Bernanke Gets Wall Street Backing As Congress Attacks

One man's prudence is another's recklessness, as Ben Bernanke is quickly learning.

In encouraging Bank of America to go forward with its planned purchase of Merrill Lynch late last year, Bernanke, as chairman of the U.S. Federal Reserve, believed he was acting to prevent a global banking collapse, an effort that has many defenders on Wall Street.

Ben Bernanke

However, members of Congress spent the day hammering the Fed chairman in a hearing for what some believe was undue pressure from the U.S. central bank on Bank of America.

With Bernanke's term ending early next year, questions have emerged about whether he will be reappointed, a possibility that, to most on Wall Street, would have seemed a no-brainer.

"This is not helping his chances for a renomination given the timing," said Richard Dekaser, president of Woodley Park Research in Washington.

"Is this going torpedo his chances? No." Market reaction to Bernanke's testimony spoke volumes about about investors' avid defense of the chairman.

Traders characterized the hearings as not being particularly damaging to the chairman's reputation, and stocks rallied sharply Thursday, sending the S&P 500 2.1 percent higher.

Yet the tone of the congressional session was hardly comforting. Bernanke was essentially being accused of coercing Kenneth Lewis, CEO of Bank of America, into buying Merrill Lynch despite the discovery of hidden losses on the investment bank's books.

Wall Street Warms To Wonk

It is not difficult to see why Wall Street has fallen hard for a Fed chairman that they initially greeted with a lukewarm reception.

In most instances—with the conspicuous exception of Lehman Brothers— Bernanke has opted for heavy involvement in stabilizing markets.

As a scholar of the Great Depression, Bernanke has tried to apply what he sees as the lessons of that dark era, doing everything in his power to ensure that liquidity remained ample and large institutions solvent.

It took Wall Street time to warm up to Bernanke. Initially, they feared his academic background meant he was too removed from financial markets to handle the job. Three years and trillions of dollars later, that tune has changed.

"His track record overall has been excellent," said David Dietze, chief investment strategist at Point View Financial Services in Summit, New Jersey.

Bernanke, who was appointed by President Bush, has many fans in Washington as well. President Barack Obama said the chairman had done a good job of handling the crisis, although he did not go so far as to give an assurance of his reappointment.

Senate Majority Leader Harry Reid, one of Washington's most powerful Democrats, also voiced support on Thursday, telling reporters he was not in a position to "castigate or denigrate."

Red Herring

Even some of Wall Street's avid critics of the Fed, such as blogger and investor Barry Ritholtz, say that this particular round of questioning comes a bit too late to do any good.

They also say this particular complaint against the central bank is less relevant than others, such as the institution's failure to prevent the financial crisis in the first place.

"I've been a pretty aggressive critic of the Fed, but where were you guys six months ago?" complained Ritholtz, director of equity research at Fusion IQ. "All of these (Congress members) who didn't know what a derivative was six months ago are now explaining what the Fed should have done."

What Does $1 Trillion Look Like? Companies at Greatest Risk For Default The Highest Paid Chief Executives Surprising Stock Market Indicators

Instead of wading through emails looking for things to catch Bernanke on, analysts say Congress would have done better to keep their eye on the ball when the going was good -- and bringing the Fed to task for its light-touch approach to regulation.

For its part, Wall Street's primary concern is continuity, especially given the fragile state of markets.

"If the signal comes down that he won't get reappointed, definitely it would be pretty ugly for this market," said Mike O'Rourke, chief market strategist at brokerage BTIG in New York.

Copyright 2009 Reuters. Click for restrictions.