implicit approval from the united states? >> will again - he went to the point about assistance that might be provided by the united states and the importance of ensuring as best we can get that assistance reaches its intended recipients when it comes to humanitarian assistance obviously that means the syrian people who are suffering greatly because of the ratios for somebody. he also taught about the president's interest in a peaceful transition. can you try to clarify what does

the president envisioned for the future of a solid if he were in the peaceful transition is it inevitable that he would be held accountable for the crimes that you have described or is it possible his going to a state that? >> i think we are focused on bringing about that transition. we are not focused on the decisions with the syrian people would have to make and the international community would have to make for the plan for the failure to abide by having the united nations observers who can account for the object of the account for the actions of the regime. i'm not going to prejudge now where that leads the point about

the peaceful transition is made in contrast to the full out so forth. it is not obviously a desirable outcome, and that is what could be the outcome here if there is not further unification in the international community and further efforts taken to pressure and isolate the regime. is there an incentive of the world can be often that would allow? >> again, i don't have any insight to provide to you about the discussions that were under way on the next steps. what needs to happen is a political transition that serves the interests of the syrian people. how that comes about is not entirely the united states they are working with our partners to

do everything we can to help make it happen. >> they missed the deadline for doing back in to the legal paperwork by one day he's in danger. was there any discussion here the white house whether it be appropriate for the president to ask immigration to pay special -- >> i'm learning the story from use we have to take a question. i haven't heard it discussed the question i think is best directed towards the dhs and the icy immigration and customs. >> the president for a long time has had those for making to

under $50,000. nancy pelosi has come by with other suggestion setting the number of 1 million. a way to move across to estimate will the president's position has been clear for years as you rightly stated. and we need to end tax breaks for the wealthiest americans and make them permanent for every family bringing in less than to hundred $50,000 a year. ..

>> we are continuing to work with leaders in congress on how best to move forward to ensure that we not only protect middle-class families but also how we achieve that balance plan to reduce the deficit and avoid be sequestered, to use washington lingo. i apologize to anyone out there watching, but you know what i'm talking about and these are obviously ongoing discussions. our position is clear and it has been clear for a very long time. >> so he's not rejecting it out of hand? >> again we are working with leaders in congress and continue to have discussions on that. i think the question that needs to be asked is of republicans who at every turn have refused to take sensible action to protect middle-class, to ensure that they receive further tax relief unless the wealthiest americans who have enjoyed substantial benefits over the

last decade get additional tax cuts or have those tax cuts extended. that is simply unaffordable and does not represent the kind of balanced approach that we need to take with the fiscal challenges. >> on the call last night the leaders. >> i don't have any specifics for the conversation beyond what i have said and beyond what the paper readout we gave out last night that. >> and you can tell us when the call was scheduled? >> it was a follow up on discussions that were held obviously at the g8. i don't have a specific date for when it was penciled in on people's calendars. >> on syria come you said early in the briefing that iran was playing a malignant role in syria. can you elaborate more on what role the u.s. sees iran has been

playing? >> i think iran has been transparent. they have admitted involvement in the syrian crisis by sending troops to syria. that fact further highlights iran's continued effort to expand its nefarious influence in the region and underscores iran's theory of syria without the assad regime. assad's hardener ship with iran is a direct offense to the syrian people, their revolution and arabs across the middle east and north africa. we are also focused on preventing iran from continuing to financially, materially and logistically support the syrian regime. again they have not attended otherwise and i think the fact that it is iran that is coming to assad's aid here is only further evidence of how isolated and beyond the pale assad and his behavior have become.

>> tomorrow night the president will be in chicago. a couple of questions about that. usually when the president has finished his final event on the road he'll fly back even if it's late at night. he's staying overnight a thing. can you confirm whether he's going to stay at his own house and also characterize if he needs to be there this saturday morning for some reason or whether he also has a feeling that eating at home gives him a little break drum washington and can refresh and? >> i can tell you the president always enjoys returning to chicago, returning to illinois. i can give you details about where he is staying but i can assure you that he will enjoy being in chicago. >> do you know if he plans to visit the campaign headquarters or anything like that at this time? >> i don't have any scheduling updates for you on that. >> i want to ask you about two topics. first of all i want to follow up on the doma ruling from today. the president campaigned on the repeal of doma.

he has endorsed legislation to meet that goal. >> well said. is the administration holding a vote against that statute? >> i haven't heard that. the president's position is clear. the actions taken as a result of that position are clear. participation of the department of justice and the specific litigation is clear but i don't have anything for you on that proposal, which i have not heard. >> the other thing i want to ask you about is there was a vote yesterday among exxonmobil shareholders to include lgbt nondiscrimination protections for its more than 80,000 workers that work at the corporation. their shareholders voted down the proposal but it's still possible for the board to accept it without shareholders. when you talked about the

executive order not happening at the time, you said that the administration was committed to directly engaging with and educating all sectors of the business community from major corporations to contractors to small businesses and raising public awareness about the human and financial cost to discrimination the workforce. following up with these words will the administration call on exxonmobil to adopt that nondiscrimination policy? >> that is certainly our position and what i said in april holds true today. i don't have anything specific for you on this case and this vote, which just took place. but broadly yes, that's our position. >> has the administration communicated at all with exxonmobil? >> i can tell you broadly those kinds of conversations have been had. our position and the views on this are well-known. that's why the president supports a legislative solution to the discrimination in those conversations will continue. i just don't have anything to

report to you on specific number stations with specific companies or business leaders. >> in the past decade and exxonmobil has taken more than $1 billion in federal contracts. in the wake of this vote will be the administration revisit the idea of issuing that executive order barring federal contractors from taking money if they don't have any nondiscrimination policies based on sexual orientation and gender identity? >> we don't expect that an eeo of that nature will be issued at this time. we are working as i have set in the past with congress. we support legislation that has been introduced and we will continue to work to build support for. we believe a legislative avenue here is the right avenue to pursue at this time. >> how can a legislative avenue be right at this time when republicans control congress? >> because it's the right thing to do. >> just following up on your comments on iran. is one of the reasons why the administration is worried of arming factions in syria that it

