Ben was so right

Vincent Farrell, Jr. is Chief Investment Officer of Soleil Securities, a New York based investment management company. Over his long career on Wall Street, he has worked for numerous distinguished firms. Mr. Farrell graduated from Princeton University in 1969 and received his M.B.A. from the Iona College Graduate School of Business in 1972.


On his “60 Minutes” interview last week, Ben Bernanke was asked what kept him up at night. Interestingly he didn’t say Citi, or deflation, or the TARP and TALF plans. What keeps him up is the fear “that we don’t have the political will. That we don’t have the commitment to solve this problem.” Congress should have reflected on his wise words this past week. Prodded by President Obama’s statement that “I don’t want to quell anger. I think people are right to be angry. I’m angry”, Senator Grassley went around the bend and offered that AIG employees should commit suicide. Death threats were delivered to AIG employees, and Congress unmercifully attacked a $1 a year man who came out of retirement at his country’s urging to try to help solve the financial crisis by heading up the beleaguered AIG. I don’t see much political will or commitment to solve this problem. I see the villagers gathering in the town square with torches getting ready to head off to burn the castle where the evil Dr. Frankenstein lives. And with as much level-headed leadership as howling mobs usually have.

It’s not likely to get a lot better this week as the House Financial Services Committee has a hearing scheduled for Tuesday featuring Ben and Treasury Secretary Geithner. Its sole focus is what did the two men know about the AIG bonuses and when did they know it. Gee, the House already passed a bill taxing bonuses at 90%. Do they want to fire up more rage so they can go to 100%? Actually, if you live in high tax areas like NY City, when you add in State, City and FICA taxes the tab would be 102.5% of the bonus. Makes you want to stay late and get the job done.

“Politicians acting in haste rarely act wisely, least of all when guided by rage” commented the Financial Times over the weekend. The paper calmly, but effectively, editorialized that to use “the tyrannical principle that Congress can use the tax code to void contracts that the executive branch has consented to, after the fact with retroactive force…is Constitutionally dubious…and an abdication of responsibility.” Those FT guys really know how to use the King’s English, don’t they?

Sunday’s NY Times was not going to be outdone by their brethren across the pond. The headline in the paper was that the Obama Administration is going to call for increased oversight of executive pay at “all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation.” The other thing likely to be announced this week (and may already have been by the time you read this) is a three pronged approach to rid the financial system of toxic assets. It would encompass a: 1) an entity backed by the FDIC to buy and warehouse loans; 2) an expansion of the TALF to buy older asset backed paper and not just newly issued stuff; and 3) the long awaited private/public partnership to buy mortgage backed paper and other troubled assets on banks’ balance sheets.

Beyond the problem of how to price this stuff that we have been wrestling with since the idea was first formed, the other, and bigger issue, is who will step up from the private sector to play with the bully that changes the rules after the fact? This should be an interesting week. But suppose the market takes all of this uncertainty and manages to deal with it? A market that can do such a thing is a market that could be rewarding.

As we have said before- stay tuned.

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