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Appendix 1: Materials used by Mr. Dudley
June 24–25, 2008 197 of 253Authorized for Public Release
Page 1 of 13Class II FOMC – Restricted FR
0
100
200
300
400
500
600
05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08
BPS
40
60
80
100
120
140BPS
ITRAXX Crossover Series 7 (LHS)
Baa CDS Spread (RHS)
(3) Global Credit Default Swap Spreads May 1, 2007 – June 20, 2008
3456789
101112
01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08
Percent
0100200300400500600700800900BPS
High-Yield Yield (LHS)Investment Grade Yield (LHS)High-Yield Spread (RHS)Investment Grade Spread (RHS)
(2) Corporate Credit Spreads and Yields January 1, 2007 – June 20, 2008
Source: Bloomberg, Lehman Brothers
60
70
80
90
100
110
120
08/01/07 09/01/07 10/01/07 11/01/07 12/01/07 01/01/08 02/01/08 03/01/08 04/01/08 05/01/08 06/01/08
Index to 100 on 8/1/07
60
70
80
90
100
110
120 Index to 100 on 8/1/07
S&P 500NasdaqS&P 500 Financials
(1) U.S. Equity IndicesAugust 1, 2007 – June 20, 2008
Source: Bloomberg
Source: Bloomberg
June 24–25, 2008 198 of 253Authorized for Public Release
Page 2 of 13
20
40
60
80
100
120
01/01/08 02/01/08 03/01/08 04/01/08 05/01/08 06/01/08
Index to 100 on 01/01/08
20
40
60
80
100
120Index to 100 on 01/01/08
Morgan StanleyGoldman SachsLehman BrothersMerrill Lynch
(4) Investment Bank Equity Prices January 1, 2008 – June 20, 2008
Source: Bloomberg
0
100
200
300
400
500
01/01/08 02/01/08 03/01/08 04/01/08 05/01/08 06/01/08
BPS
0
100
200
300
400
500BPS
Morgan StanleyGoldman SachsLehman BrothersMerrill Lynch
(5) Investment Bank CDS SpreadsJanuary 1, 2008 – June 20, 2008
Source: Markit
Class II FOMC – Restricted FR
Source: Bloomberg
15
20
25
30
35
01/01/04 01/01/05 01/01/06 01/01/07 01/01/08
Ratio
15
20
25
30
35Ratio
Morgan StanleyGoldman SachsLehman BrothersMerrill Lynch
(6) Investment Bank Financial Leverage RatiosJanuary 1, 2004 – May 31, 2008
June 24–25, 2008 199 of 253Authorized for Public Release
Page 3 of 13
0.7
0.8
0.9
1.0
1.1
1.2
01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08
Ratio
0.7
0.8
0.9
1.0
1.1
1.2Ratio
10-Year
30-Year
(9) Ten- and Thirty- Year AAA–Rated Municipals* January 1, 2007 – June 20, 2008
Source: Bloomberg
Class II FOMC – Restricted FR
*This chart shows the ratio of municipal debt yields to Treasury yields
0
1000
2000
3000
4000
5000
6000
01/01/08 02/01/08 03/01/08 04/01/08 05/01/08 06/01/08
BPS
0
1000
2000
3000
4000
5000
6000BPS
Ambac MBIAXL-Cap AGOFGIC
(8) Financial Guarantor CDS SpreadsJanuary 1, 2008 – June 20, 2008
Source: Markit
Source: Bloomberg
(7) Financial Guarantor Equity PricesJanuary 1, 2008 – June 20, 2008
0
20
40
60
80
100
120
01/01/08 02/01/08 03/01/08 04/01/08 05/01/08 06/01/08
Index to 100 on 01/01/08
0
20
40
60
80
100
120Index to 100 on 01/01/08
Ambac MBIAXL-Cap AGO
June 24–25, 2008 200 of 253Authorized for Public Release
0
20
40
60
80
100
120
08/01/07 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08
BPS
0
20
40
60
80
100
120BPS
U.S.U.K.Euro Area
Page 4 of 13
0
20
40
60
80
100
120
08/01/07 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08
BPS
0
20
40
60
80
100
120BPS
U.S.U.K.Euro Area
(10) One-Month Libor–OIS SpreadsAugust 14, 2007 – June 20, 2008
Source: Bloomberg
Source: Bloomberg
(11) Three-Month Libor – OIS Spreads August 14, 2007 – June 20, 2008
Class II FOMC – Restricted FR
June 24–25, 2008 201 of 253Authorized for Public Release
Page 5 of 13Class II FOMC – Restricted FR
0
20
40
60
80
10012
/20/
07
12/2
7/07
01/1
7/08
01/3
1/08
02/1
4/08
02/2
8/08
03/1
3/08
03/2
7/08
04/1
0/08
04/2
4/08
05/0
8/08
05/2
2/08
06/0
5/08
06/1
9/08
BPS
0
20
40
60
80
100Billions of Dollars
Auction Size (RHS)
TAF Stop-out Spread to Minimun Bid Rate (LHS)
(12) Federal Reserve Term Auction Facility ResultsDecember 20, 2007 – June 19, 2008
Source: Federal Reserve Board
Source: Federal Reserve Board, European Central Bank, Swiss National Bank
0.0
1.0
2.0
3.0
4.0
5.0
12/2
0/07
12/2
7/07
01/1
7/08
01/3
1/08
02/1
4/08
02/2
8/08
03/1
3/08
03/2
7/08
04/1
0/08
04/2
4/08
05/0
8/08
05/2
2/08
06/0
5/08
06/1
9/08
Bid-to-Cover Ratio
0.0
1.0
2.0
3.0
4.0
5.0Bid-to-Cover Ratio
TAF
ECB Swap
SNB Swap