is concerned about the possibility of starting a direct proxy war with iran, given the fact that you're saying it's helping to arm the syrian government? >> i wouldn't tease about that far. i think that we don't believe that further militarization of the situation in syria is the right course to take. that is our position. we believe we need to act while the window is still open to bring about a political transition before we have a situation in syria that dissolves into a sectarian civil war or a proxy war. as i think i mentioned earlier, there is obviously an issue with the need to evaluate and assess it and learn more about all the elements of the opposition. we believe that those who support al qaeda or al qaeda in iraq and other elements are

fringe elements of the opposition, that the broad opposition aspires to meet the democratic desires of the syrian people. but all of these things are considerations that we evaluate all the time as we review our position on syria. >> given that the u.s. and iran are clearly on opposite sides of the dispute is there any concern that what happens in syria could prejudice the chances of the agreement on the other big issue, the nuclear question? >> they are both very big issues and in each case, specifically with regards to the nuclear ambitions of the iranian regime, they are specifically the problem. there need to comply with their international obligations is the demand of the international community and specifically the the members of the p5+1.

their behavior and involvement in the syrian crisis is another example of the kind of -- is another indication of why the international community does not trust the iranian regime to keep his word. it is why we insist our negotiations with them over there nuclear program, that we will judge them by their actions, not by their promises. >> jay, where in the white house is the portrait going to hang? and as the president -- has he seen it? and does he think it reveals any particular quality about president bush? >> i will let the president discuss this. i think there will be an open precedent for the the unveiling and you will see i believe where it's going to hang. we are providing back an documentation on the history of these portraits and the tradition of hanging them and where they hang and where they

move around the house. i don't know the answer to the question of whether or not he has seen the portraits. i suspect by now he has and my guess is he saw them before the rest of us. but i can't guarantee it as i have not asked him about it. >> again, there is a process that will follow tradition i think. thank you all. [inaudible] 1xhhhhhhhh

>> i believe in every book i write, that is the first law that i have, go to green bay to find out what it's like in the winter when vince lombardi is coaching and go live in hope arkansas and experience with bill clinton. i've never been to vietnam before. how can i write about it without going to the battlefield? i had to go.

>> it earlier this year federal reserve chairman ben bernanke's taught a series of classes at george washington university school of business. next the 30th is for lectures in which he talks about the role of the federal reserve and the 2008 financial crisis. earlier in his professional career chairman bernanke held teaching positions at stanford's graduate school of business new york university and princeton university. this is an hour and 15 minutes. >> i would like to welcome everybody to the third lecture from chairman ben bernanke of the federal reserve. and the first two lectures we heard history and we heard from the post-war period obviously to

2008 in those were great lectures. they were interesting lectures and great foundational lectures but i know everyone four years ago was watching the television to see what he was going to do next. said today you will hear about what he did next. so i think this is particularly interesting out of all the foundations youth gives in us today and i welcomed chairman ben bernanke to talk to us about the 2008 financial crisis. chairman bernanke. [applause] >> hello and welcome back. perhaps before -- we want to talk up of the federal reserve's response the financial crisis. in the last couple of lectures i mentioned a key theme of the lecture which is the two main responsibilities of central banks, financial stability and economic stability. let me turn it around just a bit and talk about the two main

tools for financial stability, the main tool is central banks is providing short-term liquidity to financial institutions or placing lost funding of central banks as they have for now a number of centuries can help calm the financial panic. or economic stability the principle tool is monetary policy and of course in normal times that involves adjusting the level of short-term interest rates. now today i'm going to be focusing primarily on the intense phase of the financial crisis in 2008 and 2009 so i'll be focusing primarily on the function of the central bank percori will come back to monetary policy in the final lecture when i talk about the aftermath of recovery. now, this is a repeat from last time. i talked about some of the vulnerabilities in the financial system that transformed the decline in housing prices, which by itself seemed no more

threatening than the decline in the dotcom maxed up prices but because of these vulnerabilities that decline in housing prices led to obviously a very severe crisis. the vulnerabilities i talked about last time were private-sector vulnerabilities, including the excessive debt taken on, perhaps because of the period of great moderation and very importantly the banks ability to monitor their own risks, excessive reliance on short-term funding which as a bank in the 19th century would tell you, makes it vulnerable to a run in short-term funding is pulled away and increased use of exotic financial and germans like credit default swaps another say concentrated risk in particular companies in particular markets. so that was the private sector. the public sector had its own vulnerabilities including gaps in the regulatory structure and markets that did not have adequate oversight where there was adequate oversight,

sometimes the supervisors and regulators didn't do a good enough job. for example there wasn't enough attention paid to enforcing banks to do a better job of monitoring and managing their risks. and finally, an important gap that we have really looked at since the crisis is that with individual agencies looking at different parts of the system, there was not enough attention being paid to the stability of the financial system as a whole. let me talk just a moment more about another important public sector vulnerability and these were the so-called government sponsored enterprises fannie mae and freddie mac. fannie mae and freddie mac are nominally private corporations and they have a shareholders and abort but they were established by congress in support of the housing industry and they are known as government-sponsored enterprises. fannie and freddie as they are

called, don't make mortgages. you can't go to fannie's headquarters and get a mortgage. what they do instead is they are the middleman so to speak between the originator of the mortgage and the ultimate holder of the mortgage. so if you are bank and you make a mortgage loan if you like, you can take the mortgage you made and you can sell it to fannie or freddie. they will in turn take all the mortgages they collect, put them together into mortgage-backed securities called mbs so mortgage-backed securities and security which is a combination of hundreds of thousands of other like mortgages and then sell that to the investors. that is a process called securitization and fannie and freddie pioneered this bake is -- basic approach for orchids. particular the gse of fannie and freddie, when they sell their mortgage-backed securities, they provide the guarantees against credit loss so if mortgages go

bad, fannie and freddie make the investor whole. now, fannie and freddie were permitted to operate with inadequate capital. so in particular they were at risk in a bad situation when there were a lot of mortgage losses and they didn't have enough capital to make good those guarantees they had promised and while many aspects of the financial crisis were not well anticipated this was one and going back at least a decade before the crisis, many other people and the fed said that fannie and freddie just didn't have enough capital and that they were in fact a danger to the stability of the financial system. what made the situation even somewhat worse was that fannie and freddie besides selling these mortgage-backed securities to investors, they also purchased out of their own account large amounts of mortgage-backed securities, both their own and some that were issued by the private sector. so, they made profits from

