Federal Reserve chairman Ben Bernanke said Tuesday the fiscal stimulus being planned by Congress and the Obama administration may not be enough to revive the economy. A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions' balance sheets, he said in a speech to the London School of Economics. The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending.
Bernanke believes more needs to be done to strengthen the financial system and said the Treasury could purchase troubled assets or even provide asset guarantees to reduce the uncertainty surrounding their values. Under a third option he outlined, the Treasury could set up and capitalize so-called bad banks, which would purchase assets from financial firms in exchange for cash and equity in the bad bank.
Addressing banks' troubled assets was supposed to be the goal of the Troubled Asset Relief Program (TARP).
In September, Bernanke and Treasury Secretary Paulson told lawmakers the aim of TARP would be to purchase toxic mortgage-related assets from banks. Paulson described the asset purchases as the single most effective thing we can do to help homeowners, the American people and stimulate our economy.
But in November, Treasury did a controversial about-face and signaled that program had been shelved. The Treasury used most of the $350 billion Congress allocated to recapitalize troubled banks. It also engineered several bank takeovers.
At the close of floor trading on the NYSE, the DOW was on 8448.56 after falling 25.41 points (-0.30%). The S&P was on 871.78, up 1.52 points (0.17%) while the NASDAQ had moved to 1546.46 with a gain of 7.67 points (0.50%). Bonds were bought after Bernanke said the Fed could decide to purchase government debt, with the yield on the 2-year note falling 1.2 basis points to 0.742% while yield on the benchmark 10-year note fell 3.7 basis points to 2.989%. The dollar looked like it was trading in risk-aversion mode, with gains of 1.25% on the euro, 2.17% on the pound and 2.66% against Australia's dollar as it fell 0.07% to the yen.
Crude oil for February delivery was recently trading up 95 cents (2.53%) to $38.54 per barrel.
Gold for February delivery was recently trading up $1.70 (0.21%) to $822.00 per ounce.
In breaking news, CNBC is reporting that Citigroup and Morgan Stanley boards have approved the brokerage joint venture, which paves the way for Morgan to take a 51% stake in Citi's Smith Barney unit. The move by Citi, which is under governmental pressure to raise capital, is the first step toward a breakup of the financial supermarket model the bank has followed since its former CEO Sandy Weil convinced lawmakers to strike down the Glass-Steagall Act (with the help of Clinton Treasury Secretary Robert Rubin), which was put in place during the depression to keep savings banks and investment banks separate. Provisions of the act which prohibited a bank holding company from owning other financial companies were repealed in Nov. 1999.
Meanwhile, the WSJ is reporting Citi is preparing to unveil a major reorganization that will mark a further step toward dismantling the financial conglomerate.