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fomc | 2,008 | I know, but I am a Federal Reserve economist. I would agree with your point that separating out these nonrating businesses from the rating businesses is important, and rating agencies have announced some changes along these lines. When we looked at our recommendations, we didn't really feel as though, even if they sepa... | 95 |
fomc | 2,008 | There would still be problems. | 6 |
fomc | 2,008 | We think the real problem is that they didn't differentiate well enough between structured-finance ratings and corporate ratings, and that is where we would like to put the focus. Securities regulators are already focused on conflicts of interest, and there are codes of conduct regarding how rating agencies have to beh... | 95 |
fomc | 2,008 | One quick follow-up on that--is one implication that we might take from this that structured products are just so complicated that they may never get good ratings or sufficiently good ratings, so the market really has to shrink? Could the rating agencies just fix themselves up so that they actually could do decent rati... | 121 |
fomc | 2,008 | I agree. In fact, ABS CDOs are disappearing or have disappeared. Investors don't have any appetite for them. SIVs are disappearing as well. | 32 |
fomc | 2,008 | But they could come back. I think subprime lending will come back under a different business model. | 20 |
fomc | 2,008 | Really, the question is, What sort of market forces would produce that outcome? It certainly seems as though things should move in that direction, and we feel that some of the recommendations we are making on the differentiation between structured-finance securities and corporate securities would encourage the rating a... | 89 |
fomc | 2,008 | President Hoenig. | 4 |
fomc | 2,008 | My comment is on the conflicts of interest as well. The only thing I would like to add is that this is not the first time the rating agencies have miscalculated the risk and put that out there. The incentives are designed to do exactly that, and it will occur again. I think this statement is too generous to the rating ... | 145 |
fomc | 2,008 | President Poole. | 4 |
fomc | 2,008 | I didn't know anything about SIVs before last summer, but I must say when I began to learn something about them, I was astonished because it would seem to me that, in Finance 101, you don't finance long-term, risky assets with short-dated paper. There's a maturity mismatch, and there's a rollover risk, and we've known ... | 147 |
fomc | 2,008 | A lot of the SIVs were standalone entities managed by independent asset-management companies that were set up to do that. | 24 |
fomc | 2,008 | And they collapsed? | 4 |
fomc | 2,008 | All the SIVs are in the process of winding down now, and in the immediate aftermath of what happened in August, that was when there was a crunch in the ABCP market. | 38 |
fomc | 2,008 | But when you say the asset-management companies, are they providing at least in principle some liquidity support or something? | 22 |
fomc | 2,008 | SIVs had partial liquidity backup lines from banks covering one week's maximum withdrawal or two weeks' maximum withdrawal. That was the way to a rating. The SIVs were operating under the regulation of the rating agencies. The rating agencies modeled their portfolios, and they modeled the inflows and outflows, so I thi... | 91 |
fomc | 2,008 | There is a large, independent SIV not affiliated with a bank, named Gordian Knot, that is still in existence. It's under severe pressure, but it has been weathering the storm. One can argue it might have been more conservative than some of the other SIVs. | 57 |
fomc | 2,008 | Governor Kohn. | 4 |
fomc | 2,008 | Thank you, Mr. Chairman. My question is on exhibit 6, and the question is, Are we making any progress here? In particular, are the rating agencies stepping up to the process of doing different ratings, different nomenclature for the structured finance? My impression is that there is a lot of resistance, at least there ... | 74 |
fomc | 2,008 | Your impression may be more informed than mine, but I would say that the rating agencies are doing a lot of self-examination now. I haven't seen them willing, in my opinion, to go far enough in the directions that we've outlined. A lot of their recommendations focus on managing conflicts of interest and doing a better ... | 93 |
fomc | 2,008 | Did you have any questions? | 6 |
fomc | 2,008 | I'd add only that I think where the rating agencies are now is trying to come up with cleaner boxes and better governance--Sarbanes-Oxley types of structures, ombudsmen, liaisons, Chinese walls. The core issues that Mike and his team bring up seem highly resistant to change, but you know, there will be nothing like thr... | 98 |
fomc | 2,008 | Torture works. | 5 |
fomc | 2,008 | Governor Kroszner. | 6 |
fomc | 2,008 | A few different points. One, on the conflict of interest issue, with respect to traditional corporate credits, it seems that credit rating agencies do pretty darn well and certainly have done very well before this. So it's clear that it's not just fundamental to the model that it can't work. I think it's clear enough t... | 379 |
fomc | 2,008 | I definitely agree with you that it's more difficult to rate structured-finance securities than corporate securities because with structured-finance securities you have a lot of quantitative modeling of future cash flows with a lot of uncertainty. Clearly the ABS CDOs are very complicated structures because it's a two-... | 197 |