holding those mortgages but again, that created an additional expense of those mortgages were not insured or protected. they were vulnerable to losses and again that amount of capital, they were at risk. now, an important trigger and i will come back to all these issues but an important trigger i talked about last time and will say a little bit more about it, again it wasn't just a house price boom and bust but the mortgage products and practices that went along with the house crisis that was particularly damaging. there were a lot of exotic mortgages by which i mean sort of nonstandard, standard mortgages, thirty-year prime, fixed-rate mortgage. there were all different other kinds of mortgages being offered and often to people with weaker credit. now, one feature that many of these mortgages had was that in order for them to be repaid, you had to have ongoing increases in housing prices. so for example you might be a

mortgage borrower who would buy an adjustable-rate mortgage, an arm, where the initial interest rate with say 1%, which meant that you can afford the payment for the first year or two. now, after two years the mortgage may go up to 3% in after four years, 5% and then higher and higher so in order to avoid that, you had to at some point refinance to a more standard mortgage and as long as house prices were going up, creating equity for homeowners than it was possible to do that refinancing but once home prices stop rising and by 2006 they were already declining quite sharply, are a worse for finding themselves, rather than having building equity they found themselves underwater and couldn't refinance and found themselves stuck with these increasing payments on their mortgages. here are some examples of bad mortgage practices and i won't go for all of them. but they all have the

characteristic say for example the second one, an option a.r.m.. that is an adjustable-rate mortgage in the option is to borrow ferrying in how much they pay. they can take less than the full amount and what they didn't pay got rolled back into the mortgage so most of these mortgages had the feature that they reduced monthly payments at least early in the mortgage but a lot of mortgage payments to rise over time. the other aspect of bad mortgage practices like no-doc loans for example was that there was very little underwriting and very little analysis to make sure that the borrower was creditworthy and able to make the payments on their mortgage. here is some advertisements from the period that illustrate some of the issues. i like the one on the right. we took the name of the company off. but let's look at the features that they are offering here. 1% low start rate.

start rate is what you pay the firstrade and we don't tell you about the next year. stated income. that mean to tell us what your income is simply write it down and that is all the checking we do. not documentation. that is evident. 100% finance, no down payment in other words. interest only loans which means you pay the interest that you don't have to pay any principle back and debt consolidation. this was an interesting thing that manteiga go to the mortgage company and say not only do i want to borrow money to buy the house but i want to add in my credit card debt and everything else for alan put that into one did mortgage payment and i will pay for that with a 1% start rate. you can see there are were obviously some very problematic practices here. so now the mortgage companies, the banks in the savings and loans and a variety of other institutions made these mortgages but where did they go? how were they financed? now some of them are kept on the balance sheet of of the mortgage originator but many or most of

these exotic or sub-prime mortgages were packaged in securities and sold off to the market. so, for example, some of the securities were relatively simple. is the mortgages were sold to fannie and freddie and they had to meet the underwriting standards, fannie and freddie would combine them into mortgage-backed securities and sell them with a guarantee and those were relatively simple securities made up of basically just hundreds of thousands of underlying mortgages. some of the securities that were created were very complex and very hard to understand. an example would be a collateralized debt obligation or a cdo. the security that combined mortgages and other kinds of, types of debt together in one package and it could be sliced in different ways so that he would sell to one investor the most safe part of security and to another investor the most risk part said they were very

complicated and took a lot of analysis. now one reason that many investors were willing to buy the securities were because they had the comfort of the rating agencies, whose job it is to rate the quality of bonds and other securities in the aaa rating securities essentially saying that they are very very safe and therefore you don't have to worry about credit risks of these securities. so again many of the securities were sold to investors including pension funds, insurance companies, foreign banks, even in some cases wealthy individuals but also the financial institutions that bad either made these loans are created the securities often retain some of them as well. for example sometimes they were created by an off-balance-sheet vehicle which would hold the securities to finance themselves by cheap short-term funding by commercial banking.

some of the securities were investors in some of them stayed with the financial institutions themselves. in addition we have companies like aig that were selling insurance. they were using various kinds of credit derivatives and that basically would say well, we have a premium and if they mortgage-backed securities go bad we will make you good, we will make you whole and get his is aaa-rated. of course, these practices made the underlying security feel better and what they basically did was they created a situation where risks could be spread throughout the system. so here is a little bit of a diagram showing how sub-prime mortgage securitization might work. on the left were the box is low-quality mortgages you might have a mortgage company or a thrift company make in the loans. a thrift company or the mortgage

company doesn't care too much about the quality of the loan because they are going to sell it anyway. so they take those mortgages and they sell them to large financial firms, who take those mortgages and maybe other securities as well, combine them into a security which is essentially an amalgamation of all the underlying mortgages and other securities. now the financial friend at created the security might negotiate with the credit rating agency to say what do we have to do to get a aaa rating? there would be negotiations and discussions and in the in the security would be rated aaa. the financial firm would then take the security and cut it up in different ways or sell it as it is, sell it to investors like pension funds or other type of investors but in addition, again financial firms kept many of the securities on their own books or in related investments vehicles. finally, you had over here on

the right, you have credit insurers like aig and other mortgage insurance companies that for a fee provided insurance in case the underlying mortgages went bad. so this is the basic structure and in actuality, i've seen some diagrams of a complete flowchart and they are incredibly complex. this is a very simplified version but the basic idea is here. okay now remember what is a crisis? a crisis or a financial panic occurs when you have any kind of financial institution, think of a bank, which has illiquid assets like long-term loans for example but liquid short-term liabilities. in a classic bank panic if bank depositors lose faith in the quality of the assets held by the bank they pull out their money. the bank can't pay off everybody

because it can't change their loans fast enough and so the they run on the bank is self repealing. the bank will fail or it will have to dump its long-term assets in the market. so that is what a panic basically is in the context of a banking system. about the crisis of 2008 in 2009 was basically a classic panic but it's different institutional setting. not in a bank setting but the broader financial setting. in particular as house prices fell in 2006 in 2007 for the reasons i described, house prices falling and people who borrow on a sub-prime mortgage were not able to make the payments and was increasingly evident that more and more would be delinquent or in default. that would impose losses on the financial firms, the investment vehicles they created and also credit insurers like aig.

