Bernanke Spoon Feeds us with Baby Steps
Fed Reserve Chairman Ben Bernanke appeared before Congress and let a little more of the cat out of the bag. Giving a not too bleak picture of a problem followed by minor but regular corrections is the way we seem to like to get our bad news.
The Fed is currently predicting 1.8% growth for this year but Bernanke said a new forecast would be finalized next week. The Council of Economic Advisors’ most recent estimate was for the economy to grow by 2.7% in 2008.
Stepping down our expectations as usual.
Another revelation regarding the whole sub-prime mess which I commented on in a previous posting the Fed chairman also said that major banks and Wall Street firms are likely to report more losses from investments tied to subprime mortgages
But Bernanke added that he’s not worried about bank failures because he thinks banks entered the current downturn with sufficient capital and have been able to raise additional funds. He reassured us by saying, “Certainly all the banks we supervise remain at strong capital positions and we don’t see any imminent risk of any insolvency.”
That spoonful of sugar really helped the medicine go down didn’t it? Bernanke also admitted that the losses resulting from the credit and sub-prime fiasco were not fully revealed yet. Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee concurred saying, “One thing that is now clear to all of us is that the sub-prime mortgage problems are not contained.”
This dancing around reality reminds me of a Monty Python sketch.
http://www.youtube.com/watch?v=BcMMBUVW49o
They would do much better simply cutting to the chase and telling us the unvarnished truth so we can deal with it and get on. American’s are amazingly resilient but it’s hard to be resilient when we don’t know what we need to “resil” about. We will continue to read between the lines as a preview of coming attractions.
The problem is that bank/investment houses don’t know the extend of the problem with the sub-prime mortgages. The majority of these loans were stripped and re-packaged and sold as first class assets to banks world-wide. The package contained part mortgages. The banks and audit teams don’t know how to put a fair value on these products. This practice has been going on for many years.There has been many billion’s of dollar or foreign currency products done this way. Short term loans were swapped out for longer term commitments. The mess can’t be unraveled.Buyers of assets were believed that the backing was always of full faith and backed by first class insurance and or US Gov’t.
Since there was no failures by some of these insurance backers their reserves or Tier 1 was limited.
Another issue was interest rate swaps done on the basis of LIBOR vs PRIME RATE using historical levels and this failed. This was in the many billion of dolls and foreign currency.
It started as prime moved up from a lower base to higher and family debt started to mount with no chance of paying back. Mortgage sellers were selling to hundreds of million who didn’t know the risk of FLOATING rates as prime went up.
The FEDERAL Reserve is good when it can research historical patterns. This was the start of a new event risk. Goldman Sachs was one of the few who got out or hedged their risk. Many of the world banks/investment bank use the basis same data to view their dollars at risk.
They didn’t plan or didn’t have enough in reserves when this EVENT RISK HAPPENED.
IMHO