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| Washington, DC – House Financial Services Committee Chairman Barney Frank (D-MA) today wrote to Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke asking them to look into claims made by Rep. Spencer Bachus (R-AL) regarding AIG’s payments to its counterparties.
Chairman Frank wrote in his letter: “I do not know what basis there is for the point he [Rep. Bachus] makes, but it is a serious issue and must be addressed. Clearly, any discrimination against American owned financial institutions compared to the treatment being received by foreign owned institutions would be unacceptable to the Congress, and I believe to the American public.” Click here for the text of Reps. Frank’s and Bachus’ letters April 1, 2009 The Honorable Ben S. Bernanke: I’m enclosing two letters which I received from the senior Republican on the Financial Services Committee, Mr. Bachus. There were two letters because there was apparently some confusion in communication between him and his staff as to whether or not he wanted to request a hearing right away. That is why I received a second letter amending his first letter. I do not know what basis there is for the point he makes, but it is a serious issue and must be addressed. Clearly, any discrimination against American owned financial institutions compared to the treatment being received by foreign owned institutions would be unacceptable to the Congress, and I believe to the American public. I understand the importance of honoring foreign obligations because of the need for us to continue to receive a flow of foreign investment. But differential treatment in favor of foreign investors does not seem to me to have any basis whatsoever in the law, in policy, and certainly not in the need for a public acceptance of your actions. I therefore ask you to look into this situation thoroughly. If indeed there are cases where this is happening, then I believe a hearing before the Committee would be appropriate, unless the actions in question, should they exist, were promptly remedied. BARNEY FRANK |
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Entries tagged as ‘Ben Bernanke’
Central Banking: 03-26-09 Speeches, Remarks, Announcements
March 25, 2009 · Leave a Comment
25Mar/Design and evaluation of core inflation measures for Turkey
25Mar/Lucas Papademos: Strengthening macroprudential supervision in Europe
Speech by Mr Lucas Papademos, Vice President of the European Central Bank, at the conference on “After The Storm: The Future Face of Europe s Financial System”, organised by Bruegel, National Bank of Belgium and the IMF, Brussels, 24 March 2009
25Mar/Elizabeth A Duke: Credit availability and prudent lending standards
25Mar/Jose De Gregorio: Monetary policy and pass-through to interest rates
25Mar/William C Dudley: Oversight of the Federal Government’s intervention at American International Group
25Mar/Ben S Bernanke: American International Group
Categories: Banking
Tagged: Announcements, Ben Bernanke, BIS, Central Banking, Elizabeth Duke, Federal Reserve, Joseph Gyourko, Lucas Papademos, Remarks, Speeches
Ben Bernanke: 03-25-09 Statement, AIG, House Financial Services Committee
March 25, 2009 · Leave a Comment
Chairman Frank, Ranking Member Bachus, and other members of the Committee, I appreciate having this opportunity to discuss the Federal Reserve’s involvement with American International Group, Inc. (AIG). In my testimony, I will describe why supporting AIG was a difficult but necessary step to protect our economy and stabilize our financial system. I will also discuss issues related to compensation and note two matters raised by this experience that merit congressional attention.
Reasons for Our Original Lending Decision
We at the Federal Reserve, working closely with the Treasury, made our decision to lend to AIG on September 16 of last year. It was an extraordinary time. Global financial markets were experiencing unprecedented strains and a worldwide loss of confidence. Fannie Mae and Freddie Mac had been placed into conservatorship only two weeks earlier, and Lehman Brothers had filed for bankruptcy the day before. We were very concerned about a number of other major firms that were under intense stress.
AIG’s financial condition had been deteriorating for some time, caused by actual and expected losses on subprime mortgage-backed securities and on credit default swaps that AIG’s Financial Products unit, AIG-FP, had written on mortgage-related securities. As confidence in the firm declined, and with efforts to find a private-sector solution unsuccessful, AIG faced severe liquidity pressures that threatened to force it imminently into bankruptcy.
The Federal Reserve and the Treasury agreed that AIG’s failure under the conditions then prevailing would have posed unacceptable risks for the global financial system and for our economy. Some of AIG’s insurance subsidiaries, which are among the largest in the United States and the world, would have likely been put into rehabilitation by their regulators, leaving policyholders facing considerable uncertainty about the status of their claims. State and local government entities that had lent more than $10 billion to AIG would have suffered losses. Workers whose 401(k) plans had purchased $40 billion of insurance from AIG against the risk that their stable value funds would decline in value would have seen that insurance disappear. Global banks and investment banks would have suffered losses on loans and lines of credit to AIG, and on derivatives with AIG-FP. The banks’ combined exposures exceeded $50 billion.1 Money market mutual funds and others that held AIG’s roughly $20 billion of commercial paper would also have taken losses. In addition, AIG’s insurance subsidiaries had substantial derivatives exposures to AIG-FP that could have weakened them in the event of the parent company’s failure.