unfortunately the securities were so complex and the monitoring of the financial firms and their own risk was not sufficiently strong that there -- it wasn't just the loss and i think a very striking fact is that if you took all the sub-prime mortgages in the united states and put them all together and assumed they were all worthless, the total losses to the financials system would emphasize the stock market. the problem was that they were distributed throughout different securities in different places and nobody really knew where they were and who would bear the losses. so there was a lot of uncertainty created in the financial markets. and as a result, wherever you had short-term funding weather was commercial paper or other types of funding, we had all kinds of funding that was not deposit to ensure. it with so-called wholesale funding that came from investors and other financial firms.

whenever there was a doubt about a firm, just like in the standard bank run, the investors, the lenders, the counterparties would pull back their money quickly because the same reason depositors would pull their money out of of the bank if they thought it was to be having trouble. so there were whole series of runs which generated huge pressures on these financial firms and were forced to sell their assets quickly and many important financial markets were disrupted. now in the depression in the 30s, there were thousands of bank failures, but almost all of the banks that failed in the 30s at least in the united states were small banks. and there were some larger banks that failed in europe. the difference in 2008 was there were many small banks that failed in the intimate but they were there were also intense pressures on quite a few of the largest financial institutions in the united states.

and the next two pages are shortlisted short list of some of the firms they came under intense pressure. bear stearns which is a broke her dealer came under intense pressure in the short-term funding markets in march of 2008. it was sold to jpmorgan with fed assistance in march. things calmed down a bit after that and over the summer if there were some hope that the financial crisis would moderate than in the late summer things really began to pick up. september 7, 2008 fannie and freddie were insolvent. they didn't have enough capital to pay the losses on their mortgage guarantees. the federal reserve works with fannie and freddie's regulator and with the treasury to determine the size of the shortfall and over the weekend, the treasury with the feds came in and took those firms and put them in to a limited bankruptcy

called conservatorship and at the same time the treasury got authorization from congress to guarantee all of the fannie and freddie obligations. so if you held a fannie and freddie mortgage-backed security the company itself was in partial bankruptcy but the u.s. government now guaranteed it so that protected those investors. that had to be done or else there would have been an enormous intensification of the crisis because investors all over the world held literally hundreds of millions of those securities. famously the middle of september lehman brothers a broke her dealer, and i will talk more about this in a the study coming up, had severe losses and came under great pressure. they couldn't find either anybody to buy it or provide capital for it so september 15 it filed for bankruptcy. on the same day merrill lynch and another big roker dealer was acquired by bank of america.

again, in basically saving this term from potential collapse. on september 16, the next day, aig, the largest multi-dimensional insurance company in the world, had which remember had been selling the credit insurance, came under enormous attack from the people demanding cash either through margin requirements or short-term funding. the fed provided emergency liquidity assistance for aig and prevented the firm from failing and again i will come back to this as well. washington mutual is one of the biggest threat companies, a big provider of sub-prime mortgages which was closed by close by regulators and later in september after parts of the company where taken off jpmorgan acquired this company as well. october 3, wachovia one of the five biggest banks in the united

states, came under serious pressure. it was acquired by wells fargo, another mark -- large mortgage provider. this gives you some sense. all these firms i'm talking about were among the top 10 or 15 financial firms in the united states in a similar thing happened in europe so this was not a situation where only small banks were affected. that was a problem too of course but here we have the biggest largest most complex international financial institutions at the brink of failure. now, the lessons from the great depression going back, first remember the fed did not do enough to stabilize the banking system in the 1930s of a lesson there is in the financial panic, the central bank had to lend freely according to bagehot's rules to hault runs and try to stabilize the financial system. and a second the second lesson of the great depression the fed did not do enough to prevent

inflation and the contraction of the money supplies of the second lesson of the great depression is you need to have accommodated monetary policy to help the economy avoid the depression. so, in heeding those lessons the federal reserve and the federal government to take vigorous action to stop the financial panic and worked with other agencies and worked internationally with foreign central banks and governments. one aspect of the crisis that i think maybe doesn't get quite enough attention is the fact that this really was first of all a global crisis, in particular europe as well as the u.s. was suffering very severely from the crisis. but it was also a very impressive example of international cooperation and one particular date that i singled out here is october 10, 2008 and if that happened on that day there was a previously scheduled meeting of the g7

industrial countries that took place here in washington. the g7 are the seven largest industrial countries and the central bank and finance ministries of those seven countries came in at in washington. now, i will tell you a deep dark secret which these high-profile international meetings are usually a tariff aalborg because much of the work is done in advance by the staff and we have a discussion but it's a communiqué written by the staff and simply fairly routine in most cases. this was not one of those boring meetings. we essentially tore up the agenda and we sat down and we talked about what are we going to do, how are we going to work together to stop this crisis which was threatening the global financial system? and it may and we came up with a statement that was written from scratch that said, a proposal

and was circulated. there were a number of principles and statements involved in that but among those were first that we were going to work together to prevent the failure of any more systemically important financial institutions after-the-fact that lehman brothers had failed and we would make sure banks and financial institutions had access to funding for central banks and capital for governance. we were going to work to restore investor confidence and then we were going to cooperate as much as possible to normalize credit markets. so this was a global agreement and subsequent to this agreement is just in the following week the u.k. was the first to announce a comprehensive program stabilizing the banking system. the u.s. has announced major steps to put capital into our banks and so on so a lot of really happened in just the next couple of days after this meeting. now just to show you that this

worked, this shows you, this graph shows you the interest rate charged on loans between banks. this is the interbank interest rate so this is the interest rate that was charge. normally the interest, the overnight interest rate between banks is extremely low. weigh less than 1%. because banks they need someplace to park their money overnight and i have a lot of confidence. as you can see starting in 2007, banks lost confidence in each other and that showed that the increase in the rates they charge to make loans. so for example, in 2007, we began to see the pressures as house prices began to fall and there were decreasing concerns about the quality of the mortgage securities and the quality of the firms. in march of 2008 you can see

