The week the fed saved the world: an inside glimpse at the Greenspan-McDonough-Ferguson team's backroom maneuvering.
Federal Reserve Chairman Alan Greenspan had settled into his seat on a return flight from Switzerland when the pilot's voice came over the public address system: "American airspace has just been closed, we'll be returning to Zurich." There was no other explanation. Greenspan tried to use the onboard phone to find out what was the matter, but the lines were all engaged. Instead, Greenspan waited until he landed and then from a phone at the airport called his wife, NBC News correspondent Andrea Mitchell.
"What's happened?" he asked her.
Mitchell, moments away from a live shot with NBC news anchor Tom Brokaw, had no time to talk. But she did offer to leave the phone line open so her husband could hear the grim details of what had transpired that morning. In a seven-minute report, Mitchell told the world, and the chairman of the central bank, that a terrorist attack had toppled the World Trade Center in New York. Another hijacked aircraft had struck the Pentagon. Greenspan listened to the bulletin and then placed another call--this time to Federal Reserve Vice-Chairman Roger Ferguson.
Ferguson had arrived at the central bank on Constitution Avenue at his regular hour--8 a.m.--to prepare for a series of internal meetings and phone calls that had been on his schedule for some time. A little after 9 a.m., the phone rang. A friend from the Securities and Exchange Commission asked Ferguson if he had heard the news--a jet had careened into the World Trade Center, the caller said. (The fact that the SEC had the information so quickly isn't surprising. SEC has a market watch desk and knows of any market-moving events, anywhere in the world, almost as soon as they happen.) Ferguson turned on the television. A short time later the television was not entirely necessary. Ferguson could see, outside his window at the Fed, smoke billowing up from the Pentagon across the river. Another airliner had crashed into an American building. Ferguson's day and the day of everyone in the United States had suddenly, irrevocably changed.
Looking back on the early minutes, hours and days after the September 11th attack, central bankers say that a roster of financial difficulties they had faced in recent years prepared them, unexpectedly, for the events of that day and the days that followed. It helped them make precise decisions quickly and to act with a determination that managed to avert panic. Often heroes are made by doing what is expected of them in unexpected situations. That happened across the board at the Federal Reserve in the days after September 11th.
"A number of our experiences in the last ten to fifteen years all came together at one point," said Ferguson later. "We had been through Y2K, there were people here who recalled the market break of 1987, and I had participated in the Fed's response to the Russian debt moratorium. Y2K was all about an operational issue and we had studied that."
Ferguson, the only one of the Fed's five governors in Washington when the attacks occurred, immediately began to draft a statement with members of the Fed staff. Ferguson wanted to be concise and focused and wanted to leave nothing to interpretation. "The Federal Reserve system is open and operating. The discount window is available to meet liquidity needs." He convened a conference call at 11:30 a.m. with most of the Fed's twelve regional bank presidents and their chief operating officers. The group agreed the statement sent the right message of measured calm.
The statement, while terse, said all it needed to. To market participants it said unequivocally that the Fed would provide cash, on demand, to major banks through the discount window to ensure they could clear checks, transfer funds and securities, and keep the system running in spite of the tragedy unfolding in Lower Manhattan. The discount window is a seldom-used stopgap through which the Fed acts as a lender of last resort to finance uncleared payments. In recent years, a bank's frequent use of the discount window sent red flags flying, an indication that perhaps the institution wasn't being properly managed. In this case, banks were hobbled by something beyond their control--with American airspace temporarily closed, payments that needed to be cleared were stuck on grounded airplanes.
As the networks beamed live pictures of smoke and fire and tragedy, Fed policymakers wanted to ensure that their part of the rescue, the financial system, held up in spite of the attack. Their priority: to ensure that international monetary transactions would continue unhindered. Ferguson began placing calls to key central bankers around the world in order to set up swap lines of credit. There had been routine swap lines set up in the past that had subsequently lapsed. Ferguson worked to reinstate them after the attack. Traditionally, in times of crisis, the rule at the Fed had always been to lend freely, open up the spigot, and make sure liquidity is intact. What's more, when Fed policymakers studied possible operational problems that might have occurred during Y2K, they saw that liquidity and settlement were key. They had to ensure that settlements went ahead without a hit.