(13) Central Bank Term Funding Facilities’ Bid-to-Cover RatiosDecember 20, 2007 – June 19, 2008
June 24–25, 2008 202 of 253Authorized for Public Release
Class II FOMC – Restricted FR Page 6 of 13
80
100
120
140
160
01/01/08 02/01/08 03/01/08 04/01/08 05/01/08 06/01/08
Index to 100 on 1/1/08
80
100
120
140
160Index to 100 on 1/1/08
GSCI SpotGSCI EnergyGSCI AgricultureGSCI Industrial Metals
(14) Commodity Prices January 1, 2008 – June 20, 2008
Source: Bloomberg
86889092949698
100102
01/01/08 02/01/08 03/01/08 04/01/08 05/01/08 06/01/08
Index to 100
86889092949698100102
Index to 100 (15) Dollar Stabilizes
January 1, 2008 – June 20, 2008
Source: Bloomberg and Federal Reserve Board
Euro vs. Dollar: Index as of Jan08
Yen vs. Dollar: Index as of Jan08
Dol
lar
Dep
reci
atio
n
Dol
lar
App
reci
atio
n
Broad Trade-Weighted Dollar: Index as of Jan 97
(16) Correlation Between Weekly Changes in Spot WTI Crude Oil and the Trade-Weighted DollarJanuary 1, 1987 – June 2, 2008
-1.0-0.8-0.6-0.4-0.20.00.20.40.60.81.0
01/01/87 01/01/90 01/01/93 01/01/96 01/01/99 01/01/02 01/01/05 01/01/08-1.0-0.8-0.6-0.4-0.20.00.20.40.60.81.0
1-Year Moving Average6-Month Rolling Correlation of Percent Changes
Source: Federal Reserve Board, CEIC
** One-year rolling correlation of percentage changes in the weekly average of daily closing prices of the WTI spot crude oil price and the Federal Reserve Board’s nominal trade-weighted dollar index (vis-à-vis major currencies).
June 24–25, 2008 203 of 253Authorized for Public Release
Page 7 of 13Class II FOMC – Restricted FR
2.20
2.40
2.60
2.80
3.00
3.20
3.40
08/01/07 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08
Percent
2.20
2.40
2.60
2.80
3.00
3.20
3.40 Percent
Barclays
Federal Reserve Board
(18) TIPS Implied Average Rate of Inflation: 5-10 Year HorizonAugust 1, 2007 – June 20, 2008
Source: Federal Reserve Board, Barclays Capital
Source: Bloomberg
(17) University of Michigan Inflation ExpectationsJune 1, 1980 – June 20, 2008
0
2
4
6
8
10
06/01/80 06/01/84 06/01/88 06/01/92 06/01/96 06/01/00 06/01/04 06/01/08
Percent
0
2
4
6
8
10 Percent
1-Year
5-Year
June 24–25, 2008 204 of 253Authorized for Public Release
Class II FOMC – Restricted FR Page 8 of 13
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00
Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-08 Feb-08
Fed Funds Futures Contracts
Percent
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00 Percent
3/17/2008
4/29/2008
6/20/2008
Source: Bloomberg
(19) Fed Funds Futures Curves
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Sep-08 Dec-08 Mar-08 Jun-08 Sep-08 Dec-08 Mar-08Eurodollar Futures Contracts
Percent
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00 Percent
3/17/2008
4/29/2008
6/20/2008
Source: Bloomberg
(20) Eurodollar Futures Curves
June 24–25, 2008 205 of 253Authorized for Public Release
Class II FOMC – Restricted FR Page 9 of 13
(21) Distribution of Expected Policy Target Rate Among Primary Dealers Prior to June 25 FOMC Meeting
Source: Dealer Policy Survey
0.5
1.01.5
2.0
2.5
3.03.5
4.0
4.5Percent
Survey Response -size indicates freq
April Average Forecast
Market Rates as of 4/21
Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009
Source: Dealer Policy Survey
(22) Distribution of Expected Policy Target Rate Among Primary Dealers Prior to April 29-30 FOMC Meeting
0.5
1.01.5
2.0
2.5
3.03.5
4.0
4.5Percent
Survey Response -size indicates freq
April Average Forecast
Market Rates as of 6/16
Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009
June 24–25, 2008 206 of 253Authorized for Public Release
Class II FOMC – Restricted FR Page 10 of 13
0
20
40
60
80
100
05/09/08 05/16/08 05/23/08 05/30/08 06/06/08 06/13/08 06/20/08
Percent
0
20
40
60
80
100Percent
1.75 Percent Target Rate 2.25 Percent Target Rate
2.50 Percent Target Rate
2.00 Percent Target Rate
(24) Probabilities for Policy Rate Outcomes for August FOMC Meeting May 9, 2008 – June 20, 2008
Source: Federal Reserve Bank of Cleveland
*Adjusted based on forward Libor-fed funds basis swap spreadsNote: Dates represent last interest rate cut of previous cycles and assumes 4/30/08 is the last interest rate cut of the current cycle.
