The day was light on economic data, heavy on earnings reports and dominated by the Lehman Hearing testimonies of Bernanke and Geithner.
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The day's headline story was centered on the Lehman Brothers hearings and the related testimonies of Federal Reserve Chairman Bernanke and Treasury Secretary Geithner before the House Financial Services Committee.
Lehman Hearing - Testimonies of Bernanke & Geithner
Chairman Bernanke led off his remarks by absolving himself of all blame. The Chairman reminded the panel that Lehman was not under Federal Reserve supervision because it did not own a commercial bank. I felt like the Chairman meant to say, "In other words Congressmen, be nice to me today." Bernanke regressed back into his early days as Fed boss, with that meek voice coming through again; it was the frail and crackling one that had early market sentiment a bit worried about the boy. Of course, since those early easy days, the Fed boss has taken the reins of all our nation's economic horses, and shown himself to be a true scholar of the Depression and champion of Washington. I'll remind you that without Bernanke, the Bush Administration seemed and was lost, and our economic ship in perilous seas, lost as well.
Bernanke reminded his Congressional conspirators that, in fact, Lehman was barely supervised at all. The SEC policed its broker-dealer business, and the parent company fell under the patrol of the SEC's Consolidated Supervised Entity Program (CSE), which, importantly, was voluntary and without statutory jurisdiction (in other words, it was impotent and Lehman unsupervised).
Bernanke reviewed the Fed's bold steps to measure Lehman's (and others') risk in conjunction with the SEC, and brought together his organization with the SEC to share information. He shone a bright light on the shadow banking system. However, the mere placement of Fed representatives at Lehman must have served as a primer for rumors in a Wall Street sea full of sharks. It was not in Lehman's competitors' interests to help save the company, despite what Bernanke was telling them. So, when they all came together at the New York Fed in September of 2008, Wall Street did not step up to save Lehman. In fact, we recall Wall Street was ruthless in its devouring of Lehman and Bear Stearns, and Merrill would have been next. In that way, the sharks would risk their own survival just to feast on rival Lehman. Recall, it was only a matter of days and hours, in which Lehman's prospective counterparties ran away and its capital disappeared.
The Chairman offered this advice to the Congressmen to help our nation avoid future catastrophic risks like those posed by Lehman's failure:
"The Lehman failure provides at least two important lessons. First, we must eliminate the gaps in our financial regulatory framework that allow large, complex, interconnected firms like Lehman to operate without robust consolidated supervision. In September 2008, no government agency had sufficient authority to compel Lehman to operate in a safe and sound manner and in a way that did not pose dangers to the broader financial system. Second, to avoid having to choose in the future between bailing out a failing, systemically critical firm or allowing its disorderly bankruptcy, we need a new resolution regime, analogous to that already established for failing banks. Such a regime would both protect our economy and improve market discipline by ensuring that the failing firm's shareholders and creditors take losses and its management is replaced."
The Treasury Secretary reminded his audience of the significance and consequence of the bankruptcy of Lehman Brothers. He directed their attention to the recently published examiner's report, produced by Anton Valukas: the Valukas Report on Lehman Brothers.
The Treasury Secretary made a fantastic case for his boss, the President, and the Financial Regulatory Reform Bill now under debate in the Senate. I thought his most emphatic words came when he illustrated the lengths then President Bush had to go to in order to preserve the financial system and American economy. He said:
"When a conservative Republican President – a President with abiding faith in markets – is forced by a financial crisis to put Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) into conservatorship;
to ask Congress for $700 billion in authority to stabilize the financial system and then to invest taxpayer money into banks that account for three quarters of the entire U.S. banking system;
to lend billions of dollars to two of our largest auto makers;
when he does all that – and he was right to do it – it is undeniable that our system is broken.
The question we face is not whether to fix it but how best to fix it. "
He concluded by noting that any system that relies on market discipline to compensate for weak regulation is doomed. Geithner for president anyone? I still remember his, "You don't know me very well Congressman" statement from a few months back, and it's hard not to like the tough guy. Put the two of them together on a ticket, and I bet you have a winner.
ICSC Same-Store Sales Report
The trends we pointed out in last week's note on the ICSC data, and within our weekly copy, "This Week," played out exactly as expected this morning. The ICSC posts its Weekly Same-Store Sales data in the pre-market, and this week provided information for the period ended April 17.
Still matching up against part of the pre-Easter sales period, this year's week-over-week comparison had a hill to climb. Sales rose just 0.2%, but next week's match-up should prove fairer. When matched against the prior year's figure, it was all downhill for same-store sales. The current year period's sales were 4.6% above last year's depressed state of affairs. Expect more results like this in the weeks ahead, as we match up against some of the easiest to beat economic data in the history of our country. Remember, this expectation only applies for yearly comparisons. Most economic data is reported on a month-over-month basis, so I would not go betting on big numbers surprising the market.
As a reminder, in the week ended April 10, weekly sales gained just 0.1%, and improved 4.0% against the prior year's depressed levels.
In other corporate activity, Magna Entertainment sought bankruptcy court approval to exit Chapter 11. U.S. Bancorp (NYSE: USB) and Citigroup (NYSE: C) held shareholder meetings, and J.C. Penney (NYSE: JCP) hosted an analysts' meeting.
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