another little piece there which is around bear stearns and it doesn't look like much in comparison but that was a pretty tough period. it was a period of quite sharp movements in the financial markets and funding markets. now look what happened at their stearns. it was an enormous spike in the interbank markets rates and probably not much lending is taking place even at those high rates. but this was indicative of is suddenly there was no trust whatsoever it between the largest financial institutions because nobody knew who was going to be next and who is going to fail and who is going to come under funding pressure. and look what happened after the international announcements. within a few days he began to see a reduction in the pressure and by the end of the year, early january there was an enormous improvement in the funding pressures of the banking system. this i think it's a great

example of international cooperation and illustrates the point that this was not just a u.s. phenomenon and just u.s. policy. it really was a global cooperative effort strictly between the united states and europe. now the fed played an important role however in providing liquidity and making sure that the panic was controlled. we just talked briefly about this in general and i will do to studies that will illustrate some of the issues. now the federal reserve has a facility called the discount window, which uses routinely to provide short-term funding to banks. may be a bank that a shorter funding at the end of the day and wants to borrow overnight, it has collateral with the fed and based on that collateral they can borrow overnight at a discount rate which is the interest rate the fed charges of the discount window which allows the fed to lend to banks is

always there. notes jordan ari steps were needed to lend to the banks. the fed would always lend to the banks. we did make modifications in order to reassure banks about the availability of credit and to get more liquidity into the system, we extended the maturity of the discount window loans which were normally overnight loans. we made them longer-term and we have auctions of discount window funds where firms would bid on how much they could pay and the idea was having a fixed amount we were auctioning we would ensure celtic have a lot of cash into the system. anyway the point here is that the discount window which is the fed's usual lender of last resort facility lending to banks will use it aggressively to make sure that the banks had access to cash to try to -- but our financial system is a lot more complicated than the one that existed when the fed

was created in 1913 and many other different kinds of financial institutions and markets now and as i said, the crisis was like an old-time bank crisis but it was all different kinds of firms and institutional contexts of the fed had to go beyond the discount window. we had to create a whole bunch of other programs especially for liquidity and credit facilities that allowed us to make loans to other kinds of financial institutions again on the badgered principle that writing liquidity to firms that are suffering from loss of funding is the best way to calm a penny. all these loans were secured by collateral and we weren't taking chances with taxpayer money and i will talk about that when we come back, but the cash was going to the banks and more broadly into the system. again the purpose of this was to enhance the stability of the

financial system and get credit flows moving again. and just to emphasize this is the traditional lender of last resort function. central banks have been around for hundreds of years. what was different was that it took place in a different institutional context than the traditional banking context. here are some of the institutions and markets that we addressed through our special programs. thanks of course were covered by the discount window but a notch or -- another class of institutions broker-dealers which are financial firms with churches were also facing serious problems that included bear stearns and lehman brothers, merrill lynch, goldman sachs, morgan stanley and others, and we provided short-term lending to those firms on a collateralized basis as well. as i will talk about commercial paper borrowers received

assistance in money market funds. i will come back and i will do a case study of those two. and finally the asset-backed securities market. in the modern economy, the modern financial system a lot of the funding you get for not just mortgages that auto loans and credit cards and consumer credit are funded through the securitization process. that is, a bank might take all of its credit card receivables, bundle them together to security and sell them in the market to investors, much the same way that mortgages were sold and that is called the asset-backed securities market. the asset-backed securities market pretty much dried up during the crisis and the fed created a new liquidity program to help get it started again which they really were successful in doing. now i should mention that while the banks lending through the discount window was totally standard lending through the normal discount window these other types of lending required

us to invoke emergency authorities. there is a clause in the federal reserve act called 13.3 which says that under unusual and accident circumstances basically an emergency the fed can lend to other types of entities other than just banks. and this authority had not been used by the fed since the 1930s but in this particular case with all these other problems emerging in different institutions and different in different markets, we invoked this authority and used it to help stabilize a variety of different markets. so let me give you just a little bit of a case study here that will help you understand you know what we did and how it helped the economy. so i want to talk a little bit about money market funds. money market funds are basically investment funds in which you can buy shares, and the money market funds take your money and

invested in short-term liquid assets. money market funds historically are almost always maintained at 1 dollar per share price so they are very much like the banks actually. they are used frequently by institutional and testers like pension funds. so they pension fund of $30 million in cash probably would not put that into a bank because that much money is not sure and there's a limit to what the federal deposit federal deposit insurance would cover. they would put the money into a money market fund which promises 1 dollar for each dollar put in plus a little bit of interest on top and invest in short-term safe liquid type assets, so it is a pretty good way to manage your cash if you are and institutional investor. this diagram shows investors putting their money into money market funds.

now as i said money market shares are not insured. they did not have deposit insurance, but the investors who put their money into a money market fund can take their money out at anytime, dollar for dollar so they are treated like a bank account basically. the money market funds in turn have to invest in something and they tend to invest and save short-term assets like commercial paper. commercial paper is a short-term debt instruments issued typically by corporations. short-term and that it is 90 days or less typically. and nonfinancial corporation might issue a commercial paper to allow to manage its cash flows. it might need short-term money to meet its payroll over to cover its inventories, so ordinary manufacturing companies like gm or caterpillar would issue commercial paper to give

cash to manage their daily operations. financial corporations including banks would also issue commercial paper to get funds that they can then use to manage their liquidity positions and make use, again to make loans to the private economy. so here is the picture a little bit more completely and you see the investor, investing their excess cash and in a money market fund. the money market fund buys commercial paper which is basically a funding source for both nonfinancial businesses like manufactures and for financial companies who landed on to other borrowers. okay so now what happened to this very nice arrangement? well, lehman brothers created a huge shockwave and as i will describe lehman brothers was an investment bank.

it was a global financial services firm. it was not a bank so it was not overseen by the fed. it was an investment company. et al. buset securities. it did lot of business in the securities market. he they could not take deposits, not being a bank. instead of funded itself in short-term funding markets including the commercial paper market. lima invested heavily in mortgage related securities and also commercial real estate during the 2000. now as we know as house prices fell and delinquency some mortgages rose, lehman's financial position got worse and there were also losing lots of money in commercial real estate suleyman was becoming insolvent. it was losing money and all of its investments and it was coming under a lot of pressure. and indeed as lehman's creditors lost confidence they started withdrawing funding from lehman.

