Is Bernanke Toast? If he is, Summers is a shoo-in

Submitted by Edward Harrison of Credit Writedowns.

Here’s a conspiracy theory for you. As I am not much of a conspiracy theorist, I ill keep this one pretty simple. Here’s the chain of events.

Back in late September when the world was falling apart, Ben Bernanke, Tim Geithner and Hank Paulson were all desperate to keep things from unravelling. As a result, they were pleased that Ken Lewis and Bank of America were willing to pony up massive $44 billion to take over Merrill Lynch. They might even have encouraged the deal (i.e. we will smooth the way. There will be no FTC hurdles. We will soft peddle investigation into Countrywide mortgage fraud, etc)

The problem, of course, was that Merrill Lynch was a bottomless pit of asset writedowns. Lewis, the deal maven, must have been crestfallen when he learned how poorly things were shaping up in Q4 2008- sour enough to cancel the deal outright. Enter Bernanke and Paulson. Depending on who you believe, Lewis was going to cancel this deal, only to be coerced by Paulson and/or Bernanke into allowing it to proceed. Let’s forget that this suggests Lewis was not minding his fiduciary responsibility. If true, we should all be very troubled that government officials were abusing their power in order to manipulate actions in the private sector. By the way, Tim Geithner was already transitioning to his new role as Treasury Secretary, so he gets a bit of free pass on this one.

Now comes the allegation from a Republican congressman that Ben Bernanke, the soft spoken Southerner, was not only coercing, but he was covering it up too. This does not look so good. Of course, Gentle Ben acquitted himself of these charges today before Congress. But, with his term as Federal Reserve Chairman up in January, his re-appointment is increasingly being called into question. And Larry Summers is the front runner for his seat (see Mark Thoma’s article).

The Republicans smell blood. But — here’s where my conspiracy theory comes in – so does Larry Summers. Remember the White Paper that Obama just released? Doesn’t it give sweeping powers to the Federal Reserve? Didn’t Summers have a strong hand in crafting this white paper? And doesn’t Larry Summers know his name has been bandied about as a replacement for Bernanke? You see where this is going, right?

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Big Picture Trader

    This is not a conspiracy theory, it's the plan. Summers will be the next Fed chairman next year, and he will have nearly unlimited power to reshape the global economy in the financial industries image. With this much at stake, how can it not be the plan?

    At this point, you couldn't make up a crazier series of events and circumstances coming out of Washington daily. It's actually quite sickening…

  2. Tao Jones

    Watching the testimony and the focus of some of the more aggressive questions, it struck me that much ado is being made about the size of the loss that Bank of America took on the Merril assets. Specifically, at the time of of the "MAC" discussion it looked like the loss would be $9B, but it turned out to be $14B.

    The problem that I have with the emphasis on this fact is that management has significant discretion in the accounting treatment of "losses," including whent to take them and how large they are. As long as an accountant agrees that the amount is within reason, it can be booked. Warren Buffet and others have warned about these kind of things, which I call "stupid accounting tricks," which can be used to load up all the bad news in one quarter as a one time event (including bad news that has been delayed from disclosure by a different standard of what constitutes a loss in prior quarters). And given the wide discretion that banksters have on "mark to market" rules, we just don't know how the loss determination was made or whether it was consistent with how Bank of America had been treating its own assets.

    Regardless, this is a sordid little tale that will become really ugly as it develops. Don't cry for Ken Lewis or the board of Bank of America, though, as their cries of coercion ring hollow. Crooks as victims, that's rich.

  3. The Guy

    This is exactly why we need to audit the Fed. It will be interesting to see how Ron Paul's bill plays out. Curious how it's not getting any attention from the main stream media. Not that it's a panacea but it's a step in the right direction.

  4. Ryan

    Compared to the Rothschilds crap people spew, this isn't a conspiracy theory. This is more like "having a political mind about people in Machiavellian circumstances", which is perfectly fine.

    Bernanke's going to get thrown under a bus even if it's not all his fault. But someone has to be the scapegoat and he was always going to be a likely contender a la Paulson. I remember a picture from the front of The Economist I think that showed Greenspan handing off to Bernanke a stick of dynamite in a track relay. Written on the dynamite was the word "Economy".

  5. Hugh

    I would never bet against the stupidity of our political elites just as I would never bet against the blind greed of Wall Street. But if Summers was a viable nominee to go before Congress, he, not Geithner, would be Treasury Secretary now.

    The White House is running the Fed through Bernanke as its own personal money machine outside the Constitutional controls of Congress. Putting someone like Summers so closely tied to the White House in charge of the Fed might just be too obvious an admission of this for even the Congress to stomach.