Moreover, as the Lehman case clearly demonstrates, focusing on the direct effects of a default on AIG’s counterparties understates the risks to the financial system as a whole. Once begun, a financial crisis can spread unpredictably. For example, Lehman’s default on its commercial paper caused a prominent money market mutual fund to “break the buck” and suspend withdrawals, which in turn ignited a general run on prime money market mutual funds, with resulting severe stresses in the commercial paper market. As I mentioned, AIG had about $20 billion in commercial paper outstanding, so its failure would have exacerbated the problems of the money market mutual funds. Another worrisome possibility was that uncertainties about the safety of insurance products could have led to a run on the broader insurance industry by policyholders and creditors. Moreover, it was well known in the market that many major financial institutions had large exposures to AIG. Its failure would likely have led financial market participants to pull back even more from commercial and investment banks, and those institutions perceived as weaker would have faced escalating pressure. Recall that these events took place before the passage of the Emergency Economic Stabilization Act, which provided funds that the Treasury used to help stem a global banking panic in October. Consequently, it is unlikely that the failure of additional major firms could have been prevented in the wake of the failure of AIG. At best, the consequences of AIG’s failure would have been a significant intensification of an already severe financial crisis and a further worsening of global economic conditions. Conceivably, its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income, and jobs.
The decision by the Federal Reserve on September 16, 2008, with the full support of the Treasury, to lend up to $85 billion to AIG should be viewed with this background in mind. At that time, no federal entity could provide capital to stabilize AIG and no federal or state entity outside of a bankruptcy court could wind down AIG. Unfortunately, federal bankruptcy laws do not sufficiently protect the public’s strong interest in ensuring the orderly resolution of nondepository financial institutions when a failure would pose substantial systemic risks, which is why I have called on the Congress to develop new emergency resolution procedures. However, the Federal Reserve did have the authority to lend on a fully secured basis, consistent with our emergency lending authority provided by the Congress and our responsibility as central bank to maintain financial stability. We took as collateral for our loan AIG’s pledge of a substantial portion of its assets, including its ownership interests in its domestic and foreign insurance subsidiaries. This decision bought time for subsequent actions by the Congress, the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve that have avoided further failures of systemically important institutions and have supported improvements in key credit markets.
The Federal Reserve’s Ongoing Involvement with AIG
Having lent AIG money to avert the risk of a global financial meltdown, we found ourselves in the uncomfortable situation of overseeing both the preservation of its value and its dismantling, a role quite different from our usual activities. We have devoted considerable resources to this effort and have engaged outside advisers. Using our rights as creditor, we have worked with AIG’s new management team to begin the difficult process of winding down AIG-FP and to oversee the company’s restructuring and divestiture strategy. Progress is being made on both fronts. However, financial turmoil and a worsening economy since September have contributed to large losses at the company, and the Federal Reserve has found it necessary to restructure and extend our support. In addition, under its Troubled Asset Relief Program (TARP), the Treasury injected capital into AIG in both November and March. Throughout this difficult period, our goals have remained unchanged: to protect our economy and preserve financial stability, and to position AIG to repay the Federal Reserve and return the Treasury’s investment as quickly as possible.
In our role as creditor, we have made clear to AIG’s management, beginning last fall, our deep concern surrounding compensation issues at AIG. We believe it is in the taxpayers’ interest for AIG to retain qualified staff to maintain the value of the businesses that must be sold to repay the government’s assistance. But, at the same time, the company must scrupulously avoid any excessive and unwarranted compensation. We have pressed AIG to ensure that all compensation decisions are covered by robust corporate governance, including internal review, review by the Compensation Committee of the Board of Directors, and consultations with outside experts. Operating under this framework, AIG has voluntarily limited the salary, bonuses, and other types of compensation for 2008 and 2009 of the CEO and other senior managers. Moreover, executive compensation must comply with the most stringent set of rules promulgated by the Treasury for TARP fund recipients. The New York Attorney General has also imposed restrictions on compensation at AIG.
Many of you have raised specific issues with regard to the payout of retention bonuses to employees at AIG-FP. My reaction upon becoming aware of these specific payments was that, notwithstanding the business purposes that might be served by this action, it was highly inappropriate to pay substantial bonuses to employees of the division that had been the primary source of AIG’s collapse. I asked that the AIG-FP payments be stopped but was informed that they were mandated by contracts agreed to before the government’s intervention. I then asked that suit be filed to prevent the payments. Legal staff counseled against this action, on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail; legal action could thus have the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees. I was also informed that the company had been instructed to pursue all available alternatives and that the Reserve Bank had conveyed the strong displeasure of the Federal Reserve with the retention payment arrangement. I strongly supported President Dudley’s conveying that concern and directing the company to redouble its efforts to renegotiate all plans that could result in excessive bonus payments. I have also directed staff to work with the Treasury and the Administration in their review of whether the FP bonus and retention payments can be reclaimed. Moreover, the Federal Reserve and the Treasury will work closely together to monitor and address similar situations in the future.
