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2 percent,investors appeared to see little chance that the federal funds rate would be below 1-3/4 percent six months later. That is, as of this time last year, market participantsevidently believed it improbable that significant additional monetary policy stimuluswould be needed in the United States.Nevertheless, shortly after our last convocation, the financial crisis intensified
dramatically. Despite the steps that had been taken to support Fannie Mae and
Freddie Mac, their condition continued to worsen. In early September, the companies'
regulator placed both into conservatorship, and the Treasury used its recently enacted
authority to provide the firms with massive financial support.
Shortly thereafter, several additional large U.S. financial firms also came under heavy
pressure from creditors, counterparties, and customers. The Federal Reserve has
consistently maintained the view that the disorderly failure of one or more systemicallyimportant institutions in the context of a broader financial crisis could have extremely
adverse consequences for both the financial system and the economy. We havetherefore spared no effort, within our legal authorities and in appropriate cooperationwith other agencies, to avert such a failure. The case of the investment bank LehmanBrothers proved exceptionally difficult, however. Concerted government attempts tofind a buyer for the company or to develop an industry solution proved unavailing, andthe company's available collateral fell well short of the amount needed to secure aFederal Reserve loan of sufficient size to meet its funding needs. As the FederalReserve cannot make an unsecured loan, and as the government as a whole lacked
FRB: Speech--Bernanke, Reflections on a Year of Crisis--August 21, 2009 Page 1 of 6https://www.federalreserve.gov/newsech/bernanke20090821a.htm 08/10/2009appropriate resolution authority or the ability to inject capital, the firm's failure was,unfortunately, unavoidable. The Federal Reserve and the Treasury were compelled tofocus instead on mitigating the fallout from the failure, for example, by takingmeasures tostabilize the triparty repurchase (repo) market.In contrast, in the case of the Insurance company American International Group (AIG),the Federal Reserve judged that the company's financial and business assets were
adequate to secure an $85 billion line of credit, enough to avert its imminent failure.Because AIG was counterparty to many of the world's largest financial firms, a
significant borrower in the commercial paper market and other public debt markets,
and a provider of insurance products to tens of millions of customers, its abrupt
collapse likely would have intensified the crisis substantially further, at a time when the
U.S. authorities had not yet obtained the necessary fiscal resources to deal with a
massive systemic event.
The failure of Lehman Brothers and the near-failure of AIG were dramatic but hardly
isolated events. Many prominent firms struggled to survive as confidence plummeted.
The investment bank Merrill Lynch, under pressure in the wake of Lehman's failure,
agreed to be acquired by Bank of America; the major thrift institution Washington
Mutual was resolved by the Federal Deposit Insurance Corporation (FDIC) in an
assisted transaction; and the large commercial bank Wachovia, after experiencing
severe liquidity outflows, agreed to be sold. The two largest remaining free-standi