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fomc | 2,008 | Governor Kohn. | 4 |
fomc | 2,008 | Thank you, Mr. Chairman. Just a comment on President Lacker's question: I guess in the end it would depend on how big Bear Stearns's balance sheet would have been and whether paying interest on demand deposits at commercial banks would have somehow shrunk Bear Stearns's balance sheet and the secured funding that could ... | 116 |
fomc | 2,008 | No. May I? You know, we think that the money funds finance about a quarter or a third of the stuff in tri-party. Money funds have a unique type of liquidity risk. So it is possible, if the same set of assets were financed by banks, that because banks have a different liquidity risk the system would be more stable. So y... | 262 |
fomc | 2,008 | I also had a question, Mr. Chairman, and it's on the PDCF. I find some tension in my own attitudes here. Your leaning all over these people not to borrow helps protect the Board's decision that this is unusual and exigent, credit couldn't otherwise be available, and all of that. So it's supportive of that. On the other... | 178 |
fomc | 2,008 | Mr. Chairman, may I--not to preempt Art and Scott--in this case? I completely agree. It is very important not to undermine the value of these liquidity backstops by introducing stigma in their use until we get to the point at which we want to dial people back. But the decisions or the actions we took in the context of ... | 317 |
fomc | 2,008 | President Lacker, you had something? | 8 |
fomc | 2,008 | Yes. About the general topic of stigma and lending at our facilities, I think it would be a useful agenda item for future research, and it would be useful for us to work at thinking carefully about this. Stigma represents some information revelation to market participants attending on some act, whether it's borrowing f... | 137 |
fomc | 2,008 | President Plosser, did you have a comment? | 11 |
fomc | 2,008 | Yes. I asked Bill Dudley yesterday a question about what I had heard from the Street--that they perceived that stigma was attached to it. With this conversation, it certainly appears to me that I was hearing them say that, at least from the investment banks' point of view, they do feel that some stigma is already attac... | 94 |
fomc | 2,008 | May I just interject one thing on this? Vice Chairman Geithner makes the important point that one issue is counterparty risk for Cantor and Countrywide, which was sort of separate. The other issue is, since this is permissible only under section 13(3), that it can't be a chronic source of funding and it can't be part o... | 141 |
fomc | 2,008 | It may be too fine a distinction, but we didn't say "no" to anyone when they came in. When they came in and stayed for a month and a half or two months, then we started to say "no." | 46 |
fomc | 2,008 | But these are very different. I'm sorry-- | 9 |
fomc | 2,008 | Go ahead. Finish your sentence. | 7 |
fomc | 2,008 | I was just going to say that it's a very delicate balance. We want this set of firms to get themselves to the point where, in the eyes of the market, they have a more conservative mix of leverage (appropriately measured) and funding risk so that they are less likely, even in a pretty adverse shock, to need to finance i... | 311 |
fomc | 2,008 | If I could add just one more thing, I also think that the stigma doesn't really undercut the benefit of the PDCF as a backstop to these firms' financing. If the stigma really undercut the benefit, then the stigma would be quite important. But I think that the PDCF is still a very viable backstop even with some stigma a... | 78 |
fomc | 2,008 | President Hoenig, did you have an intervention? | 10 |
fomc | 2,008 | Yes. To follow up on Governor Kohn's point, I think it's important to our discussion going forward in terms of how we view these firms, from commercial banks to investment banks and primary dealers, because we are lending under exigent circumstances to these institutions under the primary dealer facility. Therefore, th... | 203 |
fomc | 2,008 | We're going to have a chance, of course, for everybody to give their views. President Fisher, did you have a question? | 26 |
fomc | 2,008 | I just wanted to get in on this point that Governor Kohn raised. I'm not uncomfortable with our being parsimonious with the Primary Dealer Credit Facility. It is under unusual and exigent circumstances, and I think we need to be sure that they are unusual and exigent circumstances. That's the reason it was created, and... | 114 |
fomc | 2,008 | I would defer to my colleagues in Markets, but I would just give one anecdote. Over the past few weeks, in particular, when Lehman announced its second-quarter results, some observers in the market stated that Lehman might not have come through this period if the PDCF had not been there. They never drew on it. I think ... | 108 |
fomc | 2,008 | I don't think they're back to normal, and I also think very strongly that the amount of use of the Primary Dealer Credit Facility is not a guide to how important it is as a backstop for financial firms. | 42 |
