesterday afternoon I spoke to a senior Democratic aide in the Senate who repeatedly emphasized that, the way things stand now, it would be almost impossible to get another cent for the banks. Congress has “bailout fatigue,” the aide said.

Indeed. As long as capital injections are seen as a way to bail out the people who got us into this mess (which they are as long as the banks haven’t been put into receivership), the political system won’t, repeat, won’t be willing to come up with enough money to make the system healthy again. At most we’ll get a slow intravenous drip that’s enough to keep the banks shambling along.

More and more, it looks as if we’re headed for the decade of the living dead.

I couldn’t have said it better myself. But like I said, I’m not a major economist who won a Nobel Peace Prize. Krugman is and did, so I’m gonna listen to him.

So speaking of banks wanting more money, guess who is back at the trough asking for more money from us, the taxpayers I’ll give you a hint – it’s an alphabet company. Yep – you got it, AIG:

Hell freakin’ yeah, they’re back. Some nerve, too, if you ask me, especially after their lavish spending ways. They want us to continue to subsidize them when tey have not demonstrated any fiscal restraint or responsibility?? Are you kidding me?

And while I am on this topic, it is high past time for the Democrats to stop blaming this situation totally on the Republicans. I can understand WHY they are trying to convince everyone that they had absolutely NOTHING to do with this, but the reality is that they have been in charge of BOTH Houses of Congress for over two years now. Where was their oversight of the SEC, in its non-existent oversight of people like Bernie “Made-Off”? Where were they when Franklin Raines ran Fannie Mae into the ground (and Raines, who left in disgrace, was one of Obama’s advisers)? Where were they when Jim Johnson ran Freddie Mac into the ground (and we know where Tim Johnson is – he was on Obama’s Veepstakes Search)?

So, yeah – Bush was horrible – we know that. But for the past 2 years, the DEMOCRATS have been the ones in charge of the purse-strings and the oversight, so stop the blame game, start taking some responsibility, and STOP HANDING OUT OUR MONEY LEFT AND RIGHT!!! Enough already!!

And that ESPECIALLY goes for you, Nancy Pelosi, with this new $410 BILLION dollar package chock-full of pork the House is proposing!! ENOUGH!!!

– the Fed expects GDP for 2009 to end up between -.5% to -1.3%, revised from -.2% to +1.1%. The Fed obviously is expecting a contraction in our economy for all of 2009 and further added it does not see much of a pickup in 2010.

– the Fed is setting a long term inflation target of 2% but does not expect to see a pickup in inflationary pressures for a protracted period.

– increasing its expectation for the unemployment rate in 4th quarter of 2009 to 8.5% to 8.8%.

– the Fed has seen no indication of stability in residential housing markets in January 2009.

– some Fed governors have increased concerns about defaults and foreclosures in the commercial real estate markets.

– the Fed believes long term growth potential for GDP is 2.5% to 2.7%.

– the Fed realizes that at some point it will need to contract the growth in its balance sheet to mitigate chances of increased inflation.

What does all this mean?

In summary, the Fed is publicly acknowledging that the economic recession will be longer, deeper, and more painful. They are also offering that they are determined not to let deflation or the threat of deflation impede the economy.

I see no reason to rush into adding risk assets (equities or speculative credits) on the heels of this report. It is actually very interesting to see that some high profile individuals and institutions have actually been selling assets:

T. Boone Pickens
Pickens Reduces Energy Investments, Holdings Fall 97%

Warren Buffet
Berkshire Reduces J&J Stake, Turns to Fixed-Income

Harvard University
Harvard Retreated From U.S. Stocks as Market Tumbled

LD

It was only a matter of time before the losses embedded in our banking system caught up and surpassed the capital injected. As such, our politicians and bankers are now forced to be somewhat honest with the public at large.

At long last the “news” is out: there’s another expected $1 trillion in embedded losses in our banking system. I have tried to judiciously, but clearly, highlight that very fact here at NQ over the last three months. In today’s WSJ:

Goldman Sachs economists estimate that financial institutions and investors world-wide will ultimately realize $2 trillion in losses on U.S. loans, but have recognized only half those losses so far. That scares investors who might otherwise give banks needed capital, and makes banks reluctant to make new loans. Regulators say they worry that the only remaining source of capital for banks is the government.

While I know a few readers here at NQ, blogs are generally anonymous communities. Given the nature of my writings, a month or so ago I realized it would be more effective and compelling if I opened myself to public criticism if warranted. For that reason, I went from identifying myself as LD to Larry Doyle. For those who know me, I think they would say that I am a very competitive, honest, and humble individual. I’d like to think that I am. That said, I have plenty of shortcomings. As we look to grow our audience and community, I beg your indulgence as I retrace the posts since I started writing in mid-October in which we wrote about these massive unrealized but embedded losses. We’re all about sharing here, so please pass this along to your friends. We’ll try to stay ahead of the curve for you. ~LD

Without further adieu . . .

