Corker Vs Bernanke


There was an interesting exchange between Senator Bob Corker (R-TN) and Bernanke at the Senate confab yesterday. Corker was hostile, Bernanke didn't like it one bit.

Corker said that Bernanke was, "creating "faux" stock-market wealth that would be reversed as soon as interest rates started rising". Corker also said that Ben was, "throwing seniors under the bus" with his ZIRP policy. But it was Corker's accusation that Bernanke was subsidizing the banks that took Ben over the top. To me, the exchange sounded like a couple of kids at the playground:


Bernanke: "None of the things you said are accurate"

Corker: "Oh yes they are"


I say Corker's right; Bernanke's policies have lined the banks pockets. An example:

For the big banks, corporate finance deals are a meat-and-potatoes part of the business. This type of lending falls under the description of "leveraged loans". A good example is the $13B loan that BoA is making to facilitate the Dell LBO. Buffett's Heinz deal will also have some sweet loans for the banks. The Comcast deal for NBC will add to the banker's fat. By Friday, another deal will get teed up.

This chart looks at the pricing for these loans. Look at the spreads that the banks reaped in the post 2008 period:




A few observations from the chart:


- The green shaded area that starts in 2008 is Original Issue Discount (OID). This means that a bank made a loan for $100, but only loans out $95. The banks keep the $5; it's sort of like the fees for a Payday loan.


- The blue data is Libor. This is supposed to be a rate that represents the cost to the banks for the money they lend. But that is not the case. The basis for these loans is ALWAYS based on a minimum Libor rate (floor). The minimum has averaged 1.25% for the past four years while three-month Libor has been around .3%, so the banks picked up another 100BP of spread from their actual funding costs. Bernanke's ZIRP created this arbitrage.


- The spreads the banks got for lending in the post 2008 period are much higher than the average spreads for the years preceding 2008. Even after a sharp (100bp) drop in spreads so far in 2013, bank spreads are still higher than they were before 2008.


Leveraged Loans are just one example of where the banks got fat as a result of Bernanke's ZIRP money policy. The results for consumer loans and other credit extensions are no different. It was always an objective of the Fed to have the banks increase earnings as a way to offset losses on older loans. The Fed DID achieve this objective. The Fed gave the banks a free ticket to dig themselves out of a hole. I don't think there is any doubt about what was intended; ZIRP was a subsidy for the banks.



I) Look again at the chart and focus on the run-up in Libor prior to the crisis of 2008. That was Greenspan playing catch up. It was a colossal mistake. The very sharp rise in short-term rates is what killed the economy in 2008. Yet the Fed says to us today that they have everything under control. No worries at all with unwinding a $4T balance sheet. Given the results of the 2004 - 2007 mismanagement of monetary policy it's hard for me to give the Fed any credibility with it's promise for a soft landing this time around.

II) Spreads for Leveraged Loans are down an incredible 100BP so far in 2013. This is why the "Big Deals" like Dell/Heinz are happening. This too is a Bernanke phenomenon. The cut in spreads is a function of QE4 that is pushing $85b a month into cash. When The Fed completes each POMO buy, the credit market has to find someplace to put the cash money to work. More Leveraged Loans are the logical consequence.

Some might argue that the collapse of spreads is a measure of Bernanke's "success". I see it differently. Bernanke is making rich guys like Mike Dell and Warren Buffett richer. There is no value added to that.

III) Today's round-two of the Bernanke grilling might be interesting to watch. I expect more clashes between Republican Congressmen and the "Fearless Dove".