Lessons Learned from AIG
To conclude, I would note that AIG offers two clear lessons for the upcoming discussion in the Congress and elsewhere on regulatory reform. First, AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms. If a federal agency had had such tools on September 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now. Second, the AIG situation highlights the need for strong, effective consolidated supervision of all systemically important financial firms. AIG built up its concentrated exposure to the subprime mortgage market largely out of the sight of its functional regulators. More-effective supervision might have identified and blocked the extraordinarily reckless risk-taking at AIG-FP. These two changes could measurably reduce the likelihood of future episodes of systemic risk like the one we faced at AIG.
Footnotes
1. In addition, many of these same banks had borrowed securities from AIG’s securities lending program for which they had given AIG cash as collateral. Upon an AIG bankruptcy, the banks would have taken possession of the securities instead of receiving back their cash, exposing them to possible losses on those securities.
Categories: Banking · Economics
Tagged: AIG, Ben Bernanke, Federal Reseve, House Financial Services Committee
Central Banking: 03-16-09 Recent Speeches, Remarks & Announcements
March 16, 2009 · Leave a Comment
13Mar/Expansion of membership announced by the Basel Committee
13Mar/Jürgen Stark: Economic prospects and the role of monetary policy in the current situation
13Mar/Savenaca Narube: Productivity and ethics
13Mar/John Hurley: Economic assessment and the role of the Central Bank
13Mar/William C Dudley: Financial market turmoil – the Federal Reserve and the challenges ahead
13Mar/Ben S Bernanke: Financial reform to address systemic risk
13Mar/Financial Stability Forum meets in London
13Mar/Financial Stability Forum decides to broaden its membership
12Mar/Core principles for effective deposit insurance systems – consultative document
12Mar/Basel Committee and IADI issue Core Principles for Effective Deposit Insurance Systems for public consultation
12Mar/Initiatives on capital announced by the Basel Committee
10Mar/Nout Wellink: Crisis intervention and policies – effectiveness and the need for coordinated action
10Mar/Marion Williams: The global financial crisis – can we withstand the shock
10Mar/Njuguna Ndung’u: Kenya’s Ksh.18.5 billion infrastructure bond
10Mar/Pierre Duguay: Bank of Canada’s perspective on the stability of the Canadian financial system
10Mar/Lorenzo Bini Smaghi: Three questions on monetary policy easing
09Mar/European Central Bank: Press conference – introductory statement
05Mar/Statistics on payment and settlement systems in selected countries – Figures for 2007
Categories: Banking · Economics
Tagged: Basel Committee, Ben Bernanke, BIS, ECB, John Hurley, Lorenzo Bini Smaghi, Marion Williams, Monetary Policy, Nout Wellink, Savenaca Narube, William Dudley
Economic Crisis: 03-05-09 The Value of Quantitative Easing – Worthless
March 5, 2009 · Leave a Comment
Class, I tend to agree that Quantitative Easing (which is what Ben Bernanke & Co. have been doing) will not work. I think a good explanation is provided below. Full story can be found here.
Quantitative easing is based on discredited economics
The Government hopes that debasing the currency will dig us out of the recession by promoting a “multiplier effect”. The idea is that the resulting Government spending will filter into the rest of the economy, getting us all to spend more.
Frederic Bastiat, the French economist, showed the futility of the thinking behind the “multiplier effect” in the 18th Century. In his parable of the broken window, a young boy smashes his father’s shop window.
This, for advocates of the multiplier effect, could be deemed good because it provides work for a glazier, who in turn spends his fee elsewhere, supposedly promoting prosperity.
The problem with praising the smashing of windows, as Bastiat pointed out, was that that it only looks at the visible economic effects of the shop smashing, without noticing the economic activity that would have happened had the shop owner been able to spend the money on his own priorities.
The effect of Gordon Brown’s quantitative easing will be economically damaging, redistributing money from the wealth creating part of the economy to public sector.
The Government has always been decidedly hostile to saving; now it believes that the key to a recovery is to discourage people storing their money in savings, and would like little more than for banks to reflate the credit bubble.
There is a view that, as we are in recession, we don’t need much saving and the investment saving creates because there is already lots of spare capacity in the economy.
Categories: Economics
Tagged: Ben Bernanke, Federal Reserve, Quantitative Easing
Ed Kane: 03-04-09 Incentive roots of the securitisation crisis …
March 4, 2009 · Leave a Comment
Full article from VOX Excellent Online Journal.
| Edward J. Kane 3 March 2009 |
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This column introduces Edward J. Kane’s new Policy Insight on the incentive roots of the securitisation crisis
The disastrous meltdown of structured securitisation represents a dual failure of market discipline and government supervision. At every stage of the securitisation process, incentive conflicts tempted private and government supervisors to short-cut and outsource duties of due diligence that they owed not only to one another, but to customers, investors, and taxpayers.
