Behind Dow's rebound, Bernanke's straight talk

Finally, a federal official offered some specifics about what Washington plans to do with large troubled banks – and on hearing it, Wall Street soared Tuesday.

Never mind that the stock market was due for a bounce anyway after Monday's plunge. Never mind that the official, Federal Reserve Chairman Ben Bernanke was talking more about Treasury's plan than his own. His testimony before the Senate Banking Committee helped to fuel the market rally by describing an uncertain but plausible path toward recovery.

The Dow Jones Industrial Average climbed 236 points to close at 7350.94, a 3.3 percent jump that recovered nearly all its loss from Monday. The S&P 500 jumped 4.0 percent to 773.14 and the Nasdaq climbed 3.9 percent.Mr. Bernanke's remarks cheered investors because at times he stripped out all the usual caveats that central bankers employ and talked turkey about the state of the troubled banks, which lie at the heart of the economic crisis facing the United States.

Pressed by Corker

The most illuminating part came after nearly four hours of testimony when many of the senators had already left. Sen. Bob Corker (R) of Tennessee got the ball rolling by asking about using federal money to boost the reserves of troubled banks.

Senator Corker: "What you're going to do is actually to get them to increase those reserves substantially. At that point they'll be insolvent and so therefore then you'd be providing public funding to make up that capital deficiency. Is that correct?"

Bernanke: "I don't agree necessarily that they'll be insolvent. Clearly, we have to look at their provisioning" of reserves.

Corker: "Their capital will be too low so they might not be insolvent. But the fact is they would need in some cases substantial public investment so they would be considered solvent."

Bernanke: "So they would be considered well-capitalized."

Corker: "We're going to go in and create this mechanism – these convertible preferred shares – and as the banks actually take these losses, which we know are coming, they'll convert that into common equity. But in essence, we're sort of continuing what we have been doing with TARP funding. We're just calling it something a little different."

Bernanke: "There will be some public ownership in terms of the shares of common equity. We want them to have enough capital."

Corker: "It seems to me that what you have explained is a creeping nationalism of our banks."

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