In the hours after the attack what was almost immediately clear was that the Bank of New York--the bank that clears more than half the government bonds traded in the world and sits just blocks from the World Trade Center--was having communication problems. Central bankers were worried that foreign banks might refrain from making a payment in dollars out of fear that they wouldn't receive money owed from banks in New York. There was also the concern that the emergency backup systems of New York banks might have been destroyed in the attack. There had been a longstanding swap agreement with Canada. But similar agreements with the European Union had lapsed. The Fed reinstated them so that foreign central banks could pump dollars into their own markets. (The last time the Fed entered into such an agreement was in 1995 with the Mexican central bank during the peso crisis.) The swap enabled the European Central Bank to obtain newly created dollars from the Fed, which it could then lend to European banks that needed emergency funds for dollar-denominated positions. The idea was to save the ECB from having to buy dollars in the currency market, which could have destabilized exchange rates.
Meanwhile, back in Zurich, Greenspan and the president of the New York Fed, William McDonough, also in Switzerland, were trying to get home. Ferguson had called the White House in a bid to see how the two men could be returned to the United States. The Bush administration was one step ahead of him. It was already preparing a military plane. Early that evening, Greenspan and McDonough boarded a U.S. Air Force jet in Zurich and began a transatlantic flight to Washington. Greenspan was back at the Fed by Wednesday afternoon. McDonough, for his part, returned to New York and the Fed offices at 33 Liberty Street, just blocks from the World Trade Center, a short time later. He hitched a ride on a military plane carrying Senators Hillary Rodham Clinton and Chuck Schumer and a multi-starred general.
By close of business Wednesday, the New York Fed had already moved some of its open market operations to a contingency site in East Rutherford, N.J., and had announced that the Fed had added $38.25 billion to the banking system through repurchase operations-far above the $2 billion to $6 billion typically injected into the system.
Thursday afternoon, September 13th, at the midtown Manhattan offices of Bear Sterns, a meeting began. Richard Grasso, head of the New York Stock Exchange, McDonough, and a host of market officials and investment bankers were discussing when to reopen the stock market. Some wanted to open as early as the next morning. Others, however, were worried that opening the markets before all the testing was done would make an already bad situation worse if there was any kind of technical glitch. Opening the markets only to shut them again was the worst possible scenario. That said, the group did think it was important to reopen the bond market right away--if for no other reason than to ensure movement of financial transactions.
Friday, September 14th brought all the members of the Federal Open Market Committee together on a conference call for the first time since the attacks. It was clear that the FOMC would need to lower rates. The only question was when. Cutting rates while the markets were closed, some members argued, might not have the effect they wanted. The group decided to postpone the decision. Later that afternoon the Fed quietly called members and told them to prepare for a 7:30 a.m. telephone conference on Monday. The time of the call--before the market opened--told members what was likely to happen. Later that day, in an action that was meant to assure international bankers that liquidity was not going to dry up, the Fed's Board of Governors announced that they had set up a $30 billion swap line with the Bank of England and a $10 billion swap line with the Bank of Canada. Closer to home, the Fed announced that its open market operations, providing liquidity to banks and investment dealers, had lent an unprecedented $70.2 billion. On Friday, the Fed did $81.25 billion in overnight operations. It was a new record.
Over the weekend senior officials at the Fed worked the phones. They spoke to their counterparts across the globe and it became apparent that a coordinated rate cut wasn't necessary.
The Monday morning telephonic meeting began with a moment of silence for the victims of the attacks. Then each of the FOMC members spoke briefly in turn. It took them only twenty minutes to approve a half-point cut in the Fed funds target rate.
"We wanted to get there before the market opened" a Fed official said. "Two billion shares traded on Monday and it happened without a blip. That's what was supposed to happen. People focused on the big declines; what was amazing was that it worked. The financial system was safe."
Fed officials say it is too early to tell what they learned from the disaster. The Fed and the Government Accounting Office are looking at where the central banking system succeeded and where it could have performed better. A big focus had been on the bank's various contingency sites and how close they ought to be to one another in various disaster scenarios.
There are also many questions swirling about the Bank of New York (BONY) and its troubles in the wake of the attack. Supporters say, technically, the set-up with BONY fit all the criteria planners look for when setting up contingency plans. BONY was on a different electrical grid and its telephones were also on a different grid. In this particular case, however, with most of Lower Manhattan out of commission, even those best laid plans went awry.
Said one Fed official: "If it had been another circumstance and the access to New Jersey had been closed, the Fed would have looked ill prepared. Without the electricity grids at BONY going out, they wouldn't have been subject to so much criticism. As far as lessons learned, it really is too soon to tell."
Dina Temple-Raston is a Producer at CNNfn in New York.
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|Title Annotation:||Federal Reserve, Allan Greenspan, William McDonough, Roger Ferguson|
|Publication:||The International Economy|
|Date:||Nov 1, 2001|
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