The 2007-2009 financial crisis was a systemic collapse – a sudden collapse of asset prices and the failure or near-failure/rescue of almost all large financial institutions. The United States has not witnessed a systemic collapse since the 1930s, and many thought it was impossible for the United States to have such an event, given the apparent advances in risk management that preceded it. However, the collapse occurred and was very large, damaging to the real economy and extremely expensive to resolve. A desire not to let such an event happen again pervades the body politic, indeed is demanded by many. But preventing such an event is neither easy nor costless. Financial crises typically follow large economic booms. While such booms may be characterized as bubbles in retrospect, they are extremely popular while they are occurring. The Federal Reserve has long seen its mission against inflation “to take away the punch bowl just when the party is getting good”; if it now becomes the systemic risk regulator it must be prepared to do the same against rising systemic risk, using tools beyond monetary policy. This is likely to be unpopular unless the ground is extremely well prepared and broadly understood. We return to this threshold problem in more detail below.
Criminal complaint in the matter of United States of America against Quazi Mohammad Rezwanul Ahsan Nafis who is accused of attempting to detonate an explosive device in front of the Federal Reserve Bank of New York on October 16, 2012.
The Federal Reserve Act requires each Reserve Bank to be governed by a nine-member board—three Class A directors elected by member banks to represent their interests, three Class B directors elected by member banks to represent the public, and three Class C directors that are appointed by the Federal Reserve Board to represent the public. The diversity of Reserve Bank boards was limited from 2006 to 2010. For example, in 2006 minorities accounted for 13 of 108 director positions, and in 2010 they accounted for 15 of 108 director positions. Specifically, in 2010 Reserve Bank directors included 78 white men, 15 white women, 12 minority men, and 3 minority women. According to the Federal Reserve Act, Class B and C directors are to be elected with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumer representation.
Federal Reserve Bank of New York (“FRBNY”) is extending to suppliers an invitation to participate in an Sentiment Analysis And Social Media Monitoring Solution RFP bid process. The intent is to establish a fair and equitable partnership with a market leader who will who gather data from various social media outlets and news sources and provide applicable reporting to FRBNY. This Request for Proposal (“RFP”) was created in an effort to support FRBNY’s Social Media Listening Platforms initiative.
On numerous occasions in 2008 and 2009, the Federal Reserve Board invoked emergency authority under the Federal Reserve Act of 1913 to authorize new broad-based programs and financial assistance to individual institutions to stabilize financial markets. Loans outstanding for the emergency programs peaked at more than $1 trillion in late 2008. The Federal Reserve Board directed the Federal Reserve Bank of New York (FRBNY) to implement most of these emergency actions. In a few cases, the Federal Reserve Board authorized a Reserve Bank to lend to a limited liability corporation (LLC) to finance the purchase of assets from a single institution. In 2009 and 2010, FRBNY also executed large-scale purchases of agency mortgage-backed securities to support the housing market. The table below provides an overview of all emergency actions covered by this report. The Reserve Banks’ and LLCs’ financial statements, which include the emergency programs’ accounts and activities, and their related financial reporting internal controls, are audited annually by an independent auditing firm. These independent financial statement audits, as well as other audits and reviews conducted by the Federal Reserve Board, its Inspector General, and the Reserve Banks’ internal audit function, did not report any significant accounting or financial reporting internal control issues concerning the emergency programs.
The rapid growth of the market-based financial system since the mid-1980s changed the nature of financial intermediation in the United States profoundly. Within the market-based financial system, “shadow banks” are particularly important institutions. Shadow banks are financial intermediaries that conduct maturity, credit, and liquidity transformation without access to central bank liquidity or public sector credit guarantees. Examples of shadow banks include finance companies, asset-backed commercial paper (ABCP) conduits, limited-purpose finance companies, structured investment vehicles, credit hedge funds, money market mutual funds, securities lenders, and government-sponsored enterprises. Shadow banks are interconnected along a vertically integrated, long intermediation chain, which intermediates credit through a wide range of securitization and secured funding techniques such as ABCP, asset-backed securities, collateralized debt obligations, and repo. This intermediation chain binds shadow banks into a network, which is the shadow banking system. The shadow banking system rivals the traditional banking system in the intermediation of credit to households and businesses. Over the past decade, the shadow banking system provided sources of inexpensive funding for credit by converting opaque, risky, long-term assets into money-like and seemingly riskless short-term liabilities. Maturity and credit transformation in the shadow banking system thus contributed significantly to asset bubbles in residential and commercial real estate markets prior to the financial crisis.
We have asked to meet with you in order to give you an opportunity to substantially reduce your counterparty exposure to AIG and assist in promoting the long-term viability of the company as an ongoing concern. As evidenced by recent government actions, the viability of AIG is an important policy objective given the firm’s systemic importance. As we are sure you can appreciate, a collapse of AIG over the weekend of September 13th and 14th following so closely after the collapse of Lehman Brothers would have jeopardized the financial system in general, and your financial institution in particular, given your firm’s exposure to AIG at the time. Indeed, notwithstanding unprecedented governmental action, there has been a dramatic increase in AIG’s CDS spreads, which highlights the significant economic costs that would have been bourn by AIG’s counterparties had the government not intervened and the sizable counterparty exposure that your firm continues to retain with AIG. For these reasons, it is clear to us that we have a common objective in ensuring the firm’s long-term viability. With these points in mind, we would propose that you make us a compelling offer to unwind all your outstanding CDS contracts with AIG referencing ABS CDOs in exchange for the purchase of the underlying CDOs (where the assets are available) at a percentage of the notional amount for the CDS. Of course, we are open to other proposals you might have that would lead to a final resolution of this complex portfolio and therefore satisfy our common objectives.
Previously Confidential BlackRock Solutions Maiden Lane III Counterparty Brief from November 5, 2008.
Maiden Lane LLC, Maiden Lane II LLC, Maiden Lane III LLC Balance Sheets from the Federal Reserve Bank of New York as of January 29, 2010.
By itself, the Troubled Asset Relief Program (“TARP”) is a huge program at $700 billion. As discussed in SIGTARP’s April Quarterly Report, the total financial exposure of TARP and TARP-related programs may reach approximately $3 trillion. Although large in its own right, TARP is only a part of the combined efforts of the Federal Government to address the financial crisis.
We have audited the accompanying consolidated statement of financial condition of Maiden Lane LLC (a Special Purpose Vehicle consolidated by the Federal Reserve Bank of New York) and subsidiaries (the “LLC”) as of December 31, 2008, and the related consolidated statements of income and cash flows for the period from March 14, 2008 to December 31, 2008. These financial statements are the responsibility of the LLC’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
This agreement, made as of the 25th day of November, 2008, by and among the Federal Reserve Bank of New York (“FRB-NY”), BlackRock Financial Management, Inc. (the “Manager”) and Maiden Lane III LLC (the “Borrower”), sets forth the terms under which the Manager shall provide investment management services to FRB-NY (the “Agreement”).