Thursday, August 23, 2007

Bernanke's Move: It Worked

There was a ton of gnashing teeth and sweaty palms after Bernanke refused to lower the Fed Funds rate last week. It would seem he once again made the perfect play.

Rather than cave to the market suffering from a self induced wound, Ben lowered the discount rate for lenders. This allowed those who did not point the gun at themselves when they pulled the trigger to do what was necessary to provide the necessary liquidity. Today Citigroup (C), Bank of America (BAC), Wachovia (WAC), JP Morgan Chase (JPM) took advantage of the lower rate to take over $2 billion from the Fed. This provided credit in tightening markets and did exactly what Ben wanted, it let the market restore order to the system and did not eliminate the necessary suffering of those who had it coming.

Now news comes out last night that Bank of America has invested $2 billion in a convertible preferred security with Countrywide (CFC). This is identical to the situation I spoke of when I said the only way Warren Buffett would get involved with this would be in a "private transaction they issue Buffett debt or preferred convertibles to provide a specific lender with necessary liquidity." It wasn't Buffett who made the investment but the instrument was the same. It was really the only way it could have been done and not caused a run in the stock. The preferred let's Bank of America buy common shares at $18 which is a nice immediate gain seeing as shares jumped to $26 after hours on the news. Not bad...

Tomorrow will be bullish for financials as the sentiment will go from panic to optimism. Thanks to Ben..

The real beauty here? He still has the rate cut card in his pocket should the economy begin to deteriorate.


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