By William Patalon III
Money Morning/The Money Map Report
Documents brought to light by key by congressional investigators hightlight real disagreement between top-level U.S. Federal Reserve officials about how it should address the Bank of America Corp.(NYSE: BAC) acquisition of Merrill Lynch & Co. Inc. are almost certain to fuel the ongoing congressional debate over the central bank's push to expand its authority over the U.S. financial system.
This growing concern manifested itself Thursday, when Fed Chairman Ben S. Bernanke; was grilled by Capitol Hill lawmakers during a congressional hearing looking into the central bank's conduct in BofA's buyout of Merrill Lynch. Bernanke's failure to resolve some of the most-pointed questions posed by congressional leaders – (especially Republicans) who wanted to discover whether the Fed overstepped its authority and interfered with merger-related decisions – may undermine a proposed financial system overhaul that would imbue the central bank with broad authority over big U.S. financial institutions. One example: In the Bank of America deal for Merrill Lynch, lawmakers felt that Bernanke & Co. should've required more concessions in return for the taxpayer-supplied financial aid, Bloomberg News said.
The bottom line: The additional oversight powers that Bernanke is seeking – and that are part and parcel of the proposed Obama administration financial-system overhaul may prove to be one very tough sell.
Both parties are likely to find fault with U.S. President Barack Obama's plan to put the Fed on the point, positioning it as the single agency responsible for supervising the U.S. economy's largest and most-interconnected banks and financial institutions, giving the central bank the power to dictate financial standards on capital, management of risk and even liquidity requirements.
"It may be more important for us to find another systemic risk regulator," U.S. Rep. Paul Kanjorski, D-Pa., who is a member of the House Oversight Committee where Bernanke appeared, told Bloomberg TV. Congress should "hesitate to put any more authority on the back of the Federal Reserve."
The internal central bank documents – e-mails, written notes and even official memos paint a picture of a government institution that's "wrestling" with how tough it should be on BofA and other big banks, The Wall Street Journal reported. In December, Bank of America told federal officials it was looking to possibly end the deal, and current and former bank officials contend that the Fed and former Bush administration officials pressured BofA to go through with the deal, which has turned out to be much-less beneficial than hoped for.
On the other hand, these disclosures could bolster the argument by Fed officials that the central bank needs these powers to address future financial crises. The reason: These disclosures show that it lacked the "tools" (the legislated power and authority) needed to tackle the problems as soon as they surfaced. The inability to do so probably lengthened the crisis and exacerbated both the damages – as well as its ultimate cost.
In non-financial news, U.S. commercial aircraft giant The Boeing Co. (NYSE: BA) struggled through a miserable week as it postponed testing of the new 787 Dreamliner aircraft and also lost orders from Qantas Airways Ltd., as the entire industry continued to suffer the ill effects of the economic downturn on travel.
Apple Inc. (Nasdaq: AAPL) reported better-than-expected early sales of its new iPhone 3G and appeared close to welcoming its fearless leader, Chief Executive Officer Steven Jobs, back to work. Tech giant Oracle Corp. (Nasdaq: ORCL) announced declining profits, but offered favorable forecasts for the current quarter and beyond. Likewise, retailer Bed Bath and Beyond Inc. (Nasdaq: BBBY) experienced a surprisingly strong quarter, a nice sign that the ailing consumer may be showing renewed life. State-owned Sinopec Shanghai Petrochemical Group (NYSE ADR: SHI) is attempting to purchase Swiss-based Addax Petroleum Corp. for $7.2 billion in what would be the largest global acquisition by a Chinese company.
Investors breathed a collective sign of relief when the final leg of the record $104 billion U.S. Treasury auction came to a close and interest rates had not soared through the roof. Instead, institutions and sovereign funds seemed to maintain a hearty appetite for U.S. government securities, despite rumors to the contrary. In recent weeks, naysayers have been predicting that foreign buyers would shun domestic fixed income as the ballooning U.S. deficit spiraled out of control with expensive new programs to cure all that ailed the country. For the time being, at least, Treasuries remain a safe-haven investment, and the yield of the benchmark 10-year bond even fell to around 3.5%.
