Ip, Greg

Schlesinger, Jacob M.

VandeHei, Jim

Wessel, David

Yale University

Yale University EliScholar – A Digital Platform for Scholarly Publishing at Yale YPFS Documents (Series 1) Browse by Media Type 9-18-2001 Attack on America: The Consequences - Y2K Blueprint Helps Banks Coordinate Intervention Greg Ip David Wessel Jim VandeHei Jacob M. Schlesinger Follow this and additional works at: https://elischolar.library.yale.edu/ypfs-documents Recommended Citation Ip, Greg; Wessel, David; VandeHei, Jim; and Schlesinger, Jacob M., "Attack on America: The Consequences - Y2K Blueprint Helps Banks Coordinate Intervention" (2001). YPFS Documents (Series 1). 14328. https://elischolar.library.yale.edu/ypfs-documents/14328 This Document is brought to you for free and open access by the Browse by Media Type at EliScholar – A Digital Platform for Scholarly Publishing at Yale. It has been accepted for inclusion in YPFS Documents (Series 1) by an authorized administrator of EliScholar – A Digital Platform for Scholarly Publishing at Yale. For more information, please contact elischolar@yale.edu. Page 1 of 4 © 2022 Factiva, Inc. All rights reserved.Attack On America: The Consequences --- Y2K Blueprint Helps Banks Coordinate InterventionBy staff reporters Greg Ip, David Wessel and Jim VandeHei, Jacob M. Schlesinger2,778 words18 September 2001The Wall Street Journal EuropeWSJE1English(Copyright (c) 2001, Dow Jones & Company, Inc.)WASHINGTON -- This was the moment when the U.S. government's elaborate preparations for the MillenniumBug finally paid off.The culmination came at 7:30 a.m. on Monday, when Alan Greenspan convened Federal Reserve Boardmembers in Washington, and the Fed's regional bank presidents joined by speaker phone. After observing twominutes of silence, the group took just 20 minutes to agree on slashing the Fed's benchmark fed funds interestrates by a half a percentage point to 3% -- the lowest level since 1959.But the central bank's surprise move capped a week of hectic scrambling by the world's economic generals tomake sure the terrorists who destroyed the World Trade Center didn't do the same to the world economy. And theblueprint for this battle was largely written in anticipation of the Y2K scare.While their military and law-enforcement counterparts across the U.S. secured perimeters, grounded airplanesand searched suburban apartments, central bankers, financial ministers and the White House economic teammoved just as swiftly to keep money moving globally, banks lending, cash machines full of bills. All of thisculminated with the successful reopening of the U.S. stock market, which had been shut down ever since themass terrorist attacks a week ago today.Still it's too soon to say whether their efforts will succeed. Though there were no obvious glitches in trading onMonday, stock prices fell sharply, with the Dow Jones Industrial Average falling below 9000 for the first time inmore than two years.There were rough spots. When the attacks hit, key American players -- notably Fed Chairman Greenspan andTreasury Secretary Paul O'Neill -- were overseas and had to hurry back to the States. At one point, the Fed founditself temporarily unable to lend dollars to its European counterparts, sorely in need of U.S. dollars to aid their ownbanks, because agreements among central banks had been allowed to lapse. Another glitch: Officials discoveredthat some officials phone numbers had changed and the lists hadn't been updated.But by and large, the plans worked.With U.S. markets reopened and the fear of a financial-system meltdown largely past, attention now turns torebuilding and to minimizing the depth of the inevitable recession. President George W. Bush -- starting to pivot abit from his focus largely on the human and strategic aspects of the tragedy -- convened leaders of his economicteam at the Oval Office in the White House Monday afternoon as the market closed at 4 p.m. to weighalternatives for keeping the economy and crucial sectors afloat. His group of conservative advisors -- who cameto Washington earlier this year intending to limit the federal government's role in the economy -- consideredwhether and how to bail out industries from airlines to insurance, and whether a big new tax cut would help propup growth.Earlier in the day, as Mr. Bush was leaving a meeting with Pentagon employees, he groped for words to reassureinvestors and executives, pledging to "send a clear signal to the risk takers and capital formaters [sic] of ourcountry that the government's going to act."Page 2 of 4 © 2022 Factiva, Inc. All rights reserved.As much as anybody, America's economic leadership was caught unaware and out of place by last week'ssurprise attack and had to scramble to get at the controls.Mr. Greenspan was on a Washington-bound flight from Switzerland, where he had been attending aninternational meeting of central bankers. The pilot came on an announced to the passengers that Americanairspace had been closed and that the flight was returning to Zurich. With the phones into the U.S. jammed, theFed chairman was unable to make contact with anybody back in Washington until the plane had landed. Three ofthe other four Fed governors were also out of Washington on Tuesday: One was in China for bilateral economicmeetings, another giving a speech on Social Security in Arizona, another on vacation.Back in Switzerland, Mr. Greenspan linked up with New York Fed President William McDonough -- the FederalReserve system's main contact for financial markets -- who had also attended the European meetings, to hopaboard a military tanker plane, which traveled to Washington via London. Mr. Greenspan was back at his desk by1 p.m. Mr. McDonough was able to get back to New York by hitching a ride on a U.S. air force plane carrying JoeAllbaugh, director of the U.S. Federal Emergency Management Association, and New York Democratic Sens.Hillary Rodham Clinton and Charles Schumer. Mr. McDonough's chief aide for monitoring markets, Dino Kos, wason a separate flight back from Switzerland and got diverted to Montreal. Mr. Kos found a bus that dropped him offat JFK at 2 a.m.Mr. O'Neill was in Tokyo when he found out about the attacks, preparing for meetings with Prime MinisterJunichiro Koizumi, and Japan's finance minister and central bank governor. He quickly cancelled the meetings,and