財經觀察 1498 --- Bernanke Put Shows Fed Securing Markets

Bernanke Put Shows Fed Securing Markets Beyond Greenspan Grasp 2008-11-10 05:00:10.0 GMT

By Sandra Hernandez and Jeff Kearns

     Nov. 10 (Bloomberg) -- Leave it to Federal Reserve Chairman Ben S. Bernanke to make obsolete almost everything his predecessor, Alan Greenspan, did to win investors' confidence.
     It was only 14 months ago, during the first signs of credit seizing up, that traders assumed Bernanke's Fed would get the bear to retreat once again after deploying the Greenspan Put:
So-called because the former chairman's practice of lowering interest rates and allowing money to flow to prop up securities markets enabled Greenspan followers to liquidate their stocks as if they had a put option.
     Ever since 1998, a year before Greenspan graced the cover of Time magazine as the leader of the ``Committee to Save the World'' and two years before he was celebrated as ``Maestro'' by author Bob Woodward, markets embraced the notion that Greenspan would manipulate monetary policy to encourage investment with cheaper borrowed funds and maintain financial stability.
      Today, the Greenspan Put is another relic of the bull market. As Bernanke soon realized, ``overuse of the Greenspan Put caused that prescription to lose its efficacy,'' said Doug Peta, a market strategist in New York at J&W Seligman & Co., which manages about $15 billion.
      In less than two years on the job, the 54-year-old Bernanke has been prompted to make unprecedented use of the Fed's powers as the lender of last resort to contain the worst erosion of credit since the Great Depression.

                        `Vastly Different'

     The Fed pledged to buy as much as $1.8 trillion of commercial paper from corporations to prevent short-term loans from drying up, and financed securities purchases from troubled money market mutual funds used as alternatives to savings accounts. Bernanke kept banks liquid by accepting bonds they can't trade as collateral for Treasuries. He bailed out the nation's biggest insurer with an $85 billion loan and agreed to provide dollars for central banks from Brazil to South Korea to alleviate shortages in emerging markets.
     ``What's going on now is vastly different,'' said Stephen Wood, who helps manage $181 billion as a senior portfolio strategist at Russell Investments in New York. ``It's more creative, more aggressive, more comprehensive than anything I think Greenspan would have even thought of.''
     While policy makers cut the target rate for overnight loans between banks to 1 percent from 5.25 percent since September 2007, Bernanke exceeded the Greenspan Put, turning the Fed into the nation's risk absorber of last resort and the financial intermediary of last resort. A put is an agreement that gives its buyer the right to sell a security at a set price, insuring against a drop below that level.

                          New Medicine

     Bernanke took extraordinary steps as the 14-month credit seizure caused the steepest decline in the U.S. economy in seven years last quarter and the worst drop for the Standard & Poor's 500 Index since 1937. The Fed committed about $1.5 trillion, as of last month, according to central bank data.
     ``Greenspan used an antibiotic so regularly that the bacteria became resistant,'' said J&W Seligman's Peta. ``Now the new doctor has to find another weapon.''
     Dr. Bernanke's Fed extended terms of direct bank loans to 30 days; auctioned funds to banks for 28- and 84-day intervals and made it easier for bond-trading firms to exchange government debt and mortgage securities for cash. Bernanke agreed to lend Treasury bonds to firms for 28 days in return for harder-to- trade collateral, permitted a broader range of financial institutions to borrow directly from the central bank and began to pay interest on banks' cash reserves.

                        AIG, Bear Stearns

     The central bank loaned $85 billion to American International Group Inc., the biggest U.S. insurer, in September in return for an 80 percent equity stake, and $29 billion against Bear Stearns Cos. assets in March to support a takeover by JPMorgan Chase & Co.
     Bernanke has had some success in bringing credit markets back from the brink of collapse. The cost of borrowing dollars overnight in London plummeted from a record high of 6.88 percent in September to 0.33 percent on Nov. 7. Interest rates on top- rated 30-day commercial paper fell to a 4 1/2 year low of 1.04 percent.
     Still, the economy contracted 0.3 percent last quarter and Goldman Sachs Group Inc. forecast the deepest U.S. recession since 1982. Gross domestic product will shrink 3.5 percent in the fourth quarter and 2 percent in the first three months of 2009, Goldman economist Jan Hatzius wrote in a Nov. 7 research report.
     President-elect Barack Obama will need at least 18 months to turn around the U.S. economy, Columbia University Professor and Nobel Prize-winning economist Joseph Stiglitz wrote in the Washington Post Nov. 9.

