SEPTEMBER 4, 2010
The Diviner of System Risk
Ben Bernanke as Carnac the Magnificent
After two more days of hearings this week about the 2008 credit meltdown, the lid on Federal Reserve Chairman Ben Bernanke's black box remains shut and locked. Testifying Thursday before the Financial Crisis Inquiry Commission, Mr. Bernanke made clearer than ever that financial "systemic risk" is whatever he and his fellow regulators decide it is. Read on and weep at how little has changed despite financial "reform."
The danger of a systemic financial failure was the government's catch-all justification for its unprecedented market interventions beginning with Bear Stearns in March 2008. Asked by commissioner Keith Hennessey this week to define "systemic risk," Mr. Bernanke said that many academics are currently trying to do just that, but there remains a debate about how to measure it. Taxpayers might hope that Mr. Bernanke would demand a clear definition before he commits the next trillion dollars, but that's probably not the way to bet. The Fed Chairman confidently predicted that determining the level of such risk will largely "remain subjective."
Associated PressAs bad as this news is for taxpayers, the potentially worse news came when Mr. Hennessey asked if, in times of crisis, the government could still assist a particular company now that Dodd-Frank reform is the law of the land. Mr. Bernanke quickly put the matter to rest by noting that a too-big-to-fail company undergoing the government's new resolution process could still receive money from the Treasury. Uh, oh.
As for what particular risk at AIG inspired Mr. Bernanke to authorize a taxpayer bailout that grew to $182 billion, Mr. Bernanke's answer was vague, but it differed from the explanation offered by Treasury Secretary Timothy Geithner.
Mr. Geithner has testified that an AIG bankruptcy would have threatened the insurance subsidiaries on which consumers rely. Mr. Bernanke apparently knew better than to try that one on commissioner Brooksley Born, whose mission in life is to blame the crisis on over-the-counter derivatives, especially credit-default swaps. Ms. Born asked if AIG was considered a systemic risk "in part because many of the world's largest and most important financial firms were AIG's counterparties on these credit default swaps, and thus could have been impacted with AIG's failure."
Mr. Bernanke danced around the question. After all, who wants to argue that we had to use tax dollars to bail out French banks and Goldman Sachs? The Fed chairman artfully suggested that while the AIG counterparties didn't all necessarily need the help, the risk would be triggered by the "uncertainty" among investors wondering which ones needed help and which ones didn't. Mr. Bernanke added that at the time of the rescue in September 2008 and even now, two years later, he never learned the net exposure of the giant banks to AIG.
More plausibly, he described the potential downside for creditors with "commercial paper, corporate bonds and other vehicles" that "would have triggered an intensification of the general run on international banking institutions." Mr. Bernanke made no mention of the AIG insurance businesses.
So it appears the Geithner explanation for the AIG bailout is no longer operable, and Mr. Bernanke has now confirmed that his own decision was based on intuition, not a study of credit exposures. We imagine Johnny Carson holding an envelope to his head as Carnac the Magnificent, as Ed McMahon (Hank Paulson) intones, "you, in your divine and mystical way, will ascertain the answers having never before seen the questions."
But did Mr. Bernanke's staff perform such a risk study, which he ignored? On Thursday the Fed told us it is still reviewing our Freedom of Information Act request for a staff recommendation to Mr. Bernanke. Senator Jim Bunning has said he's seen evidence showing that the Fed staff opposed the bailout. The crisis commission should release this document, along with Mr. Bernanke's subsequent email with the draft proposal to the Fed Board of Governors to approve lending to AIG.
This week the commission did at least release the minutes of the September 2008 meeting at which the FDIC board approved a "systemic risk" exception to allow the government to finance the sale of Wachovia Bank to Citigroup. Wells Fargo later topped Citi's bid in a private transaction, showing that federal assistance wasn't necessary.
The minutes reveal that while the staff did see a systemic risk, the FDIC was under intense pressure from the Fed and Treasury to approve the deal. FDIC Chairman Sheila Bair noted that she only acquiesced after Treasury agreed to cover any FDIC losses as they occurred, without waiting, as is customary, for the Federal Deposit Insurance Fund to be depleted before providing assistance.
***
Which brings us to the most troubling part of Mr. Bernanke's testimony. While reciting a litany of mistakes by private firms and various harms allegedly caused by a lack of regulation, the Fed chief once again dismissed the notion that loose Fed monetary policy contributed to the credit bubble.
So there you have it: The chairman takes no responsibility for the monetary roots of the credit mania but wants virtually unbridled authority to intervene in the markets based on a hip-pocket judgment about "systemic risks" that not even he can define. Taxpayers will just have to take his word for it.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
0 comments:
Publicar un comentario