Interest Rate Roundup

Thursday, July 10, 2008

Bernanke and Paulson hit the Hill

Both Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson are speaking before Congress today on regulatory restructuring and financial stability. Here is Bernanke's testimony and here is Paulson's. There doesn't appear to be much new coming from Bernanke. But Paulson's prepared statement does appear to include a few statements aimed at restoring confidence in the financials and the capital market. For example, towards the top of his statement, he says:

"Our financial institutions are repricing risk, deleveraging, recognizing losses, raising capital and improving their financial position. Their ability to raise capital even during times of stress is a testament to our financial institutions and our financial system.

"Fannie Mae and Freddie Mac are also working through this challenging period. They play an important role in our housing markets today and need to continue to play an important role in the future. Their regulator has made clear that they are adequately capitalized."

Of course, there is also some tough talk about market discipline and avoiding moral hazard. An excerpt:

"Market discipline is also critical to the health of our financial system, and must be reinforced, because regulation alone cannot eliminate all future bouts of market instability. For market discipline to be effective, market participants must not expect that lending from the Fed, or any other government support, is readily available. I know from first hand experience that normal or even presumed access to a government backstop has the potential to change behavior within financial institutions and with their creditors. It compromises market discipline and lowers risk premiums, ultimately putting the system at greater risk.

"For market discipline to effectively constrain risk, financial institutions must be allowed to fail."

More later. Suffice it to say the question and answer period should be interesting.

UPDATE: The Q&A period is ongoing. I haven't heard any bombshells. Here's an excerpt from a Bloomberg story covering this portion of the event ...

In response to questions, Paulson told the committee that regulators have worked to "protect'' the U.S. financial system, and he praised the Federal Reserve's decision in March to lend to Wall Street firms as a "very strong statement.''

Financial stability "is by far our most important priority,'' Paulson said.

The Treasury secretary said Congress should begin work immediately on regulatory initiatives such as creating a resolution process for failed investment banks, and he repeated his call for legislation that strengthens oversight of Fannie Mae and Freddie Mac.

Other regulatory changes may take years to approve and implement, he said, urging Congress to focus first on the shorter-term goals, he said. "Realistically, this is going to take some time,'' Paulson said.

Meanwhile, rumors and news of big losses continue to hit the market from time to time.


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