    Other factors to consider are Summers' sexist remarks that caused his departure from Harvard. Some might question too his relation however general to the crashing of the university's endowment. It is also likely that the current suckers market will have run its course by the fall or before and that will allow plenty of time for recriminations about the real state of the economy. And of course Summers may open his big fat mouth and say something intemperate between now and then.

  6. Ryan

    "It will be interesting to see how Ron Paul's bill plays out."

    Chances are it won't make it out of committee.

  7. Edward Harrison


    You are on to something here. But, honestly, anything is possible at this point, including Summers being Fed Chairman. After all, didn't Geithner just move from the Fed to Treasury? This game of musical chairs is pretty amazing.

    If you weren't cynical already, all of this is certainly going to make you cynical.

  8. Edwardo

    Yes, I can… see where it's going…to hell in a hand basket. The Great While Whale, aka Larry "don't give Bob Rubin and Phil "mental recession" Gramm all the credit for the late nineties deregulation orgy" Summers is angling for BB's job.

    Moby Summers is sure he can get us out of the mess that he was so instrumental in creating. Three guesses on what his plan consists of?

  9. Stephen

    I suspect that this is way off base.

    The likelihood of a smooth confirmation process would have to be judged "slim to nil" for either Mr. Bernanke or Mr. Summers. The President would likely want his appointee to be viewed as a "breath of fresh air".

    Do we have even an inkling of who Mr. Geithner or Mr. Volcker might recommend?

    As to the "sweeping new powers" the administration is proposing, it seems to me that they are, in fact, proposing a far smaller regulatory role for the Fed than the conventional wisdom had led us to expect only a month ago.

  10. Edward Harrison


    I respect your giving Obama's people the benefit of the doubt. Nevertheless, I do think the watering down of the Fed's role was a result of the political realities and input from other sources like Paul Volcker.

    It is pure speculation at this point as to who Obama will appoint. But he has failed to give Bernanke an unequivocal vote of support. This leaves the door open for Summers, who knows quite well that he is in contention.

    In the end, Obama will make a determination which will be politically prudent given the circumstances at the time. If Bernanke takes the fall for Merrill/BofA, we could be seeing Larry Summers in his seat come February.

  11. Tao Jones

    It would be a lot more fun to see Elizabeth Warren in there instead of Bernanke or Summers.

  12. Jr Deputy Accountant

    I have also heard Geithner's name batted around. GEITHNER!

    What is happening here?? It's like a really horrible movie except this time, it's 100% real. Or is that surreal?

    It boggles the rational mind.

  13. VG Chicago

    That’s fine. Let them shape the world in the image of their diabolical finance industry. I’m all for that. Is there any way I can help?…

    Here is how I look at this: the more daring these criminals become in their current feeding frenzy, the more of their heads will roll off the guillotine podium once the revolution begins. The more rage and anger they store up in the average chump’s heart, the greater the devastation that that anger will bring about when it will finally be unleashed. The greater the amount of rage that is stored up, the longer the purging will last. Does that minor detail remind them of the French Revolution at all?

    Napoleon said that when a social movement begins, when the march of history begins, it would be wise for leaders, regardless of how much power they have at their disposal, to run and hide. Otherwise they will be utterly crushed. There simply aren’t enough armies around to stop this once it starts. There aren’t enough chains to enslave this whole planet. If these criminals, drunken with greed and power, can’t recognize that this is not just another “recession”, but rather a social megashift, then they are a lot more stupid than even that low-IQ Geithner, with his retarded “deer in the headlights” expression.

    Meanwhile, I am patiently waiting here, in front of my extra-large flat screen TV, with fresh batteries in my remote control, large stockpiles of popcorn, and piles and piles of blank DVDs so I can capture every gory, guillotine-related, detai…

    Vinny G.

  14. One Salient Oversight

    Confidence in the Fed and the US Economy cannot continue unless Bernanke is removed from his position.

  15. VG Chicago

    One Salient Oversight: "Confidence in the Fed and the US Economy cannot continue unless Bernanke is removed from his position."

    I admit, I missed this "confidence" in the Fed and the US Economy you are referring to… But it's nice to know that it might even "continue" in the future…LOL

    Vinny G.

  16. Francois

    "t would be a lot more fun to see Elizabeth Warren in there instead of Bernanke or Summers."

    My oh my! I can picture a confirmation process where the Republiscums would go moonbat while popular support would be quite substantial. I can also visualize a calm, dispassionate Prof. Warren patiently explaining some econ 101 stuff to rabid losers of the supply-side theory.

    That's be quite a boost to the popcorn makers.