When commissions and other fees for service are paid upfront, managers and line employees of firms that originate, securitise, rate, or insure loans fear that they are passing up short-run income whenever they nix a questionable deal. At the same time, accountants, appraisers, and even government supervisors know that they can win business from competing enterprises in the short run by establishing a reputation for not challenging a troubled client’s dodgy representations about asset values or assessing its efforts to transfer risks off balance sheet as conscientiously as a third party might suppose. For government supervisors, incentive conflicts trace principally to short horizons, clientele influence, and pressure to support the expansion of homeownership for low-income households. As credit spreads increased in 2007-08, these incentive conflicts led authorities to temporise by adopting policies that risked allowing the depth and duration of the crisis to increase. Ignoring the lessons of the Savings and Loan (S&L) Mess, Federal Reserve press releases (e.g., that of March 16, 2009) and speeches by Chairman Bernanke and New York Federal Reserve President Geithner repeatedly misframed the difficulties that highly leveraged and short-funded institutions faced in rolling over their debt as evidencing a shortfall in aggregate market liquidity rather than volatile and widespread concerns about the individual solvency of troubled institutions. CEPR Policy Insight No. 32 attributes the ongoing financial crisis instead to economic and political difficulties of monitoring and controlling the production and distribution of safety-net subsidies. Crisis pressures will not relent until access to safety-net subsidies has been capped and managers and authorities acting together find a way to quell doubts about the future viability of institutions known to be struggling with outsized losses. This can be done in the short run by temporarily nationalising zombie firms and by producing and publicising convincing forensic evidence that their insolvency has been repaired. Structured securitisations may be visualised as manufacturing risk exposures in a series of work stations located alongside a conveyor belt. The different stations produce contracts that create, disguise, assess, reassign, or insure the risk exposures that move steadily along the belt. Society’s problem is that, during the bubble, Product-Quality Inspectors located at each station (i.e., supervisors) were using their computer scanners to entertain themselves rather than to inspect the quality of the work passing by. More supervision is not the solutionAlthough it is dishonest, it is natural for supervisors to blame the poor quality of the final product on weaknesses either in their lines of sight or in the supervisory equipment they had to work with. But giving supervisors more and better scanners or relocating their work stations will not cure the root problem. The root problem is the de facto corruption of supervisory incentives that poorly monitored safety-net subsidies create and sustain. TARP recipients paid out $76.7 million on lobbying and $37 million on federal campaign contributions in 2008 and (through Feb 2, 2009) received access to $295.2 billion in TARP funds. The ratio of lobbying expense to TARP receipts suggests that, during the initial stages of the crisis, financial institutions have reaped extraordinary benefits from investing in efforts to scare federal officials and to tell them how “best” to dispel crisis pressures. Following this self-interested advice has been ineffective partly because the return from expanding large firms’ investments in lobbying activity has dwarfed the return they could expect to earn from diligently attending to their ordinary business of intermediating the nation’s flow of savings and investment. A medley of potentially effective reformsNumerous complementary actions could improve the odds of getting less-destructive bubbles and better crisis management in the future. To be effective, a program of reform will have to rework in both the private and public sectors the way in which supervisory activities are performed and compensated. More importantly, it will have to make sure that compensation schemes and the division of labour mesh across private and governmental elements of the financial-engineering transaction chain. It is convenient to consider first some purely private-sector reforms. This will occur if and only if the reform is seen to improve the competitive positions of firms that adopt it. The first reform is to incorporate explicit and effective contractual clawbacks for subsequent interruptions in securitised cash flows into the contracts of employees and firms at all stages of securitisation. It is unwise to allow employees and firms that can make, securitise, or over-rate bad loans to collect compensation in advance without bonding their work by accepting liability for future defaults. Second, much like the bottom lines of corporate income and balance-sheet statements, the evolving value of the pools of assets backing various securitised claims needs to be tracked and reported explicitly at regular intervals (say, monthly). This would make it easier for investors and supervisors to identify securitisation chains in which the performance of due diligence is subpar. Third, credit-rating organisations must change the way they rate asset-backed securities and take explicit responsibility for errors they make in rating them. To improve incentives in government requires reworking the employment contracts of top officials in ways that would define their missions more sharply and make them personally accountable for outsized safety-net expenses. Building on the information used to construct bankruptcy plans at regulated firms, I would require regulators to establish, publicise, and test regularly a benchmark market-mimicking scheme for crisis management. To help them to put crisis-management plans into operation more promptly, I would also require regulators to collect and analyse estimates of safety-net subsidies from every regulated institution and consolidate these estimates in ways that would track over time the aggregate value of safety-net subsidies for the firms they supervise. Because these reforms would make the jobs of top regulators more difficult, I would also raise the salaries of these officials. However, to lengthen the horizons of safety-net managers, I would fund this raise as deferred compensation that would have to be forfeited if a crisis occurred within three or five years of their leaving office. This would have the further benefit of making new appointees more cognizant of unresolved problems that his or her predecessor might be leaving behind. To discourage elected officials from trying to win special breaks for firms that contribute money to their campaigns, I would require that regulatory personnel report fully on interactions with elected officials that occur outside the public eye. A third approach to sharpening monitoring and loss-control responsibilities would be to establish schemes in which private and governmental monitors could hold one another responsible for the quality of their work. For example, it has been widely proposed that safety-net managers be required to move trading in over-the-counter derivative and other securities to clearinghouses or exchanges when and as their volume becomes large enough to pose material safety-net consequences. However, there is no way to prevent bubbles and crises from emerging. ReferencesTimothy Geithner, The Current Financial Challenges: Policy and Regulatory Implications, Remarks at the Council on Foreign Relations Corporate Conference 2008, New York City, Mar. 6 |
Categories: Banking · Financial Crisis
Tagged: Ben Bernanke, Edward Kane, Financial Crisis, Homeownership, Savings and Loan Meltdown, Tim Geithner
Ben Bernanke: 03-03-09 Shaming Himself and the Federal Reserve Board
March 3, 2009 · Leave a Comment
Full Article here. Ben Bernanke should be ashamed of himself.
