Why the Obama-Bernanke Meeting Really Matters

Yesterday, Senator Obama met Federal Reserve Chairman Ben Bernanke for a one-on-one meeting at the Federal Reserve Bank. The meeting got a lot of attention, as it marked the first time a presumptive nominee met with an acting chairman. (If you recall, both Bill Clinton and George W. Bush met with Fed Chairman Greenspan, but they were each president-elect at the time.)

Still, the bigger story is the context of the visit and what it might portend for the future.

If you’re not aware, let me give you the scoop on the terms of the Fed Chairman and the seven members of the Board of Governors that are appointed by the president and confirmed by the Senate. Each of the Fed governors serves a 14-year term. Members, for the most part, serve one consecutive term, although there are instances where they retire early and can be reinstated. The president, on average, can only appoint two governors during a 4-year presidential term because appointments are intentionally staggered and come up each even-numbered year. Fed Chairman Bernanke’s term expires in 2010, but the next president could choose to keep him on.

This morning, the Federal Reserve Bank announced that they were going to extend the Term Auction Facilities (or discount window) to broker dealers until January 30, 2009. Access to the TAF was expected to expire this September. As you may recall, the Fed opened the discount window to the broker dealers following the collapse of Bear Stearns for fear that another broker dealer would collapse.

So why do you care and why would Obama care? Here’s why:

1. January 30th… interesting date right? First of all, it covers the broker dealers through the election. Second of all, it covers the broker dealers through Inauguration Day – which is January 20th in case you were wondering.

2. If Obama were to be elected the next president of the United States, it would give him the power to target regulation of the broker dealers. How so? Obama has talked about increased regulation and hinted at more fiscal stimulus. If the broker dealers are still in hot water come January, Obama would have the platform on Inauguration Day or immediately after to suggest the Federal Reserve take over regulation of the broker dealers. Right now the Fed overseas commercial banks. The broker dealers are pretty unregulated with the exception of the SEC and Treasury. The fact that the broker dealers have been given access to the discount window for an extended period of time (which allows people like New York Fed President Timothy Geitner and his staff to make regularly scheduled visits to these broker dealers to make sure that they are well capitalized and making sound financial decisions) suggests that the broker dealers have no choice but to live with the Fed’s temporary oversight. If you’re Obama and today you heard the Fed announce that they will extend the discount window and, assuming the SEC followed suit and continued the naked short sale rule change in effect through that date to protect those broker dealers that have access to the discount window, wouldn’t one of your first economic blueprints as a new president be to propose that the Fed oversee and regulate broker dealers? If Obama were elected and Democrats keep the majority in Congress might that be the first and most highly publicized move. He may not make friends on Wall Street, although the number of broker dealers by then will have dwindled and it will make him appear as the advocate for the shareholders and individuals who have seen their net worth cut in half. I think the Fed just did Obama a favor today, if Obama has enough faith in the Fed’s job and if he can successfully win this election. McCain would clearly be opposed to more regulation and big government.

3. Another point worth noting is the growing power of FASB or Financial Accounting Standards Board. Look at what Thain, CEO of Merrill Lynch, did yesterday, marking the CDO portfolio to 22 cents on the dollar. As the broker dealers continue to face oversight, albeit temporary, from the Federal Reserve Bank because of their access to the discount window, the scrutiny and tightening of the accounting reigns will only get more difficult and make more Wall Street executives unhappy. I remember interviewing one expert who said the financial world should have a governing body like the FDA to approve and sign off on all new products. That might very well be taking it too far but it may not. Should there be trillions of dollars in off balance sheet risk? Probably not. Will this happen again in our lifetime? Maybe but if I were a betting person I’d say this will not happen again in the near future.

This morning on Money for Breakfast, I was joined by Dan Gerstein, Lieberman’s former communications director; Joe Mathieu, the Program Director from XM Satellite Radio, and Flip Pidot, an investment analyst, to discuss the implications of Obama’s meeting with Bernanke and how each candidate can win the heart of voters who feel the economy is the pressing issue.

Check it out.