The quiet unassuming professor of economics appeared just in time at the crest of the hill and rode to the rescue of the savvy Wall Street tycoon who had his wagons circled in the valley below desperately trying to hold off the opposition.
Such was the story line of the extraordinary Senate hearing Tuesday examining the historic $700 billion bailout of financial firms proposed by Treasury Secretary Henry Paulson.
Many Congressional hearings are carefully scripted, with both sides prepared well in advance and with the conclusion never in doubt.
Bernanke calmly laid out the benefits of the Paulson proposal in such a way that took the starch out of the opposition.
But other hearings, like this one, contain real drama.
The hearing began with Federal Reserve Chairman Ben Bernanke and Paulson forced to listen in stony silence for an hour of withering criticism of the proposal by members of both Republicans and Democrats on the Senate Banking panel.
“I haven’t had a single phone call in favor of this proposal,” announced Sen. Sherrod Brown, Democrat of Ohio.
When Sen. Mike Enzi, Republican of Wyoming, vowed that the Paulson proposal would not pass, applause broke out in the audience. Sen. Jim Bunning, Republican of Kentucky, followed up by calling the plan “un-American.”
When it was the turn for the government officials to speak, Paulson fought back with a tough, take-no-prisoner statement that brought to mind the “the Hammer’ nickname that he was given by his colleagues at Goldman Sachs.
It didn’t play very well with the senators and clearly there was a sense in the room that the plan might be in deeper trouble than expected.
But then, Bernanke took the microphone, set aside his prepare remarks, and calmly laid out the benefits of the Paulson proposal in such a way that took the starch out of the opposition.
A key point of the critics was that under the plan Treasury must pay more than the market value for the mortgage assets.
But Bernanke explained that the mortgage securities have two prices – a “fire-sale price” if the mortgage asset was sold quickly today and a “hold-to-maturity” price if the mortgages were held to maturity.
Banks have been paralyzed by this fire-sale price because their precious capital would evaporate overnight.
The key to the plan, Bernanke said, was that if Treasury was able to buy the mortgages, it will be able to hold them to maturity. As a result, the fire-sale price could be avoided.
This would remove uncertainty, return liquidity, and credit markets should be able to unfreeze, Bernanke said.
“This is not an expenditure of $700 billion. This is a purchase of assets. If auctions are done properly…the American taxpayer will get a good value for his or her money and as the economy recovers, most, all, or perhaps more than all, of the value will be recovered over time,” Bernanke said.
Bernanke warned that the plan was a “pre-condition” for an economic recovery. He said there would be a severe economic downturn with no action.
“I believe that if the credit markets are not functioning that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, and the economy will not recover in a healthy way,” he said.
He said his background is as a college professor, not someone from Wall Street, so he does not have “those interests” in mind.
In an instant, the momentum of opponents had reached its zenith and began to recede.
In boxing parlance, the critics kept swinging for almost four more hours but never laid a glove on the plan.
At the end of the hearing, it seemed apparent that while the Paulson plan might not sail though by the weekend, it remained on track.
The fight is by no means over. Thorny issues still need to be worked out about oversight and help for homeowners facing foreclosure.
Many Senators still want to add a mechanism that would give the government some profit from the investment.
But Paulson should buy Bernanke a cup of coffee if the plan survives.