Subprime's Salvation Is Fed's Conundrum

The hedge fund Farallon rescued Accredited Home LendingLEND Tuesday but may have blown up some bulls' rate cut thesis in the process.

Why would subprime lenders need an injection of new liquidity from the Federal Reserve when there's enough out there to facilitate a hedge fund rescuing a subprime lender? The Fed is unlikely to cut the fed funds rate or change its bias at the conclusion of Wednesday's Federal Open Market Committee meeting because evidence of loose liquidity is still abundant in today's financial marketplace -- even with the subprime problems and house price deflation and, yes, even with slower economic growth.

But a Fed that stays on hold doesn't preclude the usual "Bernanke bump." Indeed, Todd Leone, head of listed trading at Cowen & Co., says the stock market's strength over the past couple of days is partially due to anticipation of Federal Reserve Chairman Ben Bernanke's effect.

"Bernanke has been very friendly to the Street," says Leone. "The last few times he spoke, the market has ripped. ... People are hoping they say something about easing ... some kind of easing hint."

Unlike his predecessor Alan Greenspan, who has lately spurred stock market swoons, Bernanke has rarely disappointed the market since the Fed stopped raising the fed funds rate last July. The Chairman soothed markets the day after the Feb. 27 rout. Prior to that, Bernanke's semiannual testimony to Congress in mid-February gave stocks a Valentine's Day gift that catapulted the market to its Feb. 20 highs.