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Wall Street Breakfast: Must-Know News

Ben Bernanke's Dismal by: Thomas Tan March 25, 2009
Ben Bernanke has a long history and record of predicting the market wrong. Whatever he says, in less than half year, everything seems to go very wrong in the other direction. Now he says the recession will be over by end of this year. This alone should get all of us worried.

In March 2007, he said the subprime crisis was contained when it was barely starting. When the problem of delinquencies and foreclosures started to surface, he said, “Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.” We all know what happened next.

Now switching from real estate to banking, after a year when he said subprime was not a problem, in February 2008, this time he said, “among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.”
Obviously he wouldn’t count Bear Stearns or Lehman among the large banks referred in his speech since he can blame them as only investment banks. He wouldn’t count Fannie Mae (FNM) and Freddie Mac (FRE) either, since they don’t make up a very substantial part of our banking system, or do they? To keep his words, he had to bump trillions of taxpayers’ money to save Citi (C) and Bank of America (C), and forced Merrill and Wachovia to be sold, instead of letting the bondholders of those banks taking the losses in the normal "pre-packaged bankruptcy" process, since he wants to protect the big guys as bondholders are mainly large financial institutions. But how about Washington Mutual? Its failure in September 2008 is the largest bank failure in history with $307 billion in assets. Both common and preferred stockholders got totally wiped out, all subordinate bondholders were also totally wiped out, only the most senior bondholders received merely pennies back for the dollar. This is the example of "too big to fail" becoming "too big to save".

Sometimes I don’t know whether he is speaking from his mind (unlikely from his heart), or he just says what he has to say because he has no choice. In his role as a cheerleader for the financial market, he actually gets his hands tied and is not supposed to speak freely on what is in his mind. This is actually the biggest problem for the the Fed and the whole banking industry -- like a secretive skull and bones society with only a few elite members, you are sworn to protect the secrecy at all costs, including lying. If you know the truth, you just can’t say it, or better yet, you say the opposite. Let us see what happens this time, whether he remains 100% “correct” on his prediction record.

I fully expect Bernanke won’t be able to last after his first term ending next year. Even if the President nominates him again, as an academic person, he may not want to through such suffering for another term. Especially if his prediction of recession ending this year again turns out to be wrong. I am not sure he has the thick skin and endurance to take it any more either.