fomc | 2,008 | Yes, it might just be interesting to drill down and see where the successes are and where they haven't been successful and whether it has something to do with the model. | 33 |
fomc | 2,008 | Oh, it's definitely not a random sample of asset classes that we chose to look at. The rating agencies have done a great job in many other places, I agree. | 34 |
fomc | 2,008 | Right, but just thinking about those differences, I think sometimes the rating agencies may be excessively maligned. They actually do provide something that's very useful, and we don't want to throw the baby out with the bath water. But also on that, there is a severe lack of competition among rating agencies, and we'v... | 132 |
fomc | 2,008 | The regulatory structure has been changed now as a result of the law that was passed in 2006, at least if you're talking about getting the regulatory stamp of approval from the SEC to become a nationally recognized statistical rating organization. That's now just a notification process by which, if you meet some minimu... | 243 |
fomc | 2,008 | For sure, although I think we tried something like that with the Sarbanes-Oxley issues of independent research--because this in some sense is a parallel to independent research--and even required funding of that, and that doesn't really seem to have taken off. So it seems as though the model, even with its flaws, is th... | 207 |
fomc | 2,008 | We have kind of a dual problem in that we want investors to do a better job of evaluating the risks, and maybe better ratings would help on that. At the same time, the existing rating agencies did a bad job, so we have to criticize them. We have to find some way to reconcile those. | 62 |
fomc | 2,008 | I have President Evans for a two-hander and then President Lockhart and President Lacker. I also see that President Plosser has a two-hander, and I think at that point we should probably go onto the last presentation. | 48 |
fomc | 2,008 | I can pass if it gets too long. That's okay. | 12 |
fomc | 2,008 | Okay. All right. So President Evans, President Lockhart, and President Lacker. | 18 |
fomc | 2,008 | I had an elementary question that Governor Kroszner's question kicked off. The background briefing was very well written and very clear, which made me think that I understood things, and I probably don't. But you used the term "get a rating," and at other times you talk about it as if it's a sufficient statistic and ho... | 145 |
fomc | 2,008 | Yes. | 2 |
fomc | 2,008 | Thank you. | 3 |
fomc | 2,008 | President Lockhart. | 4 |
fomc | 2,008 | I'd like to ask as a practical matter what weighting we should put in our expectations or even our recommendations on reform of the rating system versus the expectation that investors would actually reduce their reliance on ratings. My impression is that many institutional investors, especially public pension funds, ar... | 180 |
fomc | 2,008 | Well, I think you've identified the key problem that many of these funds face, and the important entities in many ways are these investment consultants. At least the funds we looked at all hire one or more of these investment consultants. Many of them are from large, globally active firms, and the role that those consu... | 145 |
fomc | 2,008 | But is your impression that those supplemental parties, the consultants and the asset managers themselves, have the credit analysis and valuation capability to address sophisticated structured products? | 30 |
fomc | 2,008 | We didn't do an evaluation of them, but some of them are from very, very large firms. They are advising funds in the trillions of dollars across all their different clients. That is the service they are selling, and so they should be--they had better be--in a position to do that. | 62 |
fomc | 2,008 | May I just suggest that you reexamine that proposition? They usually evaluate performance principally after going through initial screening devices. They almost never, that I'm aware of, provide the kind of analysis that you're assuming. So I would reexamine that proposition. | 51 |
fomc | 2,008 | President Lacker. | 4 |
fomc | 2,008 | My memory of Finance 101 is that you don't buy long-term, risky assets funded by short debt without sufficient compensation. So the neglected aspect of the whole episode we went through was how people would have been compensated in other circumstances, but that's a different discussion. I think these recommendations ma... | 235 |
fomc | 2,008 | Okay. Thank you. Why don't we continue with the final portion? | 14 |
fomc | 2,008 | Thank you. To support the Financial Stability Forum's Working Group on Market and Institutional Resilience, as noted in the top panel of exhibit 8, supervisors from France, Germany, Switzerland, the United Kingdom, and the United States formed the "senior supervisors group" in late October. Participating U.S. superviso... | 1,620 |
fomc | 2,008 | The top panel of exhibit 12 sets forth the question we sought to address--namely, to what extent did regulatory incentives contribute to or fail to mitigate weaknesses exposed by the recent turmoil? In doing so, we defined the term "regulatory incentives" to encompass both regulatory capital and financial reporting req... | 1,333 |
