Bernanke and Geithner on the Grill

There are hot seats, and then there are hot seats. Amid global jitters about slowing economic growth and plunging equity markets—including a drop in the Dow Jones industrial average below 7,000 on Mar. 2—Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner appeared before congressional panels on Mar. 3. In testimony before the House Ways & Means Committee, Geithner defended President Obama's $3.6 trillion budget proposal, while Bernanke earlier appeared before the Senate Budget Committee, sparring with lawmakers over the U.S. bailout of American International Group (AIG), government lending, federal budget proposals, and taxes in a tense session.

Here, BusinessWeek collects a sampling of comments from Wall Street economists and analysts about the Bernanke-Geithner twin bill, the economy, the stock market, corporate credit quality, and other key topics on Mar. 3:

Action Economics

[F]rosty partisan Q&A has been the main upshot following Geithner's House testimony, which mainly reiterated the Obama Administration's policy platform outlined in the President's State of the Union address. That included a focus on education, health-care reform, tax and energy policies, but not a lot of specifics so far on any new bank rescue plans. There is not even a text of the Secretary's speech on the Treasury Web site yet. Most of the comments have been on the defensive, squaring the Administration's hefty priorities against long-term fiscal responsibility, which has been reiterated several times, balancing the costs of inaction against taking decisive action near-term. Unless there are some more specifics soon, equity investors may get impatient again.

Fed Chairman Bernanke said the AIG situation is "uncomfortable" for him. Indeed, it makes him "more angry" than any other bailout. But he generally sidestepped a question on the endgame. Instead he noted the many uncertainties still ahead. However, he again defended the actions to bail out AIG, there was no choice he said, as the insurance giant's failure would have jeopardized taxpayer investments.

Sources say investors were quick to pull the plug on the rebound in equities after there was nothing in Fed Chairman Bernanke's testimony or subsequent remarks to sustain demand. There also was some apparent disappointment to hear from the Fed chief that the banking system has yet to stabilize, even though no one really expected to hear otherwise.

Tony Crescenzi, Miller Tabak

The Federal Reserve is expected to announce details of its Term Asset-Backed Securities Loan Facility today, a facility that will fund up to $1 trillion of non-recourse loans to investors who purchase AAA-rated asset-backed securities. The program could represent a turning point for the economy and the financial markets by jump-starting lending in critical areas of the economy and by reviving the asset-backed securities market, where issuance has fallen to a crawl from a pace of about $1.5 trillion to $2.0 trillion in 2005-2007. The program is designed to revive lending for automobile loans and leases, credit-card loans, student loans, and small business loans guaranteed by the Small Business Administration. If it works, a swath of economic data will be impacted, probably by the end of the second quarter or early in the third quarter, altering perceptions about the economy and boosting household, business, and investor sentiment.

Edward McKelvey, Goldman Sachs (GS)

We have marked down our forecast for U.S. economic activity in the first half of 2009; we now expect real GDP to fall at annual rates of 7% this quarter and 3% next quarter versus declines of 4-1/2% and 1% previously. The good news is that the bulk of this change is in business investment, which typically lags other sectors of the economy. Meanwhile, the steepest decline in consumer spending appears to be behind us. However, since this is already built into our forecast for remaining quarters, no further adjustments to our GDP outlook appear warranted at this time. As a result of the additional near-term weakness, we have boosted our expected path of the unemployment rate, to 9-1/2% by yearend 2009 and 10% by yearend 2010; both figures are a point above the previous forecast. We have also marked down our estimates for the year-to-year change in consumer prices, to 1% by yearend 2009 (from 1.2% previously) and zero by yearend 2010 (from 0.5% previously).

Diane Vazza, Standard & Poor's Ratings Services (MHP)

The number of corporate defaults in 2009 continued the expansion seen at the end of 2008, with nine more U.S. defaults in February, bringing the year-to-date total to 27. All of this month's defaults hail from nonfinancial sectors, with nearly half coming from media and entertainment. The preliminary estimate for the U.S. 12-month-trailing speculative-grade default rate in February is 5.4% (subject to revision), higher than the 4.66% in January and much higher than the 1.23% reported in February 2008. We expect the speculative-grade default rate to escalate to a mean forecast of 13.9% by January 2010, but it could reach as high as 18.5% if economic conditions are worse than expected.

Richard Dickson and Tracy Knudsen, Lowry's Reports

The recent selling afflicting the equity market appears to be intensifying in terms of volume and price losses in the major market averages. This intensification suggests the market could be approaching a level where selling has been exhausted enough to trigger a snapback rally.…[H]owever, it should be stressed an investor would be ill-advised to position oneself in anticipation of a bounce. This is no ordinary bear market, and additional pain, in the form of more heavy losses, could still be on tap in the days ahead.

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