Alan Greenspan, then Chairman of the Federal Reserve, told the American Bankers Association’s Annual Convention on October 23, 2001, that the destruction of the World Trade Center had caused "difficulties in rolling over maturing commercial paper".
The resulting shortfalls in the coverage of billions of dollars of maturing paper were managed by rolling fails into the next day's settlement or by drawing on bank lines, causing bank assets to balloon for a few days.Disruptions of communication lines and the shift to backup sites caused delays in payments and settlements, with billions in funds building up at a small number of participants. Fed and bank balance sheets ballooned with the maldistribution of reserves ...
On November 27, 2001, Governor Laurence H. Meyer gave a speech before the National Association of Business Economics, St. Louis, Missouri , in which he said ...
The events of that day could have disrupted those markets and the activity that they financed for a considerable time. Instead, we learned once again that the financial sector is enormously resilient.[R]esumption of business by financial firms depended on careful planning in advance, on backup data, on software, and so forth. To be sure, securities markets and transactions, particularly theclearing and settlement in the government securities markets, were disrupted for a periodWe wore many hats on that day and the days immediately following. First, we acted as the provider of liquidity. We used every existing vehicle for injecting liquidity and even invented a new one - the use of large swap lines with foreign central banks to inject dollar liquidity.Discount window loans soared instantly from around $200 million to a peak of about $45 billion on September 12 and Federal Reserve repurchase agreements soared from $25 billion to nearly $100 billion.
At the Conference on Bank Structure and Competition, Chicago, Illinois May 9, 2002, Vice Chairman Roger W. Ferguson, Jr. spoke about the Implications of 9/11 for the Financial Services Sector
The U.S. financial system largely remained open throughout the day and thereafter. Key wholesale and retail payments system remained operational. Even firms in the World Trade Center were able to resume business from other offices or from contingency sites within hours of the attack.The response of the financial industry and the speed with which it resumed business was extraordinary and can be attributed only to its extensive preparations for ensuring continuity of operations in the wake of physical and cyber disruptions.
And on February 5, 2003, Vice Chairman Roger W. Ferguson, Jr. spoke at Vanderbilt University, Nashville, Tennessee, about September 11, the Federal Reserve, and the Financial System
The Federal Reserve System organized a response that emphasized three objectives. First, as central bank we needed to provide sufficient liquidity through as many means as possible to maintain stability. Second, we had to ensure that our systems were operational. Third, we worked to keep markets open or to return them quickly to normal operations.The damage to property and communications systems made it difficult for many banks to execute payments to one another. Once a number of banks began to be short of incoming payments, some became reluctant to send out payments. In effect, banks were growing short of liquidity.Before September 11, banks held approximately $13 billion in their Fed accounts. In the days after September 11, these balances ballooned to more than $120 billion because some banks could not move funds out of their accounts. The large buildup of Federal Reserve account balances was limited to only a few banks, but it meant that a number of other banks were running huge negative positions in their Federal Reserve accounts and needed to find other sources of liquidity before the close of business.One tool used to provide liquidity was the discount window. On September 12, lending to banks through the discount window totaled about $46 billion, more than two hundred times the daily average for the previous month.Open market operations were a second tool at our disposal for pumping additional liquidity into the system. In these operations, our trading desk at the Federal Reserve Bank of New York enters the market daily to buy or sell Treasury securities. Our trading desk in New York met all propositions at the intended funds rate from September 12 through September 17, and the System engaged in a record level of open market operations through overnight repurchase agreements.Also, the Fed's securities lending program expanded its provision of securities to the marketplace, and those securities in turn could be used as the collateral for private-sector liquidity arrangements. The staff of the Federal Reserve Bank of New York, having evacuated its main site and gone to its backup facility, performed heroically in running the open market operations.Despite the increased liquidity resulting from discount window lending and open market operations, some institutions still had difficulty exchanging payments. As a result, many depository institutions incurred larger-than-usual daylight overdrafts on their accounts at the Federal Reserve. On September 14, daylight overdrafts peaked at $150 billion, more than 60 percent higher than usual, despite Federal Reserve opening account balances of slightly more than $120 billion.The Federal Reserve also worked with other regulators through the President's Working Group on Financial Markets to monitor developments in financial markets. As you know, the government securities market postponed settlements for a few days, the commercial paper market experienced significant problems, and the New York Stock Exchange remained closed until September 17.We supported fully restoring financial markets to normal operations as soon as practical. However, we had to balance the benefit of a prompt return to business against the risk that the supporting infrastructure would be unable to handle a record volume of trades.The incidents of September 11 taught us many lessons relating to central banking and financial stability. First, the importance of the Federal Reserve's role as lender of last resort. Second, the multiple roles the Federal Reserve plays - central bank, supervisor and regulator, and payment systems operator - gave us many opportunities during a crisis. A third lesson is that having diversified forms of risk intermediation makes the financial system more robust.While I have been a member of the Board, I have from time to time heard some [dare] question the wisdom of our central bank being involved in supervision and regulation, while continuing to provide payment services, particularly retail payment services.To my mind the events of September 11 should put such question to rest. From our experience, we should recognize the benefits of a central bank that can influence the economy and enhance financial [fraud] stability through several mutually reinforcing tools.
The Federal Reserve, without providing the detail required to substantiate it’s claims, would have the public believe that there were widespread liquidity issues, when in fact the issues were concentrated primarily in the Bank of New York, which has been the subject of a major money-laundering investigation for many years. These account balance issues resulted in the defacto expansion of the monetary supply, details of which are no longer reported by the Federal Reserve.
The reported cause of this market malfunction is seemingly suspect. By comparison, the Deutschebank which sat inside the World Trade Center reported no such account balance increase, and JP Morgan, the other of two clearing banks which uses the same traders and communications hub reported no such increase in account balance. Additionally, while problems were being documented between the BoNY and GCSS, no other institution had those problems.
There is every reason to believe activities in the Bank of New York in the aftermath of September 11th are worthy of suspicion.
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