Things Could Get Ugly for Bernanke

GOOD MORNING. Asian markets closed higher; U.S. futures are indicating a higher open.

Federal Reserve Chair Ben Bernanke will be facing a somewhat hostile audience when he heads to the Hill for his 10 a.m. confirmation hearing with the Senate Banking Committee. While Bernanke is almost certain to keep his job, lingering anger over the economic crisis and serious disagreements over the proper role of the Fed could make for a contentious hearing. . “I think he’ll be put through the wringer,” says Maya MacGuineas, the president of the Committee for a Responsible Federal Budget.

That’s quite a turnaround from the last time Bernanke faced confirmation, in 2005, when he was appointed by President Bush and sailed through easily. Senator Chris Dodd, the chair of the Banking Committee, has already indicated in a statement his intention to question Bernanke on the Fed’s “failure to protect consumers” leading up to the subprime mortgage crisis. What’s more, there is legislation underway in Congress that would shift some of the Fed’s power to regulate consumer financial products to a proposed new Consumer Financial Protection Agency.

Losing that power over consumer products ultimately won’t matter as much to the Fed as another proposed regulatory reform—one that would give Congress increased authority to audit and oversee the central bank’s actions, says Robert Brusca, the chief economist of Fact & Opinion Economics. “The Fed doesn’t need to be overseen by those kinds of political beasts,” Brusca says.

The real issue is a trade-off between accountability and the ability to make tough, unpopular decisions, says MacGuineas. Raising interest rates before the job market has fully recovered, for example, would be more difficult for a more-politicized Fed, she says. What’s more, weakening the Fed’s independence could undermine markets’ faith in the central bank’s ability to fight inflation—and it’s the Fed’s record fighting inflation over the last thirty years that has kept inflation expectations low today.

While the outcome of Bernanke’s confirmation hearing isn’t in doubt, he could still see substantive changes made to the institution he’s been appointed to lead – and Fed-watchers may get to hear his thoughts on those potential changes later today.

IN OTHER NEWS:

Bank of America (BAC) said early Thursday that it will repay all of the $45 billion in bailout money that it still owes the U.S. government, boosting investor optimism in the broader markets.

Outside of the sign of stability in repaying the money, the immediate benefit could be to the bank's highly-publicized CEO search. Being able to brush off compensation restrictions tied to TARP-infused banks could make it easier to find a replacement for departing Ken Lewis. Repaying the TARP will also save the bank roughly $3.6 billion in annual dividend costs from the governments investment, it said. So far Bank of America has paid $2.54 billion in dividends to the U.S. Treasury on the TARP investment.

So where is it getting the money? The bank said its planning to use $26.2 billion in excess liquidity, and $18.8 billion from the issuance of common-equivalent securities to be converted into common stock, after shareholder approval. But the common-equivalent securities carry warrants to buy a total of 60 million shares of common stock at $0.01 per share and other benefits if shareholders do not approve an increase in authorized common shares, according to the release.

The bank also plans to gain $4 billion through asset sales, and $1.7 billion through the issuance of restricted stock.

"Adding TARP to our capital has allowed Bank of America to continue to support the economy, said CEO Ken Lewis in a statement. "In the 12 months since the government first made its investment in Bank of America, our company originated $760 billion in new credit, or approximately $3 billion per business day." Of course, the big question is how the bank will perform -- and also support the economy -- without the money.