continued to harbor
doubts about the condition of the government-sponsored enterprises (GSEs) FannieMae and Freddie Mac, despite the approval by the Congress of open-ended supportfor the two firms.
Notwithstanding these significant concerns, however, there was little to suggest thatmarket participants saw the financial situation as about to take a sharp turn for theworse. For example, although indicators of default risk such as interest rate spreadsand quotes on credit default swaps remained well above historical norms, most suchmeasures had declined from earlier peaks, in some cases by substantial amounts.
And in early September, when the target for the federal funds rate was 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 intensifieddramatically. Despite the steps that had been taken to support Fannie Mae andFreddie Mac, their condition continued to worsen. In early September, the companies'regulator placed both into conservatorship, and the Treasury used its recently enactedauthority to provide the firms with massive financial support.
Shortly thereafter, several additional large U.S. financial firms also came under heavypressure from creditors, counterparties, and customers. The Federal Reserve hasconsistently maintained the view that the disorderly failure of one or more systemicallyimportant institutions in the context of a broader financial crisis could have extremelyadverse consequences for both the financial system and the economy. We havetherefore spared no effort, within our legal authorities and inappropriate 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, and
the 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 lackedFRB: Speech--Bernanke, Reflections on a Year of Crisis--August 21, 2009 Page 1 of 6https://www.federalreserve.gov/newsevents/speech/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 taking
measures to stabilize 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 wereadequate 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, asignificant borrower in the commercial paper market and other public debt markets,and a provider of insurance products to tens of millions of customers, its abruptcollapse likely would have intensified the crisis substantially further, at a time when theU.S. authorities had not yet obtained the
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