0
20
40
60
80
100
04/01/08 04/16/08 05/01/08 05/16/08 05/31/08 06/15/08
Percent
0
20
40
60
80
100Percent
1.50 Percent Target Rate
2.00 Percent Target Rate
2.25 Percent Target Rate
1.75 Percent Target Rate
(23) Probabilities for Policy Rate Outcomes for June FOMC Meeting April 1, 2008 – June 20, 2008
Source: Federal Reserve Bank of Cleveland
Source: Bloomberg
-200
-100
0
100
200
300
-26 -24 -22 -20 -18 -16 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26# Weeks Before and After Last Fed Funds Target Rate Cut
BPS
-200
-100
0
100
200
300BPS
9/4/1992 1/31/1996 11/17/1998 6/25/2003 4/30/2008
(25) Considerable Tightening Expected Over the Next Year
June 24–25, 2008 207 of 253Authorized for Public Release
Page 11 of 13Class II FOMC – Restricted FR
(26) Federal Reserve Term Auction Facility ResultsDecember 20, 2007 – June 19, 2008
Source: Federal Reserve Board
Auction Settlement Term Amount
Minimum Bid Rate
Stop-out Rate Propositions Bid/Cover Bidders
12/20/2007 28 Days $20 b 4.17% 4.65% $61.6 b 3.08 93
12/27/2007 35 Days $20 b 4.15% 4.67% $57.7 b 2.88 73
1/17/2008 28 Days $30 b 3.88% 3.95% $55.5 b 1.85 56
1/31/2008 28 Days $30 b 3.10% 3.12% $37.5 b 1.25 52
2/14/2008 28 Days $30 b 2.86% 3.01% $58.4 b 1.95 66
2/28/2008 28 Days $30 b 2.81% 3.08% $68.0 b 2.27 72
3/13/2008 28 Days $50 b 2.39% 2.80% $92.6 b 1.85 82
3/27/2008 28 Days $50 b 2.19% 2.62% $88.9 b 1.78 88
4/10/2008 28 Days $50 b 2.11% 2.82% $91.6 b 1.83 79
4/24/2008 28 Days $50 b 2.05% 2.87% $88.9 b 1.77 89
5/8/2008 28 Days $75 b 2.00% 2.22% $96.8 b 1.29 71
5/22/2008 28 Days $ 75 b 1.99% 2.10% $84.4 b 1.13 75
6/5/2008 28 Days $ 75 b 2.00% 2.26% $95.9 b 1.28 73
6/19/2008 28 Days $ 75 b 2.05% 2.36% $89.4 b 1.19 76
APPENDIX: Reference Exhibits
June 24–25, 2008 208 of 253Authorized for Public Release
Page 12 of 13Class II FOMC – Restricted FR
(27) Term Securities Lending Facility Auction Results
Source: Federal Reserve Bank of New York
AuctionSettlement Term Collateral Amount
Minimum Fee Rate
Stop-out Rate Propositions Bid/Cover
3/28/2008 28 Days Schedule 2 $75 b 0.25% 0.33% $86.1 b 1.15
4/4/2008 28 Days Schedule 1 $25 b 0.10% 0.16% $46.9 b 1.88
4/11/2008 28 Days Schedule 2 $50 b 0.25% 0.25% $40.0 b 0.68
4/18/2008 28 Days Schedule 1 $25 b 0.10% 0.10% $35.1 b 1.40
4/25/2008 28 Days Schedule 2 $75 b 0.25% 0.25% $ 59.5 b 0.79
5/2/2008 28 Days Schedule 1 $25 b 0.10% 0.10% $ 24.1 b 0.96
5/9/2008 28 Days Schedule 2 $50 b 0.25% 0.25% $28.7 b 0.58
5/16/2008 28 Days Schedule 1 $25 b 0.10% 0.10% $7.2 b 0.29
5/23/2008 28 Days Schedule 2 $75 b 0.25% 0.25% $46.1 b 0.62
5/30/2008 28 Days Schedule 1 $25 b 0.10% 0.10% $16.4 b 0.66
6/6/2008 28 Days Schedule 2 $50 b 0.25% 0.25% $26.9 b 0.54
6/13/2008 28 Days Schedule 1 $25 b 0.10% 0.10% $27.2 b 1.09
6/20/2008 28 Days Schedule 2 $75 b 0.25% 0.25% $36.8 b 0.49
June 24–25, 2008 209 of 253Authorized for Public Release
Class II FOMC – Restricted FR Page 13 of 13
175
200
225
250
275
01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08
BPS
175
200
225
250
275 BPS
5-Year
10-Year
(28) Spread Between Nominal and Inflation Protected Treasury YieldsJanuary 1, 2007 – June 20, 2008
Source: Bloomberg
1.001.502.002.503.003.504.004.505.00
Years to Maturity
Percent
1.00
2.00
3.00
4.00
5.00 Percent
3/17/2008
4/29/2008
6/20/2008
(29) Treasury Yield Curve
Source: Bloomberg
1-Year 2-Year 3-Year 5-Year 7-Year 10-Year
0255075
100125150175200
01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08
BPS
05
101520
2530
3540
Percent
VIX (RHS)
1-Month Dollar-Yen Vol (RHS)1-Month Euro-Dollar Vol (RHS)
SMOVE (LHS)
Source: Bloomberg
(30) Implied Volatility Across Markets January 1, 2007 – June 20, 2008
June 24–25, 2008 210 of 253Authorized for Public Release
Appendix 2: Materials used by Messrs. Sheets, Slifman, and Wascher
June 24–25, 2008 211 of 253Authorized for Public Release
CLASS II FOMC - Restricted (FR)
Material for
Staff Presentation on the Economic Outlook
June 24, 2008
June 24–25, 2008 212 of 253Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 1
Outlook for Foreign Growth
1970 1975 1980 1985 1990 1995 2000 2005-2
0
2
4
6
8
10
* GDP aggregates weighted by U.S. merchandise export shares. Gray shading represents U.S. recessions. Blue shading represents the forecast period.
United States
Advancedforeign economies
Emergingmarket
economies
Real GDP Growth*
Percent, Q4/Q4
2006 2007 20080.90
0.95
1.00
1.05
1.10
98
100
102
104
106
108
110
Job openingsto applicants
Manufacturingoutput
Japan Ratio Index, Jan. 2006 = 100
2006 2007 200835
40
45
50
55
60
65
-3
-2
-1
0
1
2
3
* June figure is flash estimate.
TotalPMI*
Retail sales
Euro Area 50+ = Expansion 12-month percent change
Real GDP Projections*Percent change, annual rate**
* Aggregates weighted by U.S. merchandise export shares.** Year is Q4/Q4; half year is Q4/Q2; Q1-Q3 is Q3/Q4.
