More Power for Federal Reserve and Treasury

The Federal Reserve and U.S. Treasury Testify Before Congress

A Taipan Publishing Group Market News Brief
By Sara Nunnally, Senior Research Director, Taipan Publishing Group

The Federal Reserve and U.S. Treasury Testify Before Congress

Probably the most interesting bit of news from American International Group’s (AIG:NYSE) Bonus-gate scandal was the testimony from Federal Reserve Chairman Ben Bernanke.

He now says that he initially sought a lawsuit against AIG when the bonuses were announced, but was advised against it by legal counsel. If the government lost its suit, then it may have had to award AIG punitive damages.

More money…

Bernanke told the House Financial Services Committee, “It was highly inappropriate to pay substantial bonuses to employees of the division that had been the primary source of AIG’s collapse. I then asked that suit be filed to prevent the payments.”

News came out that AIG awarded $165 million in bonus payments less than two weeks after reporting a $61.7 billion loss for the fourth quarter.

That date was March 2.

U.S. Treasury Secretary Tim Geithner says that he became aware of the full story on March 10. A full week before AIG announced to the public.

But here’s an interesting bit of information. Bernanke testified that he’d known about the bonuses for three months. How is it that the Fed chairman knew and the U.S. Treasury Secretary didn’t?

Two words: “full scope.”

Of course the U.S. Treasury knew… And if you’re a big conspiracy theorist, one might suggest that the government let this scandal happen just so it could open the floodgates on new regulatory powers.

What new powers are the Treasury Department and the Federal Reserve seeking?

The buzzwords are wind-down and close-down. Right now, the government can only take over or close an institution that they already have power of. They are seeking the power to break up failing firms that are under government power. They want to be able to sell off assets.

Barney Frank, the House Financial Services Committee chairman said (as reported in The Wall Street Journal), “‘We need to give somebody, somewhere in the federal government the power’ to put failing, non-banks ‘out of their misery.’”

A sort of Bailout Czar? Á la New York Attorney General Andrew Cuomo, perhaps, who has hit the news recently, finding that 73 AIG employees received a bonus of at least $1 million…

But no government action is going to amount to a hill of beans right now. The facts of the matter are that the government did not sue AIG to try and get back that bonus money. The government has thus far not taxed that bonus money.

And all the figureheads can yap about is that they thought these bonuses were wrong.

Adam Lass, editor of WaveStrength Options Weekly, writes, “These guys oughta wear dresses and carry pom-poms.”

He means that the government is quite incapable of sparking any real change… in Bailout-land or in the actual economy. He continued, “I do believe that they will eventually be able to simulate a recovery. Yeah, I said ‘simulate,’ not ‘stimulate,’ because the next boom will be a fiction created by re-inflating the dollar, just like the last two.”

We’ve already seen dollar-denominated assets, like gold and oil, climb. That’s only the beginning. Adam says, “It’s called inflation, folks, and we are already seeing it reappear in the nooks and crannies of the system. Producer prices are starting to climb again, as are consumer prices. And as in the beginning of most every inflationary cycle in recent memory, energy is leading the charge.”

Investors can consider the S&P Energy Select Sector SPDR ETF (XLE:AMEX), which Adam talks about in his weekly WaveStrength Options Weekly service.

Originally published March 24, 2009.

Other Related Topics: Bank Bailout , Banks , Federal Reserve , Stimulus Plan

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