WASHINGTON — The chairman of the Federal Reserve on Tuesday tacitly endorsed President Obama’s call for huge increases in spending and trillion-dollar deficits over the next couple of years, saying the economic crisis required aggressive action.
Though the chairman, Ben S. Bernanke, did not endorse any of Mr. Obama’s specific proposals, he echoed the president’s call for bold government action to address the economy’s immediate travails and pointedly refused to criticize his longer-term plans.
“All else equal, this is a development that all of us would have preferred to avoid,” Mr. Bernanke told the Senate Budget Committee, referring to record-breaking deficits expected this year and in the next two years. “But our economy and financial markets face extraordinary challenges, and a failure by policy makers to address these challenges in a timely way would likely be more costly in the end.”
Two officials on Mr. Obama’s economic team, Treasury Secretary Timothy F. Geithner and Peter R. Orszag, the budget director, made similar arguments as they defended the new Obama budget and fielded Congressional Republicans’ criticism in separate appearances on Tuesday on Capitol Hill.
Mr. Bernanke, a Republican who was appointed by President George W. Bush, provided Mr. Obama and Democratic lawmakers with crucial backing for the political battles ahead. His comments were reminiscent of the support that his predecessor, Alan Greenspan, gave to Mr. Bush’s call for tax cuts in 2001. Many lawmakers in both parties said Mr. Greenspan’s comments had helped override Democratic objections to Mr. Bush’s tax cuts.
Categories: Banking
Tagged: Ben Bernanke, Big Spend, Federal Reserve, Peter Orszag, Timothy Geithner
Conference: 02-26-09 Financial Innovation & Crises with Agenda
February 26, 2009 · Leave a Comment
2009 Financial Markets Conference—Financial Innovation & Crises
May 11–13, 2009
Conference location
Jekyll Island Club Hotel
Jekyll Island, GA
Contact information
Lisa Lee-Fogarty
404-498-8267
lisa.fogarty@atl.frb.org
Agenda
| Monday, May 11, 2009 | |
| Noon | Welcome and opening remarks Dave Altig, Senior Vice President and Research Director, Federal Reserve Bank of Atlanta |
| 1:30 p.m. | Two research papers will be presented. |
| 6:30 | Dinner and keynote speaker Ben Bernanke, Chairman, Board of Governors of the Federal Reserve System |
| Tuesday, May 12, 2009 | |
| 8:20 a.m. | Welcome and opening remarks Dennis Lockhart, President and CEO, Federal Reserve Bank of Atlanta |
| 8:30 | Policy Session I—Measuring and Managing Risk in Innovative Financial Instruments This paper will discuss the various tools and strategies for measuring and managing risk in innovative financial instruments. Specific attention will be paid to pricing of the instruments, the role of credit ratings, and liquidity risk. Innovative financial instruments and products pose several challenges for measuring and managing risk. Claims of improper valuation and inadequate risk management have been at the center of the recent credit market turmoil and seem to be tied to the innovative nature of the MBS market and securitization. As financial engineering continues, market participants and regulators will again face the need to update their own pricing models and risk management techniques. This session will survey state-of-the-art knowledge and practices in these areas and offer perspectives on future innovation in risk management. Specifically, participants will discuss the tools available for valuation and risk management and how to evaluate their applicability, the role of rating agencies in managing risk, and the particular challenge of modeling and managing liquidity risk. Paper presenter: Stuart Turnbull, Professor of Finance, University of Houston |
| 10:15 | Policy Session II—Standardization and Clearinghouses as Tools for Lessening Systemic Risk This panel discussion will address the ways instrument standardization and the existence of clearinghouses lessen systemic risk. In particular, participants will take a historical look at futures/options markets and current markets like CDSs. Innovative financial instruments often begin as idiosyncratic OTC products, traded in obscure, two-way transactions. This feature of the market points up the central role of counterparty risk, the resulting murkiness of financial linkages, and concerns regarding systemic risk exposure. Standard contract terms and/or underlying assets, along with the establishment of a clearinghouse, could lessen systemic risk by increasing liquidity and netting counterparty risk. But several specific questions remain: Would such moves be beneficial in the structured finance market and other innovative markets to come? Do financial market participants demand specialized contracts, or are these a result of the natural diffusion and progression of innovation? Would the expectation of standardization lessen innovation? Would a clearinghouse succeed, and how should such entities be formed and regulated in non-equity markets? Would trade reporting create enough transparency to lessen systemic risk, or would it require regulation via exchange-traded instruments? Moderator: Edward Kane, Professor of Finance, Boston College |
| 6:30 p.m. | Dinner and keynote speaker John Taylor, Professor of Economics, Stanford University |
| Wednesday, May 13, 2009 | |