                            `One Tool'

     The three-month London interbank offered rate, or Libor, is
1.76 percentage points higher than traders' expectations for the Fed's target rate, almost triple the average since the start of
2007 -- a signal banks remain reluctant to lend. The S&P 500 has dropped 37 percent in 2008.
     The new policies go farther than anything Greenspan attempted when he ran the central bank from 1987 to 2006.
Greenspan said he had ``one tool'' to promote economic growth, when asked by lawmakers in July 1998 how the Fed addressed unemployment. ``We don't have the instruments in monetary policy to go beyond that,'' he said.
     Most of the time, cutting interest costs worked. Greenspan reduced the fed funds rate to about 7 percent from 7.25 percent after the stock market crash of October 1987 sent the Dow Jones Industrial Average down 23 percent. The index gained 2.3 percent that year. The Fed also suspended limits on loans of securities to primary dealers, those firms that trade government debt with the Fed.

                        `Giving Away Puts'

     Greenspan cut the Fed's target twice in 1995, to 5.5 percent from 6 percent, after Mexico devalued the peso and Orange Country, California, declared the biggest municipal bankruptcy in U.S. history. The Dow jumped 33 percent that year, the biggest gain in two decades.
     About a month after Russia's debt default and the collapse of the hedge fund Long-Term Capital Management LP in 1998, Greenspan lowered the Fed's target by a quarter-percentage point, and twice more that year, to 4.75 percent. The Nasdaq Composite Index surged 190 percent after the first cut to a record in March 2000. Over the next 2 1/2 years, it lost more than three-quarters of its value as the technology bubble burst.
     ``Mr. Greenspan should quit giving away puts on the equity market,'' Paul McCulley, a managing director at Newport Beach, California-based Pacific Investment Management Co., which oversees the world's biggest bond fund, said in February 2000 in a commentary on the firm's Web site.

                          Case-Shiller

     Greenspan cut borrowing costs to 1.75 percent by the end of 2001, following the terrorist attacks of Sept. 11. He reduced interest rates to a half-century low of 1 percent in 2003 and didn't raise them for another year, encouraging a 16 percent gain in home prices in 2004 and setting the stage for the market's worst collapse since the Great Depression.
     The S&P/Case-Shiller home-price index, which measures house prices in 20 U.S. cities, fell 16.6 percent in August from a year earlier.
     Greenspan also avoided imposing curbs on markets. Private regulation ``generally has proved far better at constraining excessive risk-taking than has government regulation,'' he said in 2005. He declined to comment through a spokeswoman.
     Bernanke initially responded to widening losses from the housing market with Greenspan's put. In August 2007, after the collapse of two Bear Stearns hedge funds, he cut the rate the Fed charges for direct bank loans by 0.5 percentage point, to
5.75 percent. The move, meant to restore ``orderly conditions''
in markets, came after cash injections into the federal funds market failed to boost companies' access to capital.

                           No Metaphor

     The initiatives that followed more than doubled the assets held by the Fed to $2.08 trillion last week from $889 billion a year earlier. The average annual increase this decade before
2008 was 3.81 percent.
     The Greenspan Put ``was a metaphor because it wasn't actually a put and the Fed wasn't really buying the asset,''
said Gerald O'Driscoll, a former vice president of the Dallas Fed who is now a scholar at the Cato Institute in Washington.
``But now, literally, they're buying the asset. It is a put, literally.''
     Greenspan, 82, said in a Congressional hearing on Oct. 23 that he'd ``found a flaw'' in his market philosophy that shunned financial regulation. He also reiterated his ``shocked disbelief'' that financial companies failed to execute sufficient ``surveillance'' on their trading partners to prevent losses. Financial firms worldwide have reported $688 billion of losses and writedowns since 2007, according to data compiled by Bloomberg.
     ``The circumstances of today are so dramatically more serious than in Greenspan's time that we're getting a more dramatically involved, aggressive Fed response,'' said Jonathan Lewis, founding principal of New York-based Samson Capital Advisors LLC, which manages $4.4 billion. ``If all Bernanke did was lower rates a lot like Greenspan did, that would seem less consequential.''