PEB

Bernanke on the Backfoot

Ben Bernanke was on Thursday forced to make an unusual public defence of his actions as a bank regulator amid accusations he overstepped his authority during the frantic talks over Bank of America’s acquisition of Merrill Lynch.

Armed with hundreds of pages of subpoenaed e-mails, the House oversight committee asked the Federal Reserve chairman whether he and his staff forced BofA to go through with the deal, hid details from other regulators and threatened to fire Ken Lewis, chief executive of BofA, if he tried to pull out.

From the FT

Hard Times in the Art World

Giovanna Bertazzoni has observed a change in the culture of the sale rooms in the year between Christie’s grand summer sale of Impressionist and Modern Art in 2008 and this year’s more subdued version. She runs these evening sales, and she tells a tale of fewer lots and generally lower prices. “There are fewer parties, fewer tours of the paintings before they go on sale,” she says. “Finding paintings to sell now depends on relationships, conversations and trust. It’s a lot more work.”

The end of the speculative bubble means that fewer collections are coming onto the market. Days when sellers were tempted by generous guarantees are over. Curators such as Miss Bertazzoni did not have to be told by management to stop offering them. They no longer make commercial sense.

Hard Times.

The FT - Crisis? What crisis? The market confounds the left

Surely it was only yesterday that the west was engulfed by the crisis of capitalism? Markets buckled under the strains of the credit crunch. Portraits of Adam Smith made way for freshly-burnished busts of John Maynard Keynes. Popular rage against greedy bankers promised to restore politics to parties of the left.

Pace the doomsayers who predicted imminent Armageddon, liberal market capitalism has survived: somewhat humbled and, in the case of the financial services industry under much tighter official supervision, but recognisably much as it was. Governments have stepped in to prop up markets rather than to dismantle them. Nationalising the banks has been a means to an end rather than an end in itself.

The global economy is still in shaky condition. Recovery will be long and painful – and not just in those countries where prosperity had been built on the feeble foundations of unrestrained credit. Britain is paying the price of its borrowing spree in the ruinous state of its public finances; prudent Germany faces a still deeper economic slump because of the collapse of its export markets. Bailing out the banks has meant turning private profligacy into public debt.

That said, predictions of a return to the 1930s have proved as misjudged as the reckless complacency of policymakers and economists during the boom years. This week banks started paying back some of the money they borrowed from taxpayers. As for the predicted lurch to the left, it has not materialised. I have not seen anyone rushing to imitate the Russian model of state capitalism.

The FT Article

Blackrock in £8.2bn Barclays deal

Barclays has agreed to sell its fund management division, Barclays Global Investors (BGI), to US money management firm Blackrock for £8.2bn ($13.5bn).

Blackrock is paying a mixture of cash and shares in a deal that will create the world's biggest asset manager.

Barclays staff who own stocks in BGI will share a windfall. Bob Diamond, the president, will get £16m.

Barclays/Blackrock

Why Bernanke is right to be worried

Fed chairman Ben Bernanke’s congressional testimony on Wednesday warrants careful attention by market participants – this at a time when policy measures play an unusually large role in determining both absolute and relative values in many markets.

In his prepared written remarks, Mr Bernanke correctly points to the ongoing healing in critical elements of the financial markets, including inter-bank and commercial paper transactions. He also notes the improved functioning of the corporate credit market which has enabled many companies to raise needed and precautionary capital.

Yet, the most interesting aspects of his testimony are elsewhere. They relate to his more nuanced outlook about the economy and his attempt to place fiscal issues in their proper place.

Right to be worried.

Confidence in U.S. Economy Builds Even as Recovery Still Seems Distant

Economists, senior government officials and ordinary consumers are all showing greater confidence in the outlook for the economy.

But three months after signs of hope emerged, the evidence of improvement still exists only in the form of glimmers. A slew of recent economic data and other news, including yesterday's bankruptcy filing by General Motors, make clear that the nation is still muddling through a deep recession.

The Washington Post

Stress tests show $75bn buffer needed

US regulators on Thursday ordered 10 of the nation’s largest banks to add a total of $74.6bn in equity following the completion of stress tests, triggering a frenzy of activity as banks lined up to announce capital-raising plans.

“These tests will help ensure that banks have a sufficient capital cushion to continue lending in a more adverse economic scenario,” Tim Geithner, US Treasury secretary, said.

Stress Tests

Matthew Richardson and Nouriel Roubini

The results of government stress tests on the 19 largest US banks are due to be announced on Thursday, measuring how viable they are under adverse economic conditions. While all the banks appear to have passed the tests, reports suggest as many as 10 need to raise additional capital.

Given that the economic environment already reflects the tests’ worst-case scenario, and that recent estimates by the International Monetary Fund of financial sector losses have doubled in the past six months, the stress test results will not be credibly interpreted as a sign of bank health. Instead, market participants will conclude that those that require additional capital have, in fact, failed. As a result, these institutions will not be able to raise outside capital and will immediately require government help.

Once again, the question will be how the near-insolvent banks can be kept afloat, to avoid systemic risk. But the question we really should be asking is: Why keep insolvent banks afloat? We believe there is no convincing answer; we should instead find ways to manage the systemic risk of bank failures.

The economist Joseph Schumpeter famously argued that the essence of capitalism was the process of creative destruction by which new economic structures are born from the rubble of older ones. Schumpeter’s biggest fear, however, was that capitalism would collapse from within because society wouldn’t be able to handle the chaos.

Stress Tests and Market Discipline

6.1% slowdown in the first quarter

The US economy continued to contract in the first quarter of this year as business investment collapsed in the face of eroding global demand.

Preliminary commerce department figures showed on Wednesday that US gross domestic product declined by an annualised rate of 6.1 per cent in the first quarter, after declining by 6.3 per cent during the fourth quarter of last year. The decline was worse than the 4.7 per cent that economists expected and marks a slight improvement from the fourth-quarter contraction, which was the sharpest since 1982.

Slowdown

A Primer on a Chrysler Bankruptcy

From the NY Times

Chrysler is the first major automaker since Studebaker in 1933 to file for bankruptcy and try to reorganize. The process can be complicated. Here is a quick look at how it is likely to play out.