fomc | 2,008 | Thank you. Questions? President Rosengren. | 10 |
fomc | 2,008 | It is great to see some bank supervision people at this table, and I would just highlight one of the comments that you made about silos. It is interesting that this morning we have been discussing issues of bank balance sheet constraints and how that would occur, and it might be useful to think structurally within our ... | 621 |
fomc | 2,008 | Well, I would just comment on the first point that you made in terms of silos. I guess we would fully agree we're having a great time here, so we would love to see more interaction between supervision and the FOMC. | 48 |
fomc | 2,008 | Be careful what you wish for. | 7 |
fomc | 2,008 | You know, when people debate whether to have supervision with a central bank or not, one of the key arguments is that only we can bring to bear the resources of the entire central bank and also provide input from the supervision side. So clearly, that's something I think we need to do more of. In terms of the second qu... | 80 |
fomc | 2,008 | Yes. My perception is that the people who were further down on the list made active decisions to get out of the business or reduce their scale of the business, not necessarily just on gut feeling but because they had invested earlier on in the staff and the models to evaluate the product space. So they understood that ... | 146 |
fomc | 2,008 | I would also agree that your general point about banks being more exacting in their stress testing is a good one because it's something we and other supervisors, to be honest with you, continually look at, and many times the response that banks get internally from either owners or managers or through supervisors is tha... | 161 |
fomc | 2,008 | I might add one thing to that. In interviews we did with some firms, one point that they made was that stress testing was informative and important, but a next step they're trying to take is what it would take to cause that stress event to happen for different types of assets. So they are trying to anticipate--not so m... | 149 |
fomc | 2,008 | We need to be careful with the nomenclature. Stress testing right now in the industry encompasses a lot of things, and people will tell you that they do stress testing, but they are really doing static shocks. What we are talking about is not a historical analysis but a kind of forward-looking scenario that builds in y... | 85 |
fomc | 2,008 | President Hoenig. | 4 |
fomc | 2,008 | I think this was very interesting, and I have a suggestion and then a question. The suggestion is that this morning we had the Federal Open Market Committee meeting. This afternoon we should have the Federal Market Oversight Committee meeting, and that is what we're doing right now in looking at some of these instituti... | 214 |
fomc | 2,008 | I would say we've looked at a lot of that. The one place I would highlight most articulately is the degree of international coordination and cooperation we've had under way. The core firms in the United States are one portion of this system now, with a number of very significant global competitors. So the coordination ... | 148 |
fomc | 2,008 | I might add that we are trying to look at this. It's not just an issue of guidance, but we are going back through the supervisory process in terms of what we've learned through these interviews and challenging our beliefs and prior assessments. | 46 |
fomc | 2,008 | I think that is good because, if you think about it, we have the Basel capital standards coming forward, which involve the advanced method--relying on those institutions to a great degree in terms of judging their capital and their capital levels. When they are under pressure, they will tend to work the model. It is na... | 112 |
fomc | 2,008 | Vice Chairman. | 3 |
fomc | 2,008 | Just very quickly, you did a terrific job. I think it's important, though, to recognize that this isn't done yet, and we're not going to know fundamentally how we feel about the relative strengths and weaknesses in the system until we see how this plays out. Don't let these initial presumptions--either the diagnosis or... | 293 |
fomc | 2,008 | Let me also thank the staff for an excellent presentation. This is just the tip of the iceberg in terms of the work that's being done on all these different topics, and in turn we're collaborating with our colleagues here in the United States and abroad, and I guess we'll keep working and hope to find some valuable les... | 157 |
fomc | 2,008 | Good morning, everybody. Let me extend a welcome to First Vice President Sapenaro, who is sitting in for St. Louis this morning. A quick comment on special topics: I'm sure we're all disappointed that we won't have further conversations on the communications strategy, [laughter] but that being the case, we have the opp... | 202 |
fomc | 2,008 | 1 Thank you, Mr. Chairman. To start, I just want to update people on what happened overnight in markets. Equities rebounded a bit in both Asia and Europe, and bond yields reversed some of the decline that they saw on Monday. The dollar was slightly weaker against the yen and the euro but still in the range that it esta... | 3,158 |
fomc | 2,008 | Are there any questions for Bill? Vice Chairman. | 10 |