| 8:30 a.m. | Policy Session III—International Exposure to U.S.-Centered Credit Market Turmoil This paper will address the international transmission of financial crises and the challenges of domestic and internationally coordinated regulatory responses.The underlying assets that triggered the recent crisis were U.S. subprime mortgages. The first alarm bells sounded in Germany. The United Kingdom suffered a bank run, while, until recently, Asia and emerging markets have remained largely unscathed. There are lessons to be learned when liquidity and solvency risks associated with structured investments pervade global financial markets. In addition to illuminating these lessons, this presentation will consider the particular issues raised by the (potential) failure of large banks with cross-border operations. These concerns arise in almost every part of the world that is either home or host to banks with large cross-border operations. Paper presenter: Stijn Claessens, Assistant Director, International Monetary Fund |
| 10:30 | Policy Session IV—The Role of Banks in Financial Markets: Policy and Practice This session will explore the current and future role of banks in financial markets. In particular, how will the business models of banks change, and how will they evolve with respect to other financial market participants such as hedge funds?Commercial banks and investment banks were central to the credit turmoil as originators of structured investment products, as major counterparties in various credit instruments including U.S. Treasuries and repo transactions, and as prime brokers to hedge funds. In the face of an estimated $400 billion of subprime losses, many have questioned how the business models of banks will change. This session will explore the role of banks in financial markets—in terms of the services they provide as well as their structure and integration with other financial market participants. Paper presenter: Gary Gorton, Professor of Finance, Yale School of Management |
| Noon | Luncheon and closing remarks Dennis Lockhart, President and CEO, Federal Reserve Bank of Atlanta |
| 1:30 p.m. | Adjourn conference |
Categories: Economics · Finance
Tagged: Ben Bernanke, Dave Altig, Dennis Lockhart, Edward Kane, Elizabeth Duke, Fed of Atlanta, Financial Innovation & Crises Conference, Gary Gorton, John Taylor
Ben Bernanke: 02-25-09 Testifying Before Congress
February 25, 2009 · Leave a Comment
Fed Chairman Testifies on Capitol Hill, Sees 2010 Recovery “Only If” Banks Stabilize (Bloomberg News)
Categories: Banking · Financial Crisis
Tagged: Ben Bernanke, Federal Reserve
Federal Reserve: 02-25-09 Seniannual Monetary Policy Report to Congress
February 25, 2009 · Leave a Comment
Today’s Market Reaction
02-24-09 After the Bernanke Testimony
February 24, 2009
Chairman Dodd, Senator Shelby, and members of the Committee, I appreciate the opportunity to discuss monetary policy and the economic situation and to present the Federal Reserve’s Monetary Policy Report to the Congress.
Recent Economic and Financial Developments and the Policy Responses
As you are aware, the U.S. economy is undergoing a severe contraction. Employment has fallen steeply since last autumn, and the unemployment rate has moved up to 7.6 percent. The deteriorating job market, considerable losses of equity and housing wealth, and tight lending conditions have weighed down consumer sentiment and spending. In addition, businesses have cut back capital outlays in response to the softening outlook for sales as well as the difficulty of obtaining credit. In contrast to the first half of last year, when robust foreign demand for U.S. goods and services provided some offset to weakness in domestic spending, exports slumped in the second half as our major trading partners fell into recession and some measures of global growth turned negative for the first time in more than 25 years. In all, U.S. real gross domestic product (GDP) declined slightly in the third quarter of 2008, and that decline steepened considerably in the fourth quarter. The sharp contraction in economic activity appears to have continued into the first quarter of 2009.
The substantial declines in the prices of energy and other commodities last year and the growing margin of economic slack have contributed to a substantial lessening of inflation pressures. Indeed, overall consumer price inflation measured on a 12-month basis was close to zero last month. Core inflation, which excludes the direct effects of food and energy prices, also has declined significantly.
The principal cause of the economic slowdown was the collapse of the global credit boom and the ensuing financial crisis, which has affected asset values, credit conditions, and consumer and business confidence around the world. The immediate trigger of the crisis was the end of housing booms in the United States and other countries and the associated problems in mortgage markets, notably the collapse of the U.S. subprime mortgage market. Conditions in housing and mortgage markets have proved a serious drag on the broader economy both directly, through their impact on residential construction and related industries and on household wealth, and indirectly, through the effects of rising mortgage delinquencies on the health of financial institutions. Recent data show that residential construction and sales continue to be very weak, house prices continue to fall, and foreclosure starts remain at very high levels.