for example, investors refuse to roll over lehman's commercial paper and other business partners said we are not going to do business with you anymore because we are afraid you're not going to be here next week. so lehman was increasingly losing money and increasingly finding itself unable to fund itself. it tried with federal reserve and treasury help to either find somebody willing to put more capital into the firm or to acquire the firm and was unable to do that. so on september 15 as i mentioned, they filed for bankruptcy. this was an enormous shock that affected the whole global financial system. now in particular, one of the many implications of the failure of lehman brothers was in the money market funds. there was one particular fairly large money market fund that held among other assets commercial paper issued by lehman and work me in -- lehmann failed that commercial paper was

either worthless or illiquid for a long time so suddenly this money market fund could no longer pay off its depositors at 1 dollar per share and it lost money. now, suppose you are an investor in a money market fund and you know if you go there and ask for your dollar back you can get it but you also know that they don't have enough money there to pay everybody off 1 dollar. what are you going to do? the same thing that a 19th century bank deposit would do if they learned their bank had lost money. so investors in other money market funds began to pull out their money just like the standard bank run. i will show you the data on this in just a second that we had a very intense bank run or in this case money market fund run in which investors in these funds began to pull out the money as quickly as they could. now the fed in the treasury responded very quickly to the situation.

the treasure provided a contemporary guarantee with said that we guarantee you will get your money back. just don't pull it out right now. and the fed created a backstop liquidity program under which we lent money to banks in return using that money to buy some of the assets of the money market funds and gave the money market funds the quiddity they needed to pay off their depositors and helps to calm the panic. and just to show you the sensible was happening here, this is the money outflows from the money market funds. this is a 2 trillion-dollar industry. this is daily data so you see the lehman bankruptcy a couple of days later. you see the money market funds breaking the buck which meant it was unable to pay its investors a dollar per share. following that announcement you can see for about two days there, about $100 billion a day

was flowing out of these funds. within two days the treasury announced the guarantee program. the fed came in to support the liquidity of these funds and as you can see the run ended pretty quickly. so, that is a classic bank run and classic response, providing liquidity to help the institution being run provide the cash to its investors, providing the guarantees and that successfully ending the run. but that wasn't the end of the story because remember the money market funds were also holding commercial paper and as they began to face runs, they in turn began to dump commercial papers when they could and as a result, commercial paper market went into shock. this is a really nice example of how financial crises can spread

in all different directions so we had lehman failing. that in turn caused money market funds to experience a run and in turn led to his shock in the commercial paper market so everything is connected to everything else and it is really hard to try to keep the system stable. so, as the money market funds were strengthened in the commercial paper market, there was a sharp increase in rates in the commercial paper market and lenders were unwilling to lend for more than maybe one day to commercial paper borrowers which in turn affected the ability of those companies to function and the ability of those financial institutions to fund themselves. once again the federal reserve responding in a way that bagehot would have had would have had them respond as dabblers to special programs. basically wasted as backstop blenders and said make your bones to these companies and we will be here ready to backstop

you if there is a problem rolling over these funds and that restored confidence in the commercial paper market. this is commercial paper rates. again and once again you can see the panic from him anon, a sharp sharp increase in rates, which really understates the pressure because it also includes the fact that for many companies there was no price to get funding or if they got funding it was only for overnight or very short-term periods. the fed's actions restored confidence in that market and we see the response, the rates came back down in the beginning of 2009. one other type of that pivot he which is the last thing i want to cover, so a lot of what i've

been talking about is probably stuff you didn't hear too much about when you are reading the papers. working with these critical markets and providing broad-based liquidity to financial institutions to try to bring the panic under control. ..

we were consistent with of the proposition we should be making loans that are to be paid back and we felt that we were well secured making the loans we did. in the second example, in october, 2008 as i am sure you know, aig was close to failure and this was the largest insurance company, among the largest in the world. let me just talk a bit about that case. aig as a complicated company. on one hand was a multi service company with many constituent parts including a number of insurance companies, global insurance companies, but it had a part of the company which was called a ing financial products involved and all kinds of exotic derivatives financially

activities including housing mentioned before the loans, sorry, the credit insurance that it was selling to the owners of the mortgage-backed securities. so, when the mortgage backed securities stood combat it became evident that aig was in big trouble. in its counterparties began demanding cash or refusing to fund aig and was coming under tremendous pressure. the failure of aig in our estimation would have been basically to end. it was interacting with so many different firms, it was so interconnected with both of the u.s. and the european financial system, global banks. we were quite concerned that if it went bankrupt we would not be able to control the crisis any further. now, fortunately from the perspective of the lender of last resort, aig has taken a lot of losses in its financial products division but

underlining those losses, was the world's largest insurance company so it had lots and lots of perfectly good assets and as a result it had collateral which it could offer to the fed to allow us to make the loan to provide liquidity to stay afloat. to prevent the collapse we used the collateral will and loaned $80 billion to. obviously a fairly serious amount of money how to keep aig afloat and again highly controversial, it was both we thought legitimate in terms of the lender of last resort theory because it was a collateralized loan when foley paid a backhand second, because it was a critical element in the global financial system. overtime has said this did list and repaid the fed with interest to read the treasury still owns

a majority share of its stock but they have been paying back the treasury as well in the process of doing that. now, i'd like to emphasize we had to do is obviously not a recipe for future crisis management. first of all this is a very difficult and in many ways this case will intervention we had to do on the grounds of we needed to do that to prevent the system from collapsing. but clearly it is something fundamentally wrong with a system in which some companies are quote, to big to fail. if the company is so big it knows it is going to get bailed out putting aside the fairness is not tall fair to other companies but even beyond that, obviously they have an incentive to take big risks and heads i

win, tails you lose. we make plenty of money and if they don't pay off the government will save this. that's too big to fail and that is the situation we cannot tolerate so as i will describe next time, the problem when we had in september of 2008 was we really didn't have any legal tools, policy tools that allow us to let lehman brothers and aig and the other firms go bankrupt in a way that would not have incredible damage, create incredible damage on the rest of the system and therefore we chose the lesser of two evils and prevented aig from failing to read that being said, going forward we wanted to be sure that this never happens again and we want to be sure that the system is changed so that if a large system a critical firm like aig comes under this kind of pressure in the future that there will be a way to let it