fomc | 2,008 | That's my point. That's important. | 7 |
fomc | 2,008 | There were a number of people to whom we talked who said that the reason they stayed with Lehman during this period of stress was that they knew that the Primary Dealer Credit Facility was there as a backstop. So I have a high degree of confidence that Lehman would have been in great difficulty without it. | 62 |
fomc | 2,008 | Just to make sure--it isn't quite as awkward as it sounds. I mean, it's not clear. The test for us about whether or not these make sense is not fundamentally about whether the PDCF would save Lehman from itself. I would just make the observation that we thought originally that you could look at the bid to cover and at ... | 376 |
fomc | 2,008 | Did you complete your questions? | 6 |
fomc | 2,008 | Yes, I did. | 5 |
fomc | 2,008 | President Rosengren. | 5 |
fomc | 2,008 | I just have a couple of questions of fact. How big was Bear Stearns's tri-party repo on the Thursday that they started getting into trouble--just to give a rough sense of scale? I know it's not exact. | 45 |
fomc | 2,008 | About $150 billion. | 5 |
fomc | 2,008 | About $150 billion? | 5 |
fomc | 2,008 | That Thursday? | 3 |
fomc | 2,008 | It was a little over $100 billion. | 9 |
fomc | 2,008 | It hadn't run off that week? | 7 |
fomc | 2,008 | It was starting to run off. | 7 |
fomc | 2,008 | Okay. So roughly $100 billion. The numbers seemed to be in that range. Now, one of the reasons that we're worried about the tri-party repo was that the securities in that tri-party repo were very illiquid. Was Bear Stearns unusual in the amount of illiquid securities that were being financed? As we look down this list,... | 148 |
fomc | 2,008 | There are definite differences among dealers. I don't have the Bear Stearns cut, but we did a cut recently, and there are very clearly differences among dealers. As we know, the share of less liquid assets being financed by tri-party has been growing over the last--pick a number--five, seven years. The trend line is go... | 91 |
fomc | 2,008 | So--I'm sorry--what percentage would that be? When you say it's growing, is it now 10, 20, 50, or 80 percent? | 34 |
fomc | 2,008 | Pat, do you have that? | 7 |
fomc | 2,008 | I have in front of me data from Bank of New York, which facilitates about two-thirds of the repos. At Bank of New York, 18 percent of the collateral is debt that's settled through DTC--so that would be non-government, non-agency debt--and another 6 percent is equity. So about 25 percent is non-OMO things. The biggest c... | 144 |
fomc | 2,008 | For Bear Stearns, we have one side of the transaction looking at the investment banks. On the other side of that transaction, you have companies like Fidelity, Schwab, and Federated. So as we think about who poses systemic risk, we probably want to think about both sides. In terms of a distress scenario, you have tri-p... | 194 |
fomc | 2,008 | Well, the other big category that we have been able to identify of entities that are providing tri-party financing is the custodian banks that act as agents for securities lenders. When someone lends out securities, they often take in cash collateral. Then they want to reinvest that collateral, and the big bank custodi... | 312 |
fomc | 2,008 | One last question. Sorry for so many questions. The situation of Lehman was kind of interesting because you saw their stock price go down. Talking to financial institutions, both regulated and unregulated, in Boston, a lot of people were evaluating counterparty risk and deciding whether or not they were going to start ... | 187 |
fomc | 2,008 | On the first question, yes, we were picking up the pressures on liquidity. We saw some cracking, but it never broke. There were some counterparties that were skittish, but we never saw the type of accelerated withdrawals or running that came to mark Bear Stearns. We were watching it very closely, and so were they. But ... | 245 |
fomc | 2,008 | Governor Warsh, did you have a question? | 10 |
fomc | 2,008 | Not a question, just for the go-round. | 10 |
fomc | 2,008 | Why don't we then have an opportunity for general comments on these issues. Let me just give a bit of context. When we instituted the PDCF and the TSLF in March, about the time of the Bear Stearns event, we stipulated that they would be available for up to six months. That date, mid-September, is coming closer. It's my... | 1,011 |
fomc | 2,008 | Thank you, Mr. Chairman. The issues around the liquidity facility and what supervisory apparatus we have wrapped around primary dealers have to do with our having extended our lending reach. I think there's now a substantial gap between our implied lending commitment and the scope of our supervisory authority. Vice Cha... | 1,609 |
fomc | 2,008 | Thank you. I agree with you that we need to define limits, but I think we have stronger tools than just our declarations of piety. I would just note that there are models. One good model is the FDICIA model, for example, which lays out a whole set of criteria under which intervention can be taken and, if intervention i... | 102 |