The financial crisis intensified significantly in September and October. In September, the Treasury and the Federal Housing Finance Agency placed the government-sponsored enterprises, Fannie Mae and Freddie Mac, into conservatorship, and Lehman Brothers Holdings filed for bankruptcy. In the following weeks, several other large financial institutions failed, came to the brink of failure, or were acquired by competitors under distressed circumstances. Losses at a prominent money market mutual fund prompted investors, who had traditionally considered money market mutual funds to be virtually risk-free, to withdraw large amounts from such funds. The resulting outflows threatened the stability of short-term funding markets, particularly the commercial paper market, upon which corporations rely heavily for their short-term borrowing needs. Concerns about potential losses also undermined confidence in wholesale bank funding markets, leading to further increases in bank borrowing costs and a tightening of credit availability from banks.
Recognizing the critical importance of the provision of credit to businesses and households from financial institutions, the Congress passed the Emergency Economic Stabilization Act last fall. Under the authority granted by this act, the Treasury purchased preferred shares in a broad range of depository institutions to shore up their capital bases. During this period, the Federal Deposit Insurance Corporation (FDIC) introduced its Temporary Liquidity Guarantee Program, which expanded its guarantees of bank liabilities to include selected senior unsecured obligations and all non-interest-bearing transactions deposits. The Treasury–in concert with the Federal Reserve and the FDIC–provided packages of loans and guarantees to ensure the continued stability of Citigroup and Bank of America, two of the world’s largest banks. Over this period, governments in many foreign countries also announced plans to stabilize their financial institutions, including through large-scale capital injections, expansions of deposit insurance, and guarantees of some forms of bank debt.
Faced with the significant deterioration in financial market conditions and a substantial worsening of the economic outlook, the Federal Open Market Committee (FOMC) continued to ease monetary policy aggressively in the final months of 2008, including a rate cut coordinated with five other major central banks. In December the FOMC brought its target for the federal funds rate to a historically low range of 0 to 1/4 percent, where it remains today. The FOMC anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
With the federal funds rate near its floor, the Federal Reserve has taken additional steps to ease credit conditions. To support housing markets and economic activity more broadly, and to improve mortgage market functioning, the Federal Reserve has begun to purchase large amounts of agency debt and agency mortgage-backed securities. Since the announcement of this program last November, the conforming fixed mortgage rate has fallen nearly 1 percentage point. The Federal Reserve also established new lending facilities and expanded existing facilities to enhance the flow of credit to businesses and households. In response to heightened stress in bank funding markets, we increased the size of the Term Auction Facility to help ensure that banks could obtain the funds they need to provide credit to their customers, and we expanded our network of swap lines with foreign central banks to ease conditions in interconnected dollar funding markets at home and abroad. We also established new lending facilities to support the functioning of the commercial paper market and to ease pressures on money market mutual funds. In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with the Treasury to announce the Term Asset-Backed Securities Loan Facility (TALF). The TALF is expected to begin extending loans soon.
The measures taken by the Federal Reserve, other U.S. government entities, and foreign governments since September have helped to restore a degree of stability to some financial markets. In particular, strains in short-term funding markets have eased notably since the fall, and London interbank offered rates (Libor)–upon which borrowing costs for many households and businesses are based–have decreased sharply. Conditions in the commercial paper market also have improved, even for lower-rated borrowers, and the sharp outflows from money market mutual funds seen in September have been replaced by modest inflows. Corporate risk spreads have declined somewhat from extraordinarily high levels, although these spreads remain elevated by historical standards. Likely spurred by the improvements in pricing and liquidity, issuance of investment-grade corporate bonds has been strong, and speculative-grade issuance, which was near zero in the fourth quarter, has picked up somewhat. As I mentioned earlier, conforming fixed mortgage rates for households have declined. Nevertheless, despite these favorable developments, significant stresses persist in many markets. Notably, most securitization markets remain shut, other than that for conforming mortgages, and some financial institutions remain under pressure.
In light of ongoing concerns over the health of financial institutions, the Secretary of the Treasury recently announced a plan for further actions. This plan includes four principal elements: First, a new capital assistance program will be established to ensure that banks have adequate buffers of high-quality capital, based on the results of comprehensive stress tests to be conducted by the financial regulators, including the Federal Reserve. Second is a public-private investment fund in which private capital will be leveraged with public funds to purchase legacy assets from financial institutions. Third, the Federal Reserve, using capital provided by the Treasury, plans to expand the size and scope of the TALF to include securities backed by commercial real estate loans and potentially other types of asset-backed securities as well. Fourth, the plan includes a range of measures to help prevent unnecessary foreclosures. Together, over time these initiatives should further stabilize our financial institutions and markets, improving confidence and helping to restore the flow of credit needed to promote economic recovery.
Federal Reserve Transparency
The Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and balance sheet. For example, we continue to add to the information shown in the Fed’s H.4.1 statistical release, which provides weekly detail on the balance sheet and the amounts outstanding for each of the Federal Reserve’s lending facilities. Extensive additional information about each of the Federal Reserve’s lending programs is available online.1 The Fed also provides bimonthly reports to the Congress on each of its programs that rely on the section 13(3) authorities. Generally, our disclosure policies reflect the current best practices of major central banks around the world. In addition, the Federal Reserve’s internal controls and management practices are closely monitored by an independent inspector general, outside private-sector auditors, and internal management and operations divisions, and through periodic reviews by the Government Accountability Office.
