Bold Bernanke rescues stocks from 12-year lows
Janet Whitman, Financial Post Published: Tuesday, February 24, 2009
NEW YORK -- Stocks bounced back from 12-year lows Tuesday, boosted by assurances from U.S. Federal Reserve Chairman Ben Bernanke that big U.S. banks won't be nationalized.
Investor jitters that the U.S. government is moving toward taking over struggling financial giants such as Citigroup Inc. have sent stocks on a downward spiral over the past week.
The White House has made statements playing down the possibility, which has been gaining credence with recent endorsements from high-profile economists including former Federal Reserve chairman Alan Greenspan and Nouriel "Dr. Doom" Roubini.
But Mr. Bernanke offered the boldest official statements against nationalization yet.
"I don't see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when that just isn't necessary," Mr. Bernanke told a U.S. senate banking committee as he updated members on the U.S. economic outlook.
Investors have been fretting that U.S. government "stress tests" to determine the health of the country's 19 biggest banks over the next few weeks would lead to the nationalization of the weakest among them.
Mr. Bernanke shot down that notion, saying they won't be "pass-fail" events.
The Dow Jones industrial Average shot up 236 points to 7,350.86, recouping most of Monday's 251-point slide to lows not seen since 1997.
Toronto's main stock index surged 211.66 points to 7,859.33.
"The fear has been that government intervention to save the banks will wipe out the common equity holders like it did when Fannie Mae and Freddie Mac were rescued and to a large extent Bear Stearns holders were when the government arranged its sale," said John Ryding, chief economist and a founding partner of RDQ Economics in New York. "Bernanke made it very clear that the objective is to keep the banks in private hands. He was very forceful on that."
Investors seemed to shrug off Mr. Bernanke's bleak outlook for the U.S economy.
He told lawmakers that the recession could end later this year, with 2010 a year of recovery, but that is far from certain.
The recession's end hinges on whether actions taken by the government will stabilize the financial system, he added, and a recovery could end up delayed to well beyond 2010 if the financial system remains in turmoil.
"Overall, the downside risks probably outweigh those on the upside," Mr. Bernanke said in his prepared remarks.
Some economists said the Fed's expectations for a recovery to start this year are too optimistic, with Joshua Shapiro, chief U.S. economist with New York-based MFR Inc., calling it "a pipe dream."
Regardless of when the recession actually ends, the greater concern may end up being the strength of the recovery.
"My concern is when the economy will start to grow at a rate that will be enough to bring down the unemployment rate," said RDQ's Mr. Ryding. "That's the thing that's most meaningful to most people. Our concern is that the real recovery won't begin until at least a year after the recession comes to an end, as we've seen before."
Economists and bond-market participants were eager to hear whether the U.S. central bank intends to buy longer-term U.S. bonds, something the Fed had said it was considering in a bid to help improve credit conditions.
Mr. Bernanke said the Fed is keeping that option open, but indicated that any plans to do so are on the backburner. "We do have a couple of other things going on right now," Mr. Bernanke said.