2007 2008 2009 Q1-Q3 Q4 Q1 Q2 H2
1. Total Foreign 4.5 3.0 2.9 2.2 2.6 3.42. Advanced Foreign 2.9 1.4 1.5 1.0 1.2 2.13. Canada 3.4 0.8 -0.3 1.0 1.2 2.24. Japan 0.9 2.9 4.0 0.6 1.0 1.65. Euro Area 2.4 1.3 3.2 0.7 1.1 2.16. United Kingdom 3.0 2.5 1.6 1.0 0.7 1.77. Emerging Markets 6.7 5.1 4.8 3.8 4.5 5.18. Mexico 4.2 3.3 2.1 1.2 2.7 3.69. China 11.6 10.6 11.7 8.7 8.8 9.6
pp
p
June 24–25, 2008 213 of 253Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 2
Oil Market
2005 2006 2007 2008 200920
40
60
80
100
120
140
160
Jan.GBSpot price
Far-dated futures
Monthly
West Texas IntermediateDollars per barrel
2005 2006 2007 20082300
2400
2500
2600
2700
2800
2900
* Both crude oil and petroleum products. Excludes official inventories.** Five-year average level +/- 1 standard deviation. Source: International Energy Agency.
Historicalrange**
Monthly
OECD Private Inventories of Oil and Products*Millions of barrels, n.s.a.
Source: International Energy Agency and staff estimates. Non-OPEC production includes Angola and Ecuador.
% change05-08
p2005 2006 2007 2008
1. Consumption 83.8 84.9 86.0 86.8 3.62. Advanced Economies 45.4 45.2 44.8 44.4 -2.23. United States 21.2 21.0 21.2 20.6 -2.84. Emerging Markets 38.4 39.7 41.1 42.4 10.45. China 6.7 7.2 7.5 8.0 19.46. Middle East 6.0 6.2 6.5 6.8 13.37. Production 84.6 85.4 85.5 87.0 2.88. OPEC 34.3 34.4 33.9 35.1 2.39. Non-OPEC 50.3 51.0 51.6 51.9 3.210. Implied Stockbuild and Discrepancy 0.8 0.5 -0.5 0.2 --
World Oil BalanceMillions of barrels per day
2002 2004 2006 200890
100
110
120
130
140
* Aggregate weighted by world oil consumption shares.
Oil production
World GDP*
World Oil Production and GDPIndex, 2002:Q1 = 100
1996 1998 2000 2002 2004 200630
35
40
45
50
* Proved reserves/current oil production. ** Data unavailable before 1999.Source: BP Statistical Review of World Energy.
Including Canadian oil sands**
Proved Oil ReservesYears remaining*
June 24–25, 2008 214 of 253Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 3
2005 2006 2007 2008 200990
100
110
120
130
140
150
160
170
180
Jan. GB
Non-fuel Commodities
Non-fuel Commodity PricesIndex, 2005:Q1 = 100
Prices of commodities not traded infutures markets have also risen.
Inventories are relatively tight.
No evidence that positions takenby non-commercial traders predictcommodity prices.
Role of Speculators?
Other Explanations for RecentMoves in Commodity Prices
2005 2006 2007 20080.5
1.8
3.1
4.4
5.77.0
1.0
3.6
6.2
8.8
11.414.0
Zinc
Copper
Wheat
Corn
Weekly
Prices of Selected Commodities Dollars per bushel Dollars per pound
2004 2005 2006 2007 2008-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3WTI oil price
Non-fuelcommodity
prices**
Correlations: Commodity Prices and the Dollar*
*60-day moving correlations of daily changes. The dollar isbroad nominal index. ** Commodity Research Bureau index.
2002 2004 2006 20080
4
8
12
16
Wheat
Corn
Copper
Zinc
Inventories of Selected CommoditiesWeeks of consumption*
* Period-end stocks/annual consumption. For grains, 2008 is USDA estimate. For metals, 2008 is stock at end of March over 2007 usage.
2004 2005 2006 2007 2008-0.5
-0.4
-0.3
-0.2
-0.1
-0.0
0.1
0.2
0.3
0.4
0.5
WTI oil priceNon-fuelcommodityprices**
Correlations: Commodity Prices and Interest Rates*
*60-day moving correlations of daily changes. Interest rate isthree-month Treasury bill rate. **Commodity Research Bureau index.
June 24–25, 2008 215 of 253Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 4
Outlook for Foreign Inflation
0
1
2
3
4
5
6
7
8
2006 2007 2008 2009
Outlook for InflationPercent, a.r.
Advanced foreign economies
Emerging market economies
Jan. GB
Jan. GB
1.7
2.0
2.3
2.6
2.9
2006 2007
Percent
Canada***
2008*** Next 15 years, break-even inflation.
1.7
2.0
2.3
2.6
2.9
2006 2007
Inflation CompensationPercent
Far-dated euro area**
Euro area*
2008* Next ten years, break-even inflation.** Five-to-ten years ahead, derived from inflation swaps.
0
1
2
3
4
5
6
7
8
9
2005 2006 2007 2008
Consumer Prices in Selected Emerging Markets12-month percent change
Chinese headline
Chinese core*
Mexican headline
Mexican core*
* Excluding food and energy prices.
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009
Policy Interest RatesPercent
ECB
Bank ofCanada
Bank ofEngland
Apr. GB
June 24–25, 2008 216 of 253Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 5
U.S. External Sector
2006 2007 2008 200980
85
90
95
100
105
Jan. GB
Broad Real DollarIndex, Jan. 2006 = 100
2005 2006 2007 2008 2009-2
0
2
4
6
8
10
12
Jan. GB
Core Import PricesPercent change, a.r.
U.S. Trade Outlook
* Year is Q4/Q4; half years are Q2/Q4 or Q4/Q2.