All that said, we recognize that recent developments have led to a substantial increase in the public’s interest in the Fed’s programs and balance sheet. For this reason, we at the Fed have begun a thorough review of our disclosure policies and the effectiveness of our communication. Today I would like to highlight two initiatives.
First, to improve public access to information concerning Fed policies and programs, we recently unveiled a new section of our website that brings together in a systematic and comprehensive way the full range of information that the Federal Reserve already makes available, supplemented by explanations, discussions, and analyses.2 We will use that website as one means of keeping the public and the Congress fully informed about Fed programs.
Second, at my request, Board Vice Chairman Donald Kohn is leading a committee that will review our current publications and disclosure policies relating to the Fed’s balance sheet and lending policies. The presumption of the committee will be that the public has a right to know, and that the nondisclosure of information must be affirmatively justified by clearly articulated criteria for confidentiality, based on factors such as reasonable claims to privacy, the confidentiality of supervisory information, and the need to ensure the effectiveness of policy.
The Economic Outlook and the FOMC’s Quarterly Projections
In their economic projections for the January FOMC meeting, monetary policy makers substantially marked down their forecasts for real GDP this year relative to the forecasts they had prepared in October. The central tendency of their most recent projections for real GDP implies a decline of 1/2 percent to 1-1/4 percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half. The central tendency for the unemployment rate in the fourth quarter of 2009 was marked up to a range of 8-1/2 percent to 8-3/4 percent. Federal Reserve policymakers continued to expect moderate expansion next year, with a central tendency of 2-1/2 percent to 3-1/4 percent growth in real GDP and a decline in the unemployment rate by the end of 2010 to a central tendency of 8 percent to 8-1/4 percent. FOMC participants marked down their projections for overall inflation in 2009 to a central tendency of 1/4 percent to 1 percent, reflecting expected weakness in commodity prices and the disinflationary effects of significant economic slack. The projections for core inflation also were marked down, to a central tendency bracketing 1 percent. Both overall and core inflation are expected to remain low over the next two years.
This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside. One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected. Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing. To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets. If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability–and only if that is the case, in my view–there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery. If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the salutary effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit.
To further increase the information conveyed by the quarterly projections, FOMC participants agreed in January to begin publishing their estimates of the values to which they expect key economic variables to converge over the longer run (say, at a horizon of five or six years), under the assumption of appropriate monetary policy and in the absence of new shocks to the economy. The central tendency for the participants’ estimates of the longer-run growth rate of real GDP is 2-1/2 percent to 2-3/4 percent; the central tendency for the longer-run rate of unemployment is 4-3/4 percent to 5 percent; and the central tendency for the longer-run rate of inflation is 1-3/4 percent to 2 percent, with the majority of participants looking for 2 percent inflation in the long run. These values are all notably different from the central tendencies of the projections for 2010 and 2011, reflecting the view of policymakers that a full recovery of the economy from the current recession is likely to take more than two or three years.
The longer-run projections for output growth and unemployment may be interpreted as the Committee’s estimates of the rate of growth of output and the unemployment rate that are sustainable in the long run in the United States, taking into account important influences such as the trend growth rates of productivity and the labor force, improvements in worker education and skills, the efficiency of the labor market at matching workers and jobs, government policies affecting technological development or the labor market, and other factors. The longer-run projections of inflation may be interpreted, in turn, as the rate of inflation that FOMC participants see as most consistent with the dual mandate given to it by the Congress–that is, the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability. This further extension of the quarterly projections should provide the public a clearer picture of the FOMC’s policy strategy for promoting maximum employment and price stability over time. Also, increased clarity about the FOMC’s views regarding longer-run inflation should help to better stabilize the public’s inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low.
At the time of our last Monetary Policy Report, the Federal Reserve was confronted with both high inflation and rising unemployment. Since that report, however, inflation pressures have receded dramatically while the rise in the unemployment rate has accelerated and financial conditions have deteriorated. In light of these developments, the Federal Reserve is committed to using all available tools to stimulate economic activity and to improve financial market functioning. Toward that end, we have reduced the target for the federal funds rate close to zero and we have established a number of programs to increase the flow of credit to key sectors of the economy. We believe that these actions, combined with the broad range of other fiscal and financial measures being put in place, will contribute to a gradual resumption of economic growth and improvement in labor market conditions in a context of low inflation. We will continue to work closely with the Congress and the Administration to explore means of fulfilling our mission of promoting maximum employment and price stability.
Footnotes
1. For links and references, see Ben S. Bernanke (2009), “Federal Reserve Programs to Strengthen Credit Markets and the Economy,” testimony before the Committee on Financial Services, U.S. House of Representatives, February 10. Return to text
2. The website is located at http://www.federalreserve.gov/monetarypolicy/bst.htm. Return to text
Categories: Banking
Tagged: Ben Bernanke, Federal Reserve, Housing and Urban Affairs, Market Reaction, Semiannual Monetary Policy Report to the Congress, Senate Committee on Banking