  17. VennData

    This talk of "Summers is in the White so he can't be the chairman" forgets Bernanke was in the Bush White House before he was picked. Either way, won't happen. Bernanke's an American hero. He's a shoo in.

    Remember it was the GOP who was after him today.

  18. frances snoot

    "Working within the Federal Reserve System, the New York Fed implements monetary policy, supervises and regulates financial institutions and helps maintain the nation's payment systems."–widipedia

    Geinthner was the ACTING chairman of the NY Federal Reserve at the time of the fiasco with Merrill/Bank of A. The NY Times reports:

    "The documents also included notes taken by Bank of America’s chief financial officer, suggesting that Lawrence H. Summers, now the president’s lead economics adviser, and Timothy F. Geithner, the secretary of the Treasury, agreed that Merrill should not be allowed to fail. A spokesman for Mr. Geithner, who was the president of the Federal Reserve Bank of New York, said it was not true that he had agreed. Spokesmen for Mr. Summers and Mr. Geithner said neither was involved in discussion about Bank of America at that time."

    Note the terrible ambiguous sentence: "A spokesman for Mr. Geithner, who was the president of the Federal Reserve Bank of New York, said it was not true that he had agreed."

    Who was the Fed chairman; who agreed? The invisible spokesman? Geinther? Great grammer rhetoric.

    Are we supposed to believe that Mr. Geinther, who had direct responsibility to supervise and regulate US federal reserve financial institutions, did not know what was going on and was not on board with the pressure or the decision to pressure Ken Lewis? Shall we give Paulson a get out of jail free card as well?

    Mr. Harrison: why did you not post anything about the fact that Mr. Bernanke quite likely lied under oath?

    The easy answer: oust the lot of louts-Bernanke, Summers, and Geinther. Where IS Paulson, btw. Free as a bird.

    This is not a partisan issue, unless justice and the adherence to law and order is only an issue of importance to the Republicans. Ben Bernanke "aquitted himself of charges"? Yes, he is above Congress and above the law, is he not?

    We Americans have become a laughing stock to the world community.,1518,632494,00.html

  19. bob

    Summers as the Fed head is like putting Pablo Escobar in charge of the DEA.

    I bet he gets it. Congress will make a lot of noise, but that is all they are capable of anymore.

    Unitary Executive, round 2.

    The white paper on regulation should not even consider giving more 'oversight' power to the FED.

    We already have any number of regulators who won't regulate. We need big dumb cops who show up at Citi or BoA with a search warrant, and make a complete mess of the place, take all of their records, and let the board members sit in jail while they are looking through the evidence that the cops gathered. It could take a very long time.

    That might begin to get the Banks attention.

    Dave Chappelle on white collar crime. About 8 minutes in is the skit I am reffering to.

    Sorry Yves, I know you like animals, but I think we need a few dead golden retrievers.

  20. frances snoot

    "You see where this is going, right?"

    What is "this"? Is Mr. Harrison referring to the kangaroo hearing in Congress today in reference to the Fed Chairman's 'defense' (when you are Fed Chairman, your defense is to say 'nonsense' to all charges and that is the end of it) or to some wing-nut conspiracy idea that Summers is plotting a backstage coup to steal the Fed Chair seat? Poor innocent 'Gentle Ben'.

    Here's a post I left a few weeks back, before the press decided to rally about Beleagured Ben, Hero of Capitalism:

    "Do Fed board chairmen write epistles from prison? LIfe unpredictable? Not in America: where one can be accused by the CEO of a major bank (Ken Lewis), while under oath, of obfuscating justice and of fraud and walk free to deliver (not an apology for helping bring down a sovereign state) but an admonition to be optimistic in the face of adversity. We can predict that justice will not be served, that men will walk free with our blessings and our enumeration, while those that have lost everything suffer persecution by the state for breaking 'codes'.

    How can we Americans be optimistic when criminals walk free?"

    NO wonder Angelina Jolie wants to run for president! All of life is a stage, you know…

  21. Mara

    If there is a just and loving God, then Brooksley Born would get the job. Elizabeth Warren would be my second choice. Can you picture the look on Leisure Suit Larry's face when the woman he helped ruin will be roasting his chestntus over an open fire? Too good!

  22. VG Chicago

    >> Can you picture the look on Leisure Suit Larry's face when the woman he helped ruin will be roasting his chestntus over an open fire? <<

    Great line! A classic. Thank you, Mara.

    Vinny G.

  23. RPB

    Larry Summers is the worst possible choice. He was paid 5 buckets by DE Shaw for one day's labor. He is a crass, ego-maniac and part of the problem. I pray that he is not inserted.

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