fomc | 2,008 | I agree, and those are mechanisms for legislatively tying our hands, and that ought to be high on the agenda. | 24 |
fomc | 2,008 | We'll discuss those. Yes, President Plosser. | 11 |
fomc | 2,008 | On that point, I have been reading a bit recently. It might be useful in thinking about some of these issues about how we tie our hands and the mechanism for doing that. The IMF went through an extraordinary study effort during the sovereign debt crisis and came up with some very important mechanisms for how to change ... | 124 |
fomc | 2,008 | President Rosengren. | 5 |
fomc | 2,008 | I have three comments for the long term and three comments for the short term. For the long term, in the tradeoff between focusing on markets versus institutions, to the extent that we can have standardized products traded on exchanges, we don't need to spend as much time with institutions, and that takes care of a lot... | 969 |
fomc | 2,008 | Thank you. President Hoenig. | 7 |
fomc | 2,008 | Mr. Chairman, on the short term, I think extending through the end of the year is prudent and would support that. I would say that the possibility of its naturally dying off would be ideal. I would support that because it is "exigent circumstances." We should make that clear and work these people out of it as quickly a... | 358 |
fomc | 2,008 | Thank you. | 3 |
fomc | 2,008 | May I make a suggestion? | 6 |
fomc | 2,008 | A suggestion? | 3 |
fomc | 2,008 | Yes. You know, these are deep, consequential questions we face. This is a question on the economy, and we're not going to resolve it today. I think it's important that we recognize that we're going to have to build some time into our agenda--later this year probably, certainly early next year--and get deeper into the b... | 321 |
fomc | 2,008 | I would very much like to see us make that happen sooner rather than later just because of the force of events taking us forward. | 26 |
fomc | 2,008 | That's right. Because of testimonies and so on, we are going to have to at least enunciate some broad principles, and that is why this discussion is very useful. Obviously, details will be worked out over a longer period. President Bullard. | 52 |
fomc | 2,008 | Yes, I just have a few comments. In reading through this memo and hearing the presentation this morning, I think that these are fantastic questions. They deserve a lot of research and analysis. Just to echo Vice Chairman Geithner, they cannot easily be answered in a forum like this one. What is happening is that we sta... | 476 |
fomc | 2,008 | President Fisher. | 3 |
fomc | 2,008 | Mr. Chairman, I am in favor of keeping these facilities open through year-end as you have suggested. I think that just the existence of the PDCF is important, which we talked about earlier, and your overall outline of an approach, the topography of that approach, is attractive. The question I have is about--and you use... | 112 |
fomc | 2,008 | I was perfectly content to get through this without any questions. [Laughter] But I am happy to answer anything. | 24 |
fomc | 2,008 | In working up this MOU, have you had any interaction with Chairman Frank or any of his staff, getting a sense of how they might react or what it does in terms of their own expectations? | 40 |
fomc | 2,008 | Well, we have had a bit of interaction on the Senate side. The Senate folks are very interested in what we are doing and whether this would preempt a congressional action. Chairman Frank has been more sanguine about our doing what is appropriate to deal with the situation now--Laricke may speak to this more at the lunc... | 160 |
fomc | 2,008 | Are you picking up any signals in return, in this interaction with the Senate or elsewhere, about what they might be thinking? Are we picking up any other signals that might be of concern? | 38 |
fomc | 2,008 | On the House side, Chairman Frank is thinking of a model that is similar to what the Treasury blueprint outlined, where the Federal Reserve would be a systemic regulator and have some authorities that go along with that. I think that on the Senate side they are very much in disarray. They want to visit this issue, but ... | 78 |
fomc | 2,008 | I am a little confused. You testify in July and then have a speech. You said that you and Paulson will be speaking. I think that is a very important point. It is going to be a tough act because you don't want to take anything off the table, but you want to keep a lot open and not show your hand. Well, we don't know wha... | 190 |
fomc | 2,008 | I was planning to do that. | 7 |
fomc | 2,008 | Yes, sir. Just for some suggestions, for whatever they're worth. Thank you, Mr. Chairman. | 21 |
fomc | 2,008 | President Stern. | 3 |
fomc | 2,008 | Thank you, Mr. Chairman. Just a few points. With regard to the short-term plan of extending the facilities over the turn of the year and so forth--that is, the MOU and the testimony that goes with it--that is all fine with me. I don't have any problem with that. That sounds sensible under the circumstances. A number of... | 373 |