fail so that it can fail and the consequences of its mistakes can be borne by its management and shareholders and creditors. but in doing so it doesn't bring down the whole financial system and i will talk more next time about the progress we have made collectively in instituting the system that will now have potentially at least in too big to fail. let me say a couple words about the consequences of the crisis. we did stop them all down. we avoided i think the collapse of the global financial system that was obviously a good thing. but to give you a sense one thing i was always sure of and i think the federal reserve was always sure of is that the collapse of the financial sermon to the cover is going to have very serious collateral

consequences. there were people are doing even as late as september, 2008 why don't you set the firm's collapse. the system can take care of it. we have bankruptcy code we don't you let them fail and, you know, we never felt that was a really good option. particularly if the whole system had collapsed we would have had extraordinarily serious consequences and it was even though we prevented the total meltdown there were still obviously as you know very serious collateral impact on not just of the u.s. economy to the global economy as well. so following the crisis even though the crisis was brought under control, the u.s. economy and the global economy went into a sharp recession. the united states gdp fell by more than 5% which is the recession. there's some other statistics 8.5 million people lost their jobs and unemployment rose from 10%, so very consequential

impact. and as i said, this is not just the u.s. situation. but u.s. recession was an average recession there's many countries around the world that have less particular those in dependent on international trade, so it was a global slowdown. and as all of this was happening the, the great depression, the second 1930's depression were very real. so, what nevertheless, the great depression was much worse than the recent recession, and the review is increasingly gaining that without a forceful policy response that stabilized the financial system in 2008 and in nearly 2,009 we could have had a much worse outcome in the economy. a couple indicators to close with a couple here.

this is an interesting draft. this shows the stock market. the blue line starts in august, 1929, which is the peak of the stock market before the great depression. the red line is october 7th pub this graph shows you the evolution checking the depression period in the blue and in the more recent period in the red. the thing which is pretty striking here is that for the first 15 or 16 months, stock prices in the united states believed pretty much in this crisis as it did in 1929, 1930. but about 15 or 16 months into the recent crisis, which would have placed this in early 2009 about the time the financial crisis was stabilizing look what happened in the depression era of the stock prices kept falling

as mentioned in the end the stock prices lost 85% of their value. the united states by contrast to the prices recovered and began a long recovery in the more than double what they were three years ago. this output again, the red is the more recent data and the blue is the depression data. to conceive that the production was not quite as severe or quite as fast as in the depression. but you get the same basic phenomenon. the industrial production bottom out and began a pergola steady recovery whereas for several more years when. it's a very rapid overview of

the crisis of 08 and 09. letcher four will talk about the aftermath. the recession ended monetary policy respond by his the recovery been relatively sluggish. what has happened to the financial regulation to make sure this never happens again and what lessons has the fed taken from this experience. okay. questions. yes? >> [inaudible]

>> there were a couple of reasons. one reason was simply the fact that firms are probably too confident about the increases, house prices are likely to keep rising and the role they are rising these are such bad products because people can afford to pay for a year but then they can refinance to something more stable and this might be a way to get people into housing. but of course the risk was that house prices wouldn't keep rising and the other aspect of this was that they grew very substantially during the spurt of in part because there was a large international demand from europe and from asia and from

high-quality assets and from the ever leveraged u.s. financial firm to take a variety of different kinds of underlining credits wouldn't be subprime mortgages and through the miracles of the financial engineering to we would create from that securities that would be high quality, would be rated aaa in which they could then sell abroad to other investors. unfortunately that sometimes left them with the remaining bad pieces which a cat or sold in some other financial firm. so there were trends in the financial markets and including the overconfidence about the ability to manage those risks. a believe that house prices would probably keep rising. the sense that they could -- even after we made those mortgages they could then sell them off to somebody else and that other person or that another investor would be willing to acquire them for,

quote, seize assets. for all of these other reasons it was actually a very profitable activity while it lasted only when the house prices began to fall did it become a big loser. >> it reminds me of this ruling understand [inaudible] doesn't that seem counterintuitive? >> of the volcker rule was part of the dodd-frank financial

regulatory reform that i will be talking about in more detail on thursday in which the fed and other agencies are tasked with implementing. the purpose of the rule as you said is to reduce the risk of financial institutions by preventing banks and their affiliates from doing both proprietary trading which means short-term trading on their own account. so from taking those kind of risks. now, the law recognizes that and there are legitimate exceptions for why things might want to acquire short-term securities and those include flexible hedging against risks but one in particular one is to make markets, to serve as intermediaries who in order to create liquidity in a particular market and that some could from their rule and one of the challenges of implementing the rule trying to figure out how to set a set of standards that

allows the legitimate activities like market-making and hedging like rolling out the proprietary trading and that's obviously very difficult and we are working on that. we have put out a rule we have thousands of commons we are looking at that trying to figure out how best to do that. but, you know, the point that you raised in the liquid the market is important. during the crisis it was much worse problem than the lack of trading volume. you had big financial institutions unable to find themselves, unable to fund the funding to support their asset positions that they held which left them with one of two possibilities, either defaulting because they didn't have enough funding, or the attack that many of them took which is to start telling of the assets as quickly as possible which spread the

panic because if there's a huge selling market for the commercial real-estate bonds that's going to drive the price down very sharply and then if anybody else is holding the bonds in their financial position being in the road that creates pressure on them, so one of the -- i didn't use the word contagion in my discussion. contagion just in analysts context is the spreading of panic, the spreading of fear. one market to another. and contagion was a major problem in many financial panics but certainly this one and that is one of the mechanisms that lead the funding pressures to jump to create such a broad based product.

