WEDNESDAY JANUARY 27, 2010

Monday Morning Quarterbacks

The media will be filled with Monday Morning Quarterbacks today as the House holds an inquiry into the AIG "bailout", the Federal Reserve's FOMC issues its statement at 2:15 and the Senate will vote on Chairman Bernanke's second term tomorrow.

The main issue of the AIG hearings will be the 100% payment of counter parties (including the evil Goldman Sachs) with taxpayer monies.  This fact will be sliced and diced, with a particular focus on the accusation that the NY Fed guided AIG to hide the true value of their counter-party risk.  Treasury Secretary Timothy Geithner will be the star witness.  Mr. Geithner was President of the NY Fed at the time of the AIG action.  His predecessor at Treasury, Hank Paulsen, will also testify.  Congressmen from both sides of the aisle will be gunning for them.  There is no question that different courses of action could have been taken.  In hindsight, it would have been more politically tolerable if "haircuts" were given to the counter-parties.  However, I believe it is easy to cast aspersions now, comfortable in our knowledge that the financial markets have stabilized.  One cannnot overestimate the horrible circumstances of the week of September 15, 2008.  Keep in mind that the AIG matter involved contractual matters.  In the height of crisis, having the government direct a financial company to violate the terms of their contracts  would have created an even greater crisis environment.  Could things have been handled differently?  Certainly.  But all of these government officials were asked to make incredibly difficult decisions with the global financial system on the brink of collapse.  I think the Congressional inquiry amounts to cheap Monday Morning Quarterbacking.

Similarly, the dialog surrounding the renomination of Ben Bernanke as Chairman of the Federal Reserve also involves a high degree of hindsight.  Yes, Mr. Bernanke has been at the Fed for many years, first as Alan Greenspan's deputy and then as Chair.  I agree with many that claim the Fed's easy money policy was in part to blame for the housing "bubble."  Nonetheless, many of the difficult decisions made by the Fed were made in a crisis environment that was unique in history.  Could matters been handled differently?  No doubt.  It now appears that the Senate will reconfirmed Mr. Bernanke .  However, the political grandstanding has caused a great deal of uncertainty for the markets.

Finally, the FOMC will conclude its meetings and issue its statement this afternoon.  With its Chairman's nomination scheduled for tomorrow, does anyone think the committee will raise interest rates this afternoon?  Once again, the market will parse the language for signs of an exit strategy.  In particular, the market will look for the Fed's commitment to cease purchases in the mortgage-backed security market.

And, by the way, I don't think the Viking's Brett Favre should have thrown that pass with 12 seconds remaining in the game against New Orleans!

POSTED AT 1899-12-30 10:03:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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