fomc | 2,008 | Thank you. President Yellen. | 7 |
fomc | 2,008 | I will be very brief, Mr. Chairman. I do want to say, with respect to the short-term issues, that I fully support the plan that you laid out. I certainly favor keeping these facilities in place beyond September. Even if their use diminishes, I agree with the point that it doesn't necessarily indicate that they are not ... | 515 |
fomc | 2,008 | President Plosser. | 5 |
fomc | 2,008 | Thank you, Mr. Chairman. I will be very brief. A lot of my views have been shared already. Just to expand on President Rosengren's comment--how we define the right institutions, the scope of this, I think that some of the questions here are really hard. It is my understanding that the workgroups we talked about last ti... | 546 |
fomc | 2,008 | Thank you. President Pianalto. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I also support extending our lending facilities to get through the year-end funding problems. As many others have already said, I agree that we should undertake an evaluation of the changes to our emergency liquidity facilities. I think it is important that we do it more broadly and that we don... | 217 |
fomc | 2,008 | Thank you. President Lockhart. | 7 |
fomc | 2,008 | Thanks, Mr. Chairman. I have maybe a variation on Governor Warsh's comment of yesterday: Much has been said by many, so I will try not to take too much time here. I think Vice Chairman Geithner's admonitions are correct, and I certainly support them. I am quite supportive of extending through the year-end, and the shor... | 503 |
fomc | 2,008 | Thank you. President Evans. | 6 |
fomc | 2,008 | Thank you, Mr. Chairman. I will also try to be brief, in spite of the large number of questions that were handed out. The short term should be quite easy. On the tactical issues, I agree with the suggestion of extending the facilities through year-end. They seem to have worked well. Also, a number of very interesting a... | 381 |
fomc | 2,008 | Thank you. Governor Kohn. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I think I would just like to dig into some of the comments that President Lockhart and President Evans just made, just for a second, take a step back, and ask why we are here having this conversation. I know the timing is because we have this PDCF, but what happened was that the financial marke... | 705 |
fomc | 2,008 | Thank you. Governor Warsh. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. Let me make a few prefatory comments, and then try to answer a couple of the key questions in the memo. First, a crisis is a terrible thing to waste. My sense is that we have an opportunity here to do the right thing over the period to try to get market discipline--to Charlie's point--back and ... | 1,561 |
fomc | 2,008 | Thank you. Governor Kroszner. | 9 |
fomc | 2,008 | Thank you very much. I agree with a lot of what Governor Warsh said and a lot of what has been said before. Let me just take a slightly different tack answering the question that Governor Kohn raised: Why are we here? Part of that is, because of the Glass-Steagall Act, we have this unusual structure in the United State... | 828 |
fomc | 2,008 | Thank you. | 3 |
fomc | 2,008 | Oh, and I apologize--I fully support going ahead with extending the facility past the year-end. I would make sure that it's a bit more than just immediately past year-end and go some time into February so there are no questions about year-end. | 50 |
fomc | 2,008 | Thank you. Governor Mishkin. | 7 |
fomc | 2,008 | Thank you, Mr. Chairman. I also strongly support the short-term strategy that was laid out by the Chairman. I don't see that we really have an alternative in that context. There are a lot of issues here. The reality is that this is super complex, and we have a lot of work over the next year to be ready for the next Adm... | 554 |
fomc | 2,008 | Thank you. Vice Chairman. | 6 |
fomc | 2,008 | I obviously support the strategy laid out. I just want to underscore, particularly in response to Governor Warsh's comments, that this is in effect a conditional extension, in the sense that we are being careful to get ourselves more comfortable with where these four firms in particular are on capital and liquidity bef... | 670 |
fomc | 2,008 | Thank you. President Plosser. | 8 |
fomc | 2,008 | I want to come back to one of Governor Warsh's comments, just probe it a little further, because I was intrigued by his notion that in some way trying to wean ourselves from this he suggested that we raise the price. It occurred to me in that same context, if we thought that had value in some sense, another way we coul... | 126 |
fomc | 2,008 | Vice Chairman. | 3 |
fomc | 2,008 | First, I completely agree that, once we get to the point at which we believe the best policy is to dial this stuff back and transition to a world in which they don't exist, we are going to want to look at a whole bunch of things--changing terms, changing the relative attractiveness across the auction facilities, thinki... | 380 |
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