The Fed Chairman Speaks - 5 / 7 / 2009

Bernanke spoke this morning to his nation, the Financial Nation, a nation of which he is Commander and Chief. He speaks slowly and simply to financial professionals and, very much unlike Alan Greenspan, there can be no question what his message is. Here's the message I heard and then, in italics, my view as to the ultimate effects the public companies we care about.

1. The Fed has finally grabbed the Regulatory agencies by the horns and will hold them accountable for future misses, bubble creation, lax or inconsistent review and, action or inaction.

In short, the days of hands off industry self regulation are over. The SEC will become bigger, badder, and go after the larger sized offenders (Investment, Commercial, Mortgage Banks) as a priority, rather than justifying their existence by over regulating and punishing small offenders that have little impact on the financial system. Lax oversight of the big banks directly contributed to this economic crisis. Virtually all SEC heads, NASD heads, and FINRA heads came from industry - that is to say they came from these big companies, and their cronies at these biggest institutions were given by them, in many cases, a free pass or a less regulatory environment to operate in. Meanwhile these agencies went after the smaller, regional and local, broker dealers and commercial mortgage lenders with aplomb. They may have been offenders too, but their reach was not systemic. Expect to see Government employed legal minds and Phd's taking over the top spots at these agencies. And expect that these agencies will double in size.

2. This speech by Bernanke will be referred to for years by the regulators, congressional, and senatorial oversight committees as the May 2009 address. In this address Bernanke said to all Public Company Boards and Executives in all industries that you are required to and will be held accountable for managing your balance sheet risk.

This means that after the US Economic Machine is stabilized to the Fed's satisfaction, the US government is finished saving companies, finished saving jobs, finished financing broken industries.

3. Bernanke said that bigger, more economically critical firms in any industry, will be subjected to greater scrutiny and changes in laws and regulations that will reduce their ability to create systemic risk.

So long as Benanke is in place, and barring illness it will be at least 10 years, the rules and regulations governing US public corporations in any industry of significant size will be subject to changes at a moments notice. This does not exclude Microsoft, Google, Pfizer, GE, and, of course any money center bank or equivalently sized Investment bank.

4. Executives of leading institutions of any industry must understand their responsibility to their shareholders as well as to the public at large.

If, in the future, you as an executive or board member, presides over an institution that takes advantage of the US Economic system to the ultimate detriment of the system or to the detriment of your shareholders, you will be paraded out in the public and held accountable for your management actions or inactions which caused the problem.

5. Banks will need to raise more capital to satisfy the newly determined risk / volatility in the world financial markets.

Ultimately this means that the banks must maintain stronger balance sheets and must issue more equity to meet these new requirements which should cause their equity value to fall due to the added dilution.


In my view Benanke has set the foundation for future action by the government, by its regulatory agencies, and by the law itself which will slow economic growth in the near term, but ultimately create a more level playing field for all institutions participating in a US led World Economy. If I were an executive in any systemically important institution I'd realize that my days of huge profits and salaries at the expense of the US and World economies are over. You can keep all the salary and bonus you want once the government is satisfied you are adding value to the system, the economy and the public at large.

so executives, Build Value Every Day, or else.

Brad van Siclen