From an equity standpoint, investors remain confused about the future direction of the markets and whether to ride the prior upward trend or take profits from the rally that exceeded 30% in anticipation of a return to the lows set in early-March. Some believe the indexes will trade sideways for the foreseeable future. The Dow Jones Industrial Average lost ground (thanks in large part to Boeing), while other major indexes closed relatively flat from the prior week's levels. Despite a bit of volatility, oil hovered neared $70 a barrel level and gasoline prices fell slightly for the first time in two months.
While the economic numbers appear to be getting stronger (see below), many investors want to see more than just "less" contradiction or "slower" weakness in the economy and various sectors. Many believe that the "worst of times" may be over, but the "best of times" may still be far away. Some even approve of the job Bernanke is doing (despite what their elected reps are saying).
Year Close (2008)
Qtr Close (03/31/09)
Dow Jones Industrial
10 yr Treasury (Yield)
A Congressional tongue-lashing didn't keep Bernanke and Fed policymakers from completing their business at hand. Last week's policy meeting provided few surprises as the Fed left the benchmark Fed Funds rate unchanged at (virtually) 0% and announced that no rate changes seem likely in the near-term. The Fed also confirmed its intent to buy $1.45 trillion in mortgage-related securities and $300 billion in Treasuries, though made no commitment to purchase more than that previously announced amount. The accompanying statement depicted an economy that remained weak, but seemed to be exhibiting some signs of rebounding (ever so slightly). For the time being, inflation (or even deflation) does not appear to be of major concern. The policymakers also continued to apprise the public on the success of the various "stimulus" actions and announced the closing of several lending programs that they no longer deem necessary.
The World Bank said the worldwide slump would be worse than it has previously projected, boosting its forecasted slump to 3% from the previous forecast which called for a slump of 1.75% – and claimed that activity would be the worst on record. By contrast, the Paris-based Organization for Economic Cooperation and Development reported that the "worst may soon be over" and revised its economic forecast to more favorable terms for the first time in two years.
Among weekly releases, new home sales declined in May and existing home sales rose less than expected as much of the buying centered around distressed sales and foreclosures. The median price of an existing home purchased in May was more than 16% below last year's level.
Higher durable goods orders lent some confidence to manufacturers, as activity rose for the second consecutive month. Personal income and spending both increased in May and the administration was quick to praise the benefits of the stimulus package. However, the savings rate also climbed to its highest level in 15 years as consumers remained uncertain about the economy in general and their job situations in particular. On a bright note, the Reuters/University of Michigan Sentiment index increased to its highest level since February 2008. Gross domestic product (GDP) in the first quarter was revised again – to minus 5.5% (from minus 5.7% reported last month), a positive sign, though impatient economists and investors alike seem ready for even better (positive) data in the quarters to come.
Weekly Economic Calendar
Existing Home Sales (05/09)
Slower than expected increase in activity
Durable Goods Orders (05/09)
2nd consecutive monthly increase
New Home Sales (05/09)
Surprising decline in sales
Fed Policy Meeting
Recession easing with no real signs of inflation
Initial Jobless Claims (06/20/09)
Increases in new and total claims
GDP (1st qtr revised)
Contraction improved to -5.5% from -5.7%
Personal Income/Spending (05/09)
Higher income, spending, and savings due to stimulus
The Week Ahead
Consumer Confidence (06/09)
Construction Spending (05/09)
ISM –Manu (06/09)
Initial Jobless Claims (06/27/09)
Unemployment Rate (06/09)
Non-farm Payroll (06/09)
Factory Orders (05/09)
July 4th Holiday Observed
News and Related Story Links:
- The Wall Street Journal:
Documents Fuel Concerns About Expanding Central Bank's Role.
- Bloomberg News:
Bernanke Grilling May Weaken Case for Expanded Powers.
- Money Morning News Analysis:
Strong Sales of New iPhone Offset News of Apple CEO Steve Jobs' Liver Transplant.
- Money Morning News Analysis:
Obama's Financial System Overhaul Would Give the Fed Broad Powers Over Wall Street.
China's Sinopec (NYSE: SHI) Acquires Addax Petroleum for $7.2B
World Bank slashes growth projection as global recession deepens.
- Money Morning New:
OECD Boosts Outlook but Urges Developed Countries to Keep Lending Costs Low.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.