fomc | 2,008 | May I say just one thing, Mr. Chairman? I want to point out that not only has Bill, along with a whole range of people in New York and on the Board staff, been working 24 hours a day for about five days, not only did he write a terrific statement for the FOMC just now, despite all of those other preoccupations, but he ... | 128 |
fomc | 2,008 | We thank you. President Lacker. | 8 |
fomc | 2,008 | You're still going to get questions apparently. [Laughter] | 12 |
fomc | 2,008 | I hope your wife is doing well. | 8 |
fomc | 2,008 | She is doing well, thanks. | 7 |
fomc | 2,008 | First, just about breakevens. Breakevens came down a lot yesterday, but my understanding is the five-year, five-year forwards did not come down nearly as much. I think the figures I have are 3 basis points on the Board's measure and just 11 on New York's measure. Is that right? | 66 |
fomc | 2,008 | Three is right on the Board's measure. | 9 |
fomc | 2,008 | I don't have a number. | 6 |
fomc | 2,008 | I am concerned about this late-day softening problem with the Primary Dealer Credit Facility. Everything else we have done has been fairly straightforward to sterilize, but because with this the quantity is activated late in the day, the funds are just going to flow into the market. You know, you're in the position of ... | 207 |
fomc | 2,008 | We have given it some thought, but the press of other business, frankly, has overwhelmed us in the very short run. But I think it is a good point. I would say two things about the Primary Dealer Credit Facility and our ability to keep the funds rate at the target. One, if this works the way we hope it works, there are ... | 281 |
fomc | 2,008 | Mr. Chairman, could I just add one thing on this? I think the delicacy of the whole tri-party repo thing is hard to overstate. For better or worse, mostly for worse, the full tri-party repo market generally has spread over the last few years well beyond Fed-eligible securities, and until we get to the other side of thi... | 498 |
fomc | 2,008 | President Lacker. | 4 |
fomc | 2,008 | Yes, I just want to emphasize that what we have done so far has had this separability about it, and except for the brief period in late August last year, it has not threatened our ability to manage the federal funds rate in a way we thought appropriate for the whole economy. If we don't cure this problem soon, it will ... | 133 |
fomc | 2,008 | You make a good point, President Lacker. President Fisher. | 13 |
fomc | 2,008 | More mundane questions, but by the way, Bill, thank you for your service. Everybody agrees with what the Vice Chairman said, and I hope you took note of it. Now that I've made you feel better, I have just a very simple question. On the TAF, has the portion of foreign participation gone down? | 65 |
fomc | 2,008 | I don't think there has really been a shift. There's no meaningful shift. | 15 |
fomc | 2,008 | So it's still pretty much where it was. | 9 |
fomc | 2,008 | It's high. It will be interesting now with the reintroduction of the swap. You know, the ECB will essentially have a noncompetitive auction with us on this coming Monday. It will be interesting to see how that affects the TAF auction results. | 51 |
fomc | 2,008 | Then the second question, Bill, which I raised on the phone. I don't remember an answer. Is it correct that German bunds have now traded through Treasuries in terms of default risk, and is that meaningful at all? | 47 |
fomc | 2,008 | I think there was a day that that might have happened, but I don't really know the answer to that. I'm not sure what that really means. | 30 |
fomc | 2,008 | That's my question. Does it mean anything? | 9 |
fomc | 2,008 | If that were to happen, I'm not sure what I would make of it. That would probably reflect more what's going on between different countries in Europe than to have anything really to do with us versus Germany. That's how I would interpret it. | 48 |
fomc | 2,008 | Thank you. | 3 |
fomc | 2,008 | President Rosengren. | 5 |
fomc | 2,008 | I'd like to commend the New York Fed staff for what I know has been a very difficult time over the past week. My question is almost the opposite of President Lacker's. He raises some interesting points, but I wonder. Given the stigma issues involved and what's just happened with Bear Stearns, you would think that borro... | 134 |
fomc | 2,008 | Yes, we have certainly gotten questions about how this will be disclosed. Now, there will be a disclosure. There will be a line item in the H.4.1 release, but it will just show the total dollar amounts extended through this facility. It is all bid through the New York District, so the total primary dealer borrowing wil... | 285 |
fomc | 2,008 | Governor Warsh. | 4 |
fomc | 2,008 | I'm under the impression--Bill, you correct me--in the earnings call from the investment banks today and tomorrow, the four remaining are going to do all they can to destigmatize this facility with answers to the effect that "we haven't tapped the facility yet, but we would be very open to do it in the right circumstan... | 120 |
fomc | 2,008 | I think it is incumbent upon me to point out that the Board staff was also very involved, and I mention Brian Madigan, Pat Parkinson, Scott Alvarez, Deborah Bailey, and others as well. So it was very much a joint effort. Other questions for Bill? If not, we'll turn to Dave Stockton. Oh, I am sorry, we need a vote to ra... | 81 |
fomc | 2,008 | I move that we ratify the open market operations. | 11 |
fomc | 2,008 | Second. | 2 |
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