The Economy – What Lies Ahead (October 14, 2008)

This injection of capital will not necessarily fully flow through to the economy. The banking system here in the U.S. 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.

Economic/Market Highlights 10/16 (October 16, 2008)

Remember the overall banking system has upwards of $1 trillion in losses that need to be recognized. Both Citi and Merrill know this and have pre-announced that they do not expect to show a profitable quarter in the near future.

McCain/Palin’s Economic Stimulus Plan (October 23, 2008)

. . . what these steps have done is buy time so that the banking system can generate revenues over the next few years to both write down and realize losses that are currently on their books, but which if were currently acknowledged would have rendered certain banks as already bankrupt.

Markets Selloff 10% Overnight (October 24, 2008)

In the midst of all this though, please remember that as I have tried to highlight, that there are likely $1 trillion in embedded losses in the banking system. That bill must be paid.

The Wall St. Model is Broken … and Won’t Soon be Fixed!! (November 12, 2008)

The losses in the banking system alone are upwards of $1 trillion. From there let’s move into insurance companies, hedge funds et al. Paulson, Sheila Baer, Bernanke and others know that any money that goes into the system is purely going to help the banks recapitalize themselves in the face of these losses.

When Barney Frank, Nancy Pelosi, and Barack Obama complain that they need to make sure that credit lines open and remain open, they are not addressing the fact that the banks have an overwhelming amount of non-performing assets already and that those assets are likely going to grow in the face of an unemployment rate headed up by 2% to 4%!!

Economic/Market Highlights 11/12 (November 13, 2008)

Transparency
I had an exchange with a reader as to why the government is not revealing which banks have been participating in certain specific programs launched over the last few months. I made the case that the government is trying to protect the participating banks and in turn the taxpayers by not revealing the names.

The reader responded as to why and how could he ever invest in a bank. That is a very good point, investing in banks now is a much higher risk proposition because one does not know just how deep losses are in individual banks. Who does know?? Hank Paulson knows and he does not want to reveal those figures because they would further spook the markets.

“The Greatest Generation”…… (November 14, 2008)

The TARP bailout/rescue plan proposed to date has not inspired confidence nor generated any real impact for three reasons:

1. the banks have such sizable embedded losses that the funds already injected are being and will be used to recapitalize the balance sheets …

Economic/Market Highlights 11/17 (November 17, 2008)

Markets read this as a further indication that losses are so deeply embedded in the system that only time and “private money” can truly bring needed change. But how does “private money” receive incentive to enter the market?

Economic/Market Highlights 11/19…The Pain Increases!! (November 20, 2008)

Neither Paulson nor Congress nor anybody in Washington or Wall St. will tell you that the system has trillions in embedded losses but they do and our markets know it and are showing it by their prices.

“IT’S EASY TO FIND FAULT…especially if you’re clueless!! (December 11, 2008)

It keeps getting back, though, to the fact that the current situation as well as our future situation under any reasonable economic scenarios highlight the fact that the Wall St. banks are sitting on enormous embedded losses and expected future losses (continued increasing defaults on residential mortgages, credit cards, commercial loans, corporate loans). The money is not flowing through because:
banks need to replenish capital against these losses.

“Where’s The Money??….!!” (December 29, 2008)

In large measure, our mainstream media has done an exceedingly poor job as to highlighting the dynamics at work in the banking system. I will utilize a tape from a high profile financial show to reveal how the media is largely pandering to the public on this topic. Prior to doing that, though, let me get very detailed in answering the question as to “where’s the money?”

The business of banks is to lend money and in so doing they provide the liquidity to keep our economy moving. The banks lend money in a number of sectors but they can be summarized as follows: credit cards, residential mortgages, commercial mortgages, corporate loans. In addition to their lending role, most banks maintain a separate investment portfolio to further augment their revenue.

We have maintained that as a result of these investment activities, banks retained a wide array of what are now qualified as “toxic mortgage assets”. Globally, while banks and investment banks have taken $1 trillion in write-downs on these assets, by my estimation, confirmed by independent research and analytics, there are likely at least another $750 billion in write-downs yet to take on these assets.

Larry Doyle’s (LD’s) Dollars and Sense “Central Station” (January 10, 2009)

Comment by LD | 2009-01-10 10:45:43

Citi will inevitably sell other units at discounted prices.

In summary, it is not outside the realm of possibilities that this institution ends up being nationalized much like has occurred with some banks in the UK.

Against this backdrop, do not expect access to credit to improve anytime soon.

“Market Musings on a Monday . . . “ (January 12, 2009)

We have highlighted extensively why the embedded losses in the banking system would inhibit credit from flowing.

“Where’s The Money?” on December 29th specifically addressed the extent of losses and expected chargeoffs in our banking system. Why do the mainstream media and politicians continue to pander to the public on this topic?

“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!”

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