WASHINGTON (Reuters) - The following are highlights of Federal Reserve Chairman Ben Bernanke’s testimony on Wednesday to the House of Representatives Financial Services Committee on the Fed’s semiannual report on monetary policy and the economy.
“The stock market is one important financial indicator, but it’s not the only indicator. There are credit markets for example, which are telling different stories to the stock market in some cases. With respect to the stock market, it is important because it does reflect the profit expectations of a large number of firms, therefore it is closely tied to expectations about the economy. That being said, a large share of the profits that are being reflected in stock prices are not U.S. -based, they are foreign-based, so that obscures the connection a little bit. Secondly the risk appetite of investors changes over time and right now the standard measures of the risk premium that investors are charging to hold stocks are at very high levels relative to anything we have seen in recent decades. It’s suggesting that part of the reason the stock prices have fallen so much and so low is that investors are very skittish about holding any risky assets and have moved in a very substantial way toward the safest assets like Treasury securities. At least in part, the stock values reflect not so much the fundamentals, the long-term profitability of the economy, but they also reflect investor attitudes about risk and uncertainty which right now are at very high levels.”
“The first portion of the TALF (Term Asset-backed Securities Loan Facility) which is going into operation very soon, includes certainly auto loans, asset-backed securities and also floor-plan loans for dealers. We do require triple-A securities but remember a triple-A security can be a senior tranche of a security that has different layers of seniority, so it should still provide substantial security to auto loans and therefore help the customers of auto companies be able to purchase vehicles. So it’s our belief that we will be, through this program, will be helping the automobile industry by providing credit to customers. We will obviously look at that again if necessary.”
BERNANKE ON GEITHNER’S PROPOSED PUBLIC-PRIVATE PARTNERSHIP
“We want to make sure that the prices of the assets that are purchased reflect true market values that are not overpaid. So the idea between the public-private partnership would be that there would be both public and private money involved and that the pricing decisions would be made by private-sector specialists, not by public bureaucrats...
“If the government is willing to provide longer-term lending, or leverage, there are many investors who presumably would be willing to buy under those circumstances who are unwilling to buy without the credit, without the lending they need to finance those purchases.”
BERNANKE ON TREASURY ADDING FEATURE TO DRAW BANK INVESTMENT:
“We need that (the option of converting preferred shares in banks to equity holdings) in order to strengthen the banking system so that it will be able to make loans and support the economy. In terms of government protections for taxpayers, the terms on which they’re converted and other aspects of that — voting rights would be relevant to that — the Treasury, I believe, is working on features that will make the shares attractive from an investment perspective as well as from a financial stabilization perspective.”
Asked why the government would move away from the protection it enjoys as a preferred investor: “Simply the concern that the ... preferred equity shares have reached their limit in usefulness, and that in order to provide enough quote, high quality capital, these companies need more common equity...
“Our regulatory standards include the preferred stocks from the government as Tier 1 capital. But there are two considerations. One is that our rules also specify that the preponderance, quote, of Tier 1 capital should be common. That’s one consideration. That’s in our existing rules. But secondly the markets have also shown a very strong preference for common in terms of trusting the capital bases of these banks. So, those two considerations have played into these determinations, but I leave it to the Treasury to further explain to how they are going to provide protections.”
“We will be focusing on new issues of asset-backed securities. They could be backed by refinances, for example. They need not loan-financed new construction.
“People talk a lot about credit availability and part of that is the banking system, but the biggest part of it is the drying up of the securitization markets...The Fed has been focused on getting those markets going again, setting them up in such a way that when the markets begin to recover the private sector will come back in. For the time being, with no activity, the Fed wants to be there to try to help credit flow.”