2007 2008 2009 H1 H2 Q1 Q2 H2
Growth rates (percent, annual rate*)
1. Real exports 4.3 12.6 5.6 7.2 7.2 7.5
2. Real imports 0.5 1.4 -0.5 -6.7 1.0 2.8
Contribution to U.S. real GDP growth (percentage points, annual rate*)
3. Real net exports 0.4 1.2 0.8 2.1 0.7 0.5
Memo:
4. Current account balance (percent of GDP) -5.7 -4.9 -5.0 -5.1 -5.4 -4.6
5. Non-oil trade balance (percent of GDP) -3.1 -2.3 -1.8 -1.7 -1.3 -0.8
e p p p
June 24–25, 2008 217 of 253Authorized for Public Release
June 24–25, 2008 218 of 253Authorized for Public Release
June 24–25, 2008 219 of 253Authorized for Public Release
0
5
10
15
20
25
30
35
40
45
0
5
10
15
20
25
30
35
40
45Percent of respondents
2004 2005 2006 2007 2008
June
Percent of homowners reportingdecline in their house price
Past 12 months
Next 12 months
June 24–25, 2008 220 of 253Authorized for Public Release
June 24–25, 2008 221 of 253Authorized for Public Release
June 24–25, 2008 222 of 253Authorized for Public Release
June 24–25, 2008 223 of 253Authorized for Public Release
June 24–25, 2008 224 of 253Authorized for Public Release
June 24–25, 2008 225 of 253Authorized for Public Release
Appendix 3: Materials used by Mr. Madigan
June 24–25, 2008 226 of 253Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Material for Briefing on FOMC Participants’ Economic Projections Brian Madigan June 24, 2008
June 24–25, 2008 227 of 253Authorized for Public Release
2008:H1 2008:H2Central Tendencies (percent, annual rate)
Real GDP Growth 1.2 to 1.4 0.6 to 2.1April projections -0.4 to 0.5 1.0 to 1.9
PCE Inflation 3.7 to 4.0 3.6 to 4.6April projections 3.5 to 4.0 2.5 to 3.1
Core PCE Inflation 2.1 to 2.2 2.3 to 2.5April projections 2.2 to 2.4 2.2 to 2.4
Ranges(percent, annual rate)
Real GDP Growth 1.0 to 1.5 0.4 to 2.2April projections -0.5 to 0.6 0.4 to 2.9
PCE Inflation 3.6 to 4.6 3.2 to 4.8April projections 3.0 to 4.4 2.3 to 3.6
Core PCE Inflation 2.0 to 2.4 2.0 to 2.6April projections 2.0 to 2.5 1.7 to 2.7
Memo: Greenbook(percent, annual rate)
Real GDP Growth 1.4 0.7April Greenbook -0.5 0.9
PCE Inflation 3.8 4.5April Greenbook 3.9 2.7
Core PCE Inflation 2.1 2.5April Greenbook 2.2 2.4
Table 1: Economic Projections of Federal Reserve Governors andReserve Bank Presidents
June 24–25, 2008 228 of 253Authorized for Public Release
2008 2009 2010Central Tendencies(percent)
Real GDP Growth 1.0 to 1.6 2.0 to 2.8 2.5 to 3.0April projections 0.3 to 1.2 2.0 to 2.8 2.6 to 3.1
Unemployment Rate 5.5 to 5.7 5.3 to 5.8 5.0 to 5.6April projections 5.5 to 5.7 5.2 to 5.7 4.9 to 5.5
PCE Inflation 3.8 to 4.2 2.0 to 2.3 1.8 to 2.0April projections 3.1 to 3.4 1.9 to 2.3 1.8 to 2.0
Core PCE Inflation 2.2 to 2.4 2.0 to 2.2 1.8 to 2.0April projections 2.2 to 2.4 1.9 to 2.1 1.7 to 1.9
Ranges(percent)
Real GDP Growth 0.9 to 1.8 1.9 to 3.0 2.0 to 3.5April projections 0.0 to 1.5 1.8 to 3.0 2.0 to 3.4
Unemployment Rate 5.5 to 5.8 5.2 to 6.1 5.0 to 5.8April projections 5.3 to 6.0 5.2 to 6.3 4.8 to 5.9
PCE Inflation 3.4 to 4.6 1.7 to 3.0 1.6 to 2.1April projections 2.8 to 3.8 1.7 to 3.0 1.5 to 2.0
Core PCE Inflation 2.0 to 2.5 1.8 to 2.3 1.5 to 2.0April projections 1.9 to 2.5 1.7 to 2.2 1.3 to 2.0
Memo: Greenbook(percent)
Real GDP Growth 1.0 2.4 3.1April Greenbook 0.2 2.8 3.1
Unemployment Rate 5.6 5.6 5.4April Greenbook 5.7 5.5 5.2
PCE Inflation 4.2 2.1 1.9April Greenbook 3.3 1.8 1.8
Core PCE Inflation 2.3 2.2 2.0April Greenbook 2.3 2.0 1.8
Table 2: Economic Projections of Federal Reserve Governors andReserve Bank Presidents
June 24–25, 2008 229 of 253Authorized for Public Release
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17Number of participants
Weighted to Downside
Broadly Balanced Weighted to Upside
January April June
Risk Weighting around Outlook for Real GDP Growth
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17Number of participants
Lower Historically Normal Higher
January April June
Degree of Uncertainty about Outlook for Real GDP Growth
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17Number of participants
Weighted to Downside
Broadly Balanced Weighted to Upside
January April June
Risk Weighting around Outlook for Total PCE Inflation
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17Number of participants
Lower Historically Normal Higher
January April June
Degree of Uncertainty about Outlook for Total PCE Inflation
Exhibit 3Risks and Uncertainty in Economic Projections
June 24–25, 2008 230 of 253Authorized for Public Release
Exhibit 4 Consideration of Long-Term Projections
Issue
Alternative approaches
• Current three-year horizon for projections does not always reveal your
views of: o Steady-state characteristics of economy
Sustainable rate of unemployment Sustainable rate of output growth
o Rate of inflation consistent with dual mandate
1. Extend entire set of projections for four variables and forecast narratives out
to five years. a. Advantage: full, coherent presentation b. Disadvantage: burden on participants
2. Maintain three-year projection horizon for four variables but add fifth-year projections for output growth, unemployment, and total inflation
a. Advantage: less burden on participants b. Disadvantage: less complete explanation of transition to steady state
3. Maintain three-year projection horizon for four variables but add estimates of long-run averages of output growth, unemployment, and total inflation five to ten years ahead
a. Advantage: no need for participants to project fourth and fifth years for four variables
b. Disadvantages: i. Less complete explanation of transition to steady state
ii. Need to forecast long-run demographic and productivity trends
June 24–25, 2008 231 of 253Authorized for Public Release
Appendix 4: Materials used by Mr. Madigan
June 24–25, 2008 232 of 253Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Material for FOMC Briefing on Monetary Policy Alternatives Brian Madigan June 24-25, 2008
June 24–25, 2008 233 of 253Authorized for Public Release
Exhibit 1 Class I FOMC – Restricted Controlled (FR) Table 1: Alternative Language for the June 2008 FOMC Announcement Bluebook version, slightly revised
