Obama and Bernanke offer hope for the economy

After months of relentlessly dismal financial news, the nation’s chief economic policymakers delivered an unexpected message Tuesday: All is not lost.

President Obama, in an address to a joint session of Congress, sounded notes of optimism for the future while still offering an unvarnished portrait of an economy in crisis.

“The impact of this recession is real, and it is everywhere,” Obama said. “But . . . we will rebuild, we will recover, and the United States of America will emerge stronger than before.”

Earlier in the day, Federal Reserve Chairman Ben S. Bernanke also offered reassurance, telling a Senate panel that -- with careful management -- the economy could stop shrinking by the end of this year and return to expansion mode next year.

The stock market responded to Bernanke’s remarks by staging a powerful rally, nearly erasing a sharp decline the day before that sent major stock indexes to levels not seen since the late 1990s.

Bernanke also sought to allay a particular fear that has haunted investors in recent days -- that the government would nationalize major banks and wipe out shareholders’ investments in the process.

The Fed chief said he saw no need for nationalization.

“We don’t need majority ownership to work with the banks,” Bernanke said. “We have very strong supervisory oversight. We can work with them now to get them to do whatever is necessary to restructure. . . . We don’t have to take them over to do that.”

Obama vowed Tuesday that his administration would “act with the full force of the federal government” to ensure that big banks had money to lend even if economic conditions worsened.

But he warned that the banking plan “will require significant resources from the federal government -- and yes, probably more than we’ve already set aside.”

The Obama administration and banking regulators had tried Monday to reassure the markets that they did not intend to nationalize banks. But their joint statement was taken as a mixed message: While reiterating support for a private banking system, the administration said it was adopting a new policy allowing for the conversion of the preferred stock the government receives from future capital injections into voting stock.

A voting stake could give federal officials a greater say over how banks are run, and the policy shift was seen by some as a possible step toward full-scale nationalization of certain banks.

Bernanke’s comments Tuesday did not erase the uncertainty, but investors took heart. The Dow Jones industrial average shot up 236.16 points, or 3.3%, to 7,350.94.

More broadly, Bernanke and Obama sought to dispel anxiety about the future, but they did not minimize the extent of current problems or the size of the challenge ahead.

“If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability,” Bernanke said, “there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.”

More bad news may be in the offing as the Treasury Department begins today to conduct what it describes as stress tests of the nation’s largest banks, putting them through a rigorous analysis to determine whether they’ll need more help to survive in the event of even tougher financial shocks.

But if the banks take their medicine, Obama and Bernanke insisted, the economy will eventually regain its vigor.

“We’re going to do a tough evaluation, try to figure out how much hole there is, if there is a hole,” Bernanke told the Senate Banking Committee. “In many cases, there’s not a hole.”

But the Fed chief made clear that he believed it would cause more damage to the country to allow one of its 20 largest banks to fail than it would to help them succeed.

“There is no commitment by any means never to shut down a big bank, absolutely not,” Bernanke said. “But I do believe that the major banks we have now can be stabilized.”

The Treasury Department is said to be considering converting existing preferred stock in struggling Citigroup Inc. to common stock to boost the company’s finances. A number of lawmakers expressed opposition to that approach.

“Common stock is riskier than preferred stock,” Sen. Charles E. Grassley (R-Iowa) said. “The American taxpayers are already shouldering a lot of risk these days.”

Preferred stockholders are first in line to recoup their investments if a company fails. But owning common stock would give the government the chance to profit if the banks’ share prices recovered.

And if converting preferred shares into common shares helps stabilize the banks by reducing the dividends they owe to preferred shareholders, that would benefit taxpayers by helping the overall economy, said James A. Wilcox, a professor at UC Berkeley’s Haas School of Business.

“The reverberations on the economy as a whole have enormous repercussions for the taxpayer,” he said.

Lawmakers remain angry at how the Bush administration handled the release of the first half of the $700-billion financial rescue fund and at how some banks have used the money.

“My constituents are sick and tired of bailouts,” Rep. Judy Biggert (R-Ill.) said at an oversight hearing for the fund. “They pay their mortgages on time. They save and invest for the future. They work hard to pay their bills and taxes. Now they continue to see federal money fly out the door, and they want answers.”

More anger at banks flared Tuesday after the website TMZ reported that Chicago-based Northern Trust Corp., which received a $1.6-billion federal infusion in November, hosted lavish parties around Los Angeles last week in connection with its sponsorship of the Northern Trust Open golf tournament in Pacific Palisades.

Among the bank’s splurges: putting up hundreds of clients and guests at luxury hotels such as the Beverly Wilshire in Beverly Hills and the Ritz-Carlton in Marina del Rey; a private party at the House of Blues in West Hollywood, featuring a performance by Sheryl Crow; and gift bags with Tiffany trinkets for some guests.

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, and 17 Democratic colleagues wrote to Northern Trust Chief Executive Frederick H. Waddell demanding that the bank refund to the government the cost of “these lavish events.”

Sen. John F. Kerry (D-Mass.) said he would introduce legislation to ban such practices by recipients of bailout money.

“I’m sick and tired of picking up the newspaper and reading about another idiotic abuse of taxpayer money while our country is on the brink,” he said.

Northern Trust said it signed a five-year contract to sponsor the annual golf tournament in 2007, a year before the government bailout began.

“Northern Trust did not seek the government’s investment, but agreed to the government’s goal of gaining the participation of all major banks in the United States,” the bank said. It added that the federal money it received was not spent on “marketing, advertising, corporate sponsorship or charitable activities.”

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jim.puzzanghera@latimes.com

maura.reynolds@latimes.com