was able to get onto a cavernous military cargo plane with special seats snapped in place. After refueling inthe air, the plane landed at Andrews Air Force base near Washington around 5 p.m. Wednesday.Fortunately, economic and financial policy makers had a war plan in place for just such a shock to the system,and there enough essential players to implement the emergency response plan, even with so many top officialsincommunicado at crucial moments. The main vehicle for handling major financial jolts is the President's WorkingGroup on Financial Markets, a committee first assembled in the wake of the 1987 stock market crash. It hadhoned its crisis- management blueprint during the global financial turmoil in 1997 and 1998, and in preparationsfor the Y2K changeover at the end of 1999. The group consists of the Fed, the Treasury, the Securities andExchange Commission, and the Commodities Futures Trading Commission, with some White House officialsweighing in."They knew a lot more about the interconnections of the payment systems and the bank computers than they didbefore Y2K," says Alice Rivlin, a former Fed vice chairman.Indeed, to respond this week, central bankers around the world pulled out an emergency contact list that hadbeen prepared in anticipate of a possible Y2K crisis. Within hours of the plane crashes, the leaders or deputies ofthe key working group agencies were on the phone with their own organizations and with each other, making achecklist of potential problems to examine and batting about ideas on how to respond. They've been meeting, byphone, at least twice a day every day for the past week. Two main participants include have been separatehalves of one of Washington's main financial power couples: Fed Vice Chairman Roger Ferguson and AnnetteNazareth, head of market regulations for the SEC.Mr. Ferguson, the one member of the Fed's board of governors in town Tuesday, was one of the first officials inWashington to launch the emergency response. He was, in many ways, well-suited for the crisis, especially forfinding and snuffing out problems in the banking system. Before joining the Fed in 1997, he was afinancial-institutions consultant at McKinsey & Co. After becoming the central bank's first African-American vicechairman in 1999, he chaired a committee of the world's central banks preparing for Y2K. Few people knew aswell as Mr. Ferguson exactly what questions to ask and whom to contact to assess the state of the globalfinancial system.With unconfirmed reports of car bombs going off in nearby downtown Washington and many federal officespreparing to evacuate, Mr. Ferguson convened as many of the regional bank presidents as he could on theconference, and once it was over, issued a critical statement: "The Federal Reserve System is open andoperating. The discount window is available to meet liquidity needs."The wording was similar to a statement Mr. Greenspan had issued in the wake of the 1987 market crash just afew weeks after he had taken the helm at the Fed. The discount window is a rarely used backstop for banksneeding quick money. The previous week, the total lent through that mechanism was a mere $200 million. Withina day of the Fed announcement, it had hit a staggering $45.6 billion.Page 3 of 4 © 2022 Factiva, Inc. All rights reserved.Meantime, the New York Fed, under the watchful eye of Sandra Krieger, a PhD economist responsible for moneymarket operations, was busy making sure banks and investment dealers unable to raise essential funds in thebarely functioning money markets had all the financing they needed. Though some of its 25 primary dealers hadseen their trading operations stranded by the disaster, enough were operating that the Fed that morning got byWednesday afternoon the New York Fed had received demands for $46.25 billion in one-day funds; it lent $38.25billion, more than double the previous record for any single injection of funds, set back in the 1980s. To ease theway, it made it easier for dealers to post securities other than Treasurys as collateral. After that day, it met alldemands for funds; by Friday, the injection had reached an astounding $81.25 billion, exceeding what it had doneover Y2K.Meanwhile, the New York Fed had to deal with the chaos surrounding its own offices on Maiden Lane just a fewblocks from the destroyed World Trade Center. Beginning Wednesday, some of its staff began moving to a backoffice site in East Rutherford, New Jersey, which also has a backup trading desk. That afternoon, the U.S.National Guard ordered out most of the remaining staff when concerns rose that another nearby building mightcollapse. The concerns proved unfounded, but by Thursday the Fed was conducting its open market operationsfrom East Rutherford. Not all its staff evacuated: Throughout the crisis, a protection force has kept watch over thehuge hoard of gold the New York Fed stores deep beneath its headquarters on behalf of foreign central banks.Throughout the week, Fed officials popped up everywhere doing their part to get the markets going again. At ameeting Thursday afternoon on how to reopen the markets, Mr. McDonough reminded the bankers andexecutives in attendance that they were expected to keep credit flowing to brokerage firms who were good creditsbut cash constrained by the disaster. They had heard the same message during the 1998 debt markets crisis andover Y2K. The Fed also quietly notified banks that it would be "very understanding" of their lending to securitiesdealer affiliates, a practice normally limited by Depression-era laws.Except for New York, the Fed's 12 regional banks were unaffected by the attack, though they did have to meet ashort-lived surge in demand for currency from their member banks. But on Wednesday both the Richmond andAtlanta Feds learned they may have been the target of other terrorist attacks. Concern was especially acute inRichmond, where the Federal Reserve Bank building is among the city's most prominent and was designed bythe same architects who designed the World Trade Center. Though the banks were told the source of theinformation was doubtful -- and has since been discounted -- they nonetheless beefed up security. The Fedpresident in Richmond, Al Broaddus, drafted a letter to his employees Saturday expressing confidence in thebuilding's security and promising to take any actions