April FOMC Alternative A Alternative B Alternative C
Policy Decision
1. The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.
The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 1-3/4 percent.
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
The Federal Open Market Committee decided today to raise its target for the federal funds rate 25 basis points to 2-1/4 percent.
2. Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
Recent information indicates that economic activity has remained weak in recent months. Although consumer spending appears to have firmed somewhat, residential investment has continued to contract sharply and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
Rationale 3. Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
Although energy prices have increased further and some indicators of inflation expectations have risen in recent months, core inflation has been stable of late. The Committee expects inflation to moderate later this year and next year, reflecting a projected leveling-out of energy prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
Overall inflation has been elevated, energy prices have continued to increase, and some indicators of inflation expectations have risen further. The Committee expects inflation to moderate later this year and next year, partly reflecting today’s policy action. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
Assessment of Risk
4. The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to near-term inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information on the economy and financial conditions.
June 24–25, 2008 234 of 253Authorized for Public Release
Exhibit 2
Optimal Policy Under Alternative Inflation Goals
2008 2009 2010 2011 20120.5
1.5
2.5
3.5
4.5
0.5
1.5
2.5
3.5
4.5Percent
1½ Percent Inflation GoalFederal funds rate
Current BluebookApril Bluebook
2008 2009 2010 2011 20124.0
4.5
5.0
5.5
6.0
4.0
4.5
5.0
5.5
6.0Percent
Civilian unemployment rate
2008 2009 2010 2011 20121.50
1.75
2.00
2.25
2.50
1.50
1.75
2.00
2.25
2.50Percent
Core PCE inflationFour-quarter average
2008 2009 2010 2011 20120.5
1.5
2.5
3.5
4.5
0.5
1.5
2.5
3.5
4.5Percent
2 Percent Inflation Goal
2008 2009 2010 2011 20124.0
4.5
5.0
5.5
6.0
4.0
4.5
5.0
5.5
6.0Percent
2008 2009 2010 2011 20121.50
1.75
2.00
2.25
2.50
1.50
1.75
2.00
2.25
2.50Percent
June 24–25, 2008 235 of 253Authorized for Public Release
Exhibit 3Equilibrium Real Federal Funds Rate
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008-3
-2
-1
0
1
2
3
4
5
6
7
8
-3
-2
-1
0
1
2
3
4
5
6
7
8Percent
Note: Appendix A provides background information regarding the construction of these measures and confidence intervals.
* This measure was not reported in the April Bluebook.
Short-Run Estimates with Confidence Intervals
The actual real funds rate based on lagged core inflationRange of model-based estimates70 Percent confidence interval90 Percent confidence intervalGreenbook-consistent measure
Short-Run and Medium-Run Measures
Current Estimate Previous Bluebook
Short-Run Measures
1. Single-equation model (2.2 (2.1
2. Small structural model -0.6 -0.8
3. Large model (FRB/US) (0.4 (0.3
Confidence intervals for three model-based estimates
4a. 70 percent confidence interval -1.2 - 2.6
4b. 90 percent confidence interval -2.2 - 3.8
5. Greenbook-consistent measure -0.1 -0.5
Medium-Run Measures
6. Single-equation model (2.2 (2.2
7. Small structural model (1.8 (1.7
Confidence intervals for two model-based estimates
8a. 70 percent confidence interval (1.1 - 2.9
8b. 90 percent confidence interval 0.5 - 3.7
9. TIPS-based factor model (2.0 2.0
Measures of Actual Real Federal Funds Rate
10. Based on lagged core inflation -0.2 (0.1
11. Based on lagged headline inflation -1.3 -1.1*
12. Based on Greenbook projection of headline inflation -1.3 -0.7*
June 24–25, 2008 236 of 253Authorized for Public Release
Appendix 5: Materials used by Messrs. Angulo, Alvarez, and Parkinson
June 24–25, 2008 237 of 253Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Material for Supervisory Report Concerning Investment Banks and Related Policy Issues June 25, 2008
June 24–25, 2008 238 of 253Authorized for Public Release
F.R. Restricted Controlled
Primary Dealer Monitoring Update
June 25, 2008
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
Page 1 of 15
June 24–25, 2008 239 of 253Authorized for Public Release
2F.R. Restricted Controlled
Presentation Overview
Objectives and Approach
Current Focus at Four Investment Banks
Capital
Liquidity
PDCF (and TSLF) Usage
Near-Term Issues
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
Page 2 of 15
June 24–25, 2008 240 of 253Authorized for Public Release
3F.R. Restricted Controlled
Objectives
Tied closely to Primary Dealer Credit Facility (PDCF) and FRA 13(3) authority
Build the capability to exercise informed judgment about the capital and liquidity positions of the primary dealers given their access to the PDCF
Minimize the risk that the availability of financing under the PDCF undermines the incentives for primary dealers to manage capital and liquidity more conservatively
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
Page 3 of 15
June 24–25, 2008 241 of 253Authorized for Public Release
4F.R. Restricted Controlled
Approach
Focus is on the firms that own primary dealers not affiliated with financial holding companies --primarily the four largest investment banks.