[laughter] [inaudible] about the global collaboration. you talk about the g-7 in 2008. as we saw in the multinational corporations began to what pressures came from the international community? do the bailout aig? >> welcome there were not any real pressures. everything was happening too fast. i think in fact, you know, one area where the collaboration was not as good as we would like was exactly dealing with some of these all financial firms. for example, they were problems between the u.k. and the u.s. over the lehman brothers failure and inconsistencies which caused problems for some of the

creditors. so one of the things we are trying to do under the dodd-frank financial reform legislation which includes as i mentioned before includes provisions for safely allowing large financial firms to say all but one of the complexities there is that many of the firm's this would be applied to our multinational firms. two or three countries may be dozens of countries, and so collaboration with other countries and figuring out how we would work together to help a large multinational firm fail as safely as possible is part of what is going on now as we work internationally. we tried during a crisis to cooperate and mostly at hawk way we were in touch with regulations in the u.k. and elsewhere but given the time frame and the lack of preparation, we didn't do as much as we would be able to do with a lot more lead time. so i think that was a weakness

of international collaboration. for the most part though, the countries cooperated in dealing with the financial institutions based in their own country. aig was an american company and we dealt with that whereas the company to be true european company was dealt with by the europeans. also, there was a lot of cooperation between the central bank's. and i may have a chance to say that more about this, but there were a lot of the european banks that used dollars that needed dollar funding. they used dollar funding both because they helped to the assets, they made dollar loans, they made loans to support trade, which is often done in dollars, so they needed dollars. the european central bank can't provide dollars so what we did is what was called a swap or we

gave the european central bank dollars and the euro. they took the dollars and lend them on their own recognizance to the european banks taking off the dollar pressure and easing of the dollar funding pressures around the world. succumb to swaps which are still in existence now because the issues in europe were an important issue of collaboration and also in october 2008 right before the crisis was intensified the federal reserve and i think five other central banks all announced interest-rate cuts on the same day, so we coordinated even our monetary policy. but, so we did our best to coordinate. there were some areas where like working on the multinational firms a lot more preparation was needed and we are still working on these cooperative late today.

>> the off-balance sheet vehicles being used and sort of why they were allowed to keep that much information on the books. >> well, it has to do with accounting rules basically you create the separate vehicle, and if the bank might have substantial the interest in that vehicle and it might have a partial ownership. it might have some promises to provide credit support if it goes bad or liquidity supports that needs cash, but it doesn't have under the rules that excessive if the amount of control that the bank had on this off-balance sheet vehicle is limited to, then according to the rules it could treat it as a separate organizations to speak not part of its own balance sheet.

and that allowed the banks to get away with somewhat less cattle for example than they would have to carry if they had all these assets on their own balance sheet. now, one of the may good developments since has been that these rules have been reworked, and many of the off balance sheet vehicles that existed during the -- before the crisis would no longer be allowed. the would have to be consolidated which means that have to be brought back on to the balance sheet, a part of the balance sheet to have appropriate capital and so on so those practices are not completely gone that the accounting rules have greatly toughened up the situation, circumstances under which the bank can put something off its balance sheet into a separate investment vehicle. max? >> you mentioned several firms that came on.

my question is where do you draw the line between? is it arbitrary or is there some sort of policy? >> that's a great question. first of all, i want to resist the word doctrine a little that. the interconnectedness' and so on isn't something we thought was a good thing to read one of the main goals of the financial reform is to get rid of it because because it's bad for the firms and it's unfair in many ways and will be a great accomplishment so it's not something that we advocate or supported in any way we were just forced into a situation where we were having to choose

to a number of different options now it's a good question. i think in the case of the crisis had basically to make judgments on a case by case basis trying to be as conservative as possible i think in the case certainly of aig there wasn't much doubt in our mind this was a case where action was necessary but possible. lehman brothers was in itself probably too big to fail in the sense that its failure had enormous negative impact on the global financial system, but there we were, helpless because it was essentially an insolvent firm and it didn't have enough collateral to borrow from. we can't put capital into a firm that's insolvent. this is before t.a.r.p. or anything else that provide

capital that the treasury can use so we had no legal way to do it. if we could have avoided that we could have done so so it was somewhat ad hoc also the case that we intervene with bear stearns the case is pretty clear given only the firms themselves but also the context, the environment was going on at the same time. now, interestingly, we've had to get much more into this issue since the crisis because there are a number of different rules and regulations which actually require the fed and other rich to the three agencies to make some determination about how system applicable the firm is for example the new capital requirements require the largest system applicable firms to have capital surcharge and the firms which are not system applicable and is part of that process to

international bank regulators of work together to set the criteria relating to the size, complexity and interconnectedness, derivatives, a whole bunch of criteria that helped determine how much expert capital they had to hold. likewise, the fed now when it proves a merger of two banks they have to evaluate whether the merger creates a systemically more dangerous situation. so, we have worked hard and we have put out criteria that describes some of the variety of criteria with this threshold that will get to try to figure out if a merger creates a systemically critical from which it does we are not supposed to allow that merger to happen. so the science is progressing in its infancy, but again, in the

crisis they were limited to, well, principal interventions for bear stearns and aig along with other agencies also provide assistance to a couple of other institutions, but nothing nearly to the extent of aig situation if for now that the fed has become much more focused on the financial stability we have people working on various metrics and indicators. we indicate to the firms that need to be particularly carefully supervised and hold extra capital because of their potential risks that they bring to the system fifth for. one vulnerable the that domestic

credit agencies for a signing aaa ratings to the securities that carry much more risk than perhaps the tralee rating might warrant. the incentives would be in line for the lawyers to seek the ratings that were more accurate because they would be taking on more risk. was there a systemic problem as far as how the incentives were lined in the credit ratings system that allowed this multi reading to propagate through the system. it will hire and pay the credit richard and will be in the interest of the buyers and those bearing the risk that a ban together somehow and pay the credit reader to give them the best opinion they can about the credit quality is in the securities and. very few examples of anywhere it works as the problem with the

economists call the free rider problem. basically. the peace standard and poor's to read a particular issuance. anyone else can figure out what the rating was and then they can basically to get in touch of that without having to pay, having to be part of the consortium that pays. so there's a lot of ideas out there about how you can restructure the payment system to create better incentives for the credit raters, but it is a challenging problem because, again, this obvious solution of having the investors pay only works if the investors collectively can share the cost and somehow keep that information from being spread among other investors. okay. 2:00? i will see you on thursday to dhaka the aftermath of the

crisis. thank you. [applause]