Limited on-site presence + off-site staffDirect contact with managementInformation sharing and communication with SEC...but we are not engaged in traditional bank supervisionCurrent focus at the four investment banks is on capital and liquidity
Capital – increasing (but not sole) focus on risk-based capital (RBC)Liquidity – iterative approach
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
Page 4 of 15
June 24–25, 2008 242 of 253Authorized for Public Release
5F.R. Restricted Controlled
Leverage Trend as Reported by the Firms
Gross Leverage
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%4Q
200
3
1Q 2
004
2Q 2
004
3Q 2
004
4Q 2
004
1Q 2
005
2Q 2
005
3Q 2
005
4Q 2
005
1Q 2
006
2Q 2
006
3Q 2
006
4Q 2
006
1Q 2
007
2Q 2
007
3Q 2
007
4Q 2
007
1Q 2
008
2Q 2
008
Goldman Sachs Morgan Stanley Merrill Lynch Lehman Brothers
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
Page 5 of 15
June 24–25, 2008 243 of 253Authorized for Public Release
6F.R. Restricted Controlled
Capital – Current View
Tier 1 Capital Ratios: 4 Largest Securities Firms
10.80%
11.75%
10.50%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Goldman Sachs Lehman Brothers* Merrill Lynch Morgan Stanley
Mar-08 Apr-08 Est. May-08
* Note: For May this ratio would be 12.5% with June capital raise included
Comparison of FRBNY Adjusted Leverage Ratios*
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
GS LEH MER MS BAC C JPM WFC WB
1Q2007 1Q2008
* Note: FRBNY Leverage Ratio = Tangible Equity / Total Assets less Secured Financing Assets and Intangible Assets
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
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7F.R. Restricted Controlled
Recent Trend in Parent Company Liquidity Pools Goldman Liquidity Pool Trend ($ in billions)
-
20
40
60
80
100
120
3/14
3/21
3/28 4/
4
4/11
4/18
4/25 5/
2
5/9
5/16
5/23
5/30 6/
6
6/13
Lehman Liquidity Pool Trend ($ in billions)
-
10
20
30
40
50
60
3/14
3/21
3/28 4/4
4/11
4/18
4/25 5/2
5/9
5/16
5/23
5/30 6/6
6/13
Merrill Liquidity Pool Trend ($ in billions)
-
20
40
60
80
3/14
3/21
3/28 4/4
4/11
4/18
4/25 5/2
5/9
5/16
5/23
5/30 6/6
6/13
Morgan Liquidity Pool Trend ($ in billions)
-
20
40
60
80
100
3/14
3/21
3/28 4/4
4/11
4/18
4/25 5/2
5/9
5/16
5/23
5/30 6/6
6/13
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
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8F.R. Restricted Controlled
Liquidity Stress Approach
Iterate with the 4 firms
Current scenario: Severe stress but short of full Bear Stearns scenario30 day liquidity horizonNO access to the PDCF
Compare and converge assumptions
Construct cash flow analysis
Relate cash needs under stress to available liquidity (liquidity pool + additional funding sources)
As of dates: 5/22/08 - 6/10/08Severity
Assumption
Total Unsecured Funding 100%
Fixed Income FinanceOMO Eligible 0%Liquid 20%Less Liquid 50%Illiquid 100%
Equity FinanceLiquid 20%Less Liquid 50%
Off-Balance Sheet Assets On-Boarded Institution SpecificLoan Commitments/Other Contractual Uses Institution SpecificOther Liabilities/Commitments Institution Specific
Prime Brokerage, Withdrawal of Free Credits 50%Customer Shorts with Liquidity Risk 11%Release of Lockup Cash Flows 90% - 100%Collateral and Margin Calls: Payments / Receipts 100% / 90%Derivatives / Margin Mismatches: Payments / Receipts 100% / 90%
ADDITIONAL FUNDINGAffiliated Banks / Unaffiliated Bank Lines / Other Institution Specific
OPERATING CASH FLOWS
ON-BOARDING AND OTHER COMMITMENTS
UNSECURED FUNDING - Percent not rolling
SECURED FUNDING - Percent not rolling
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
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9F.R. Restricted Controlled
PDCF Usage
Bear Stearns has been by far the largest and most regular borrower
Until very recently, there were 3 other “chronic”users
Cantor FitzgeraldCountrywide SecuritiesBarclays Capital
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
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10F.R. Restricted Controlled
TSLF Usage – Schedule 1
Dealer Evolution of Top 5* Schedule 1 Awards:Total Amounts Outstanding
0
2
4
6
8
10
12
4/3/2008 4/17/2008 5/1/2008 5/15/2008 5/29/2008 6/12/2008
$ Billions
DEUTSCHE BNP PARIBASCITIGROUP MERRILL LYNCHBARCLAYS CAPITAL Average**
*Based on total Schedule 1 TSLF awards**Excludes top 5
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
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11F.R. Restricted Controlled
TSLF Usage – Schedule 2
Dealer Evolution of Top 5* Schedule 2 Awards:Total Amounts Outstanding
0
2
4
6
8
10
12
14
16
18
20
3/27/2008 4/10/2008 4/24/2008 5/8/2008 5/22/2008 6/5/2008 6/19/2008
$ Billions UBS LEHMAN BROTHERS MERRILL LYNCHDEUTSCHE CITIGROUP GOLDMAN SACHSAverage
*Based on total Schedule 2 TSLF awards; Citigroup and Goldman are tied for fifth**Excludes top 5
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
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12F.R. Restricted Controlled
Near-Term Issues
For how much longer should our monitoring program continue with its current focus in its current form?
How do we limit the reputational risk to the Federal Reserve that increases with the length of our on-site presence at the investment banks?
If our monitoring program needs to evolve, in which areas should we alter the depth and/or breadth of our activities?
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
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June 24–25, 2008 250 of 253Authorized for Public Release
Primary Dealers
(in billions of dollars)
Total Assets1 Regulators
Dealer Legal Entity
(1) Consolidated
(2) Tri-party Repo Collateral2
(3) Legal Entity
(4) Consolidated
(5)
1. Goldman Sachs 705 1,189 117 SEC CSE/SEC 2. Deutsche Bank Securities 574 3,642 366 SEC FHC/FRS 3. Morgan Stanley 568 1,091 129 SEC CSE/SEC 4. Lehman Brothers 488 786 147 SEC CSE/SEC 5. UBS Securities 458 2,244 159 SEC FHC/FRS 6. Barclays Capital 439 2,4513 237 SEC FHC/FRS 7. Citigroup Global Markets 354 2,200 154 SEC FHC/FRS 8. Credit Suisse Securities 336 1,215 170 SEC FHC/FRS 9. JP Morgan Securities 280 1,643 90 SEC FHC/FRS 10. Banc of America Securities 272 1,737 311 SEC FHC/FRS 11. BNP Paribas Securities 245 2,496 102 SEC FHC/FRS 12. Merrill Lynch Govt
Securities
170 1,042 141
Treasury/SEC
CSE/SEC
13. Greenwich Capital Mkts 150 3,7953 58 SEC FHC/FRS 14. Bear Stearns 131 399 20 SEC CSE/SEC 15. HSBC Securities USA 75 2,3543 34 SEC FHC/FRS 16. Dresdner Kleinwort
Wasserstein Securities
62 1,780 14
SEC
FHC/FRS
17. Cantor Fitzgerald 31 293 NA SEC None 18. Daiwa Securities America 29 174 5 SEC Japan FSA 19. Countrywide Securities 24 199 12 SEC THC/OTS 20. Mizuho Securities USA 23 1,3743 12 SEC FHC/FRS
1 As of Q1 2008, except where noted. 2 Average for May 27 through June 6. In some cases includes collateral financed by affiliates of the primary dealer. 3 Q4 2007.
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
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Liquidity Facilities and the Prudential Supervision of Investment Banks1 and Other Primary Dealers
Key Issues for Discussion
Liquidity Facilities
1. When and under what circumstances should we decide to extend, modify, or eliminate our current credit facilities for primary dealers (PDCF and TSLF)? Should the timing and circumstances differ for the two facilities?
2. If we decide to eliminate one or both credit facilities, how should that be done?
How much notice should be provided? Should the terms of credit extension be gradually tightened prior to closing the facility, or should the facility be closed in one step? When notice is given, should we give assurances that the closing of the facilities will be delayed if conditions in financial markets warrant?
3. Should we seek legislation that would permit us to provide some type of liquidity
backstop to primary dealers in the longer term? Under what conditions should a primary dealer be permitted to draw on such a backstop? What is the rationale for any such backstop?
Prudential Supervision
1. How do we limit the moral hazard risk that our current credit facilities undermine the incentives for primary dealers and the holding companies that own them to manage liquidity and capital to appropriately conservative levels?
a. On what principles should supervisory expectations for investment banks’ capital, liquidity, and risk management be based? Should these expectations be codified in a formal document? How? b. To what liquidity standard should the SEC-regulated investment banks be held? Is it appropriate to expect the firms to maintain liquidity sufficient to withstand a Bear Stearns-type scenario? Should bank- affiliated primary dealers (and their parent companies) be held to the same liquidity standard as investment banks?2 c. Should investment banks be held to the same capital standards as bank holding companies? What about the leverage ratio?
1 For purposes of this discussion an investment bank is a primary dealer whose consolidated supervisor is the SEC. Of the twenty primary dealers, four (including Bear Stearns) are subsidiaries of investment bank holding companies subject to consolidated supervision by the SEC, thirteen are subsidiaries of Financial Holding Companies (FHCs), one (Countrywide) is a subsidiary of a thrift holding company , and one (Cantor Fitzgerald) is not subject to consolidated supervision. 2 Under the SEC’s program for consolidated supervision, investment banks are required to maintain liquidity pools at the parent company sufficient to meet expected cash outflows in specified stress scenarios. Those scenarios include the loss of access to unsecured funding for an entire year.
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
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2. In the longer term, can we rely on an MOU with the SEC to provide the prudential supervision that is necessary to limit moral hazard? Or is legislation needed to enhance the effectiveness of prudential supervision of primary dealers? Is there a need for legislation only if we provide primary dealers with an ongoing liquidity backstop or is legislation needed even if their access is only in unusual and exigent circumstances? 3. If legislation is needed, what type of legislation? Legislation requiring consolidated supervision of investment banks? By whom? Should the securities laws be amended to provide the SEC with explicit authority to conduct consolidated supervision of investment banks? Should all primary dealers and their affiliates be regulated as FHCs? Are changes to the functional regulation provisions of Gramm-Leach-Bliley needed to make effective consolidated supervision of primary dealers that are part of FHCs? 4. If we provide primary dealers with an ongoing liquidity backstop, do we need to alter the criteria for becoming a primary dealer (which have worked well to define appropriate counterparties for desk transactions) to require a primary dealer and its consolidated organization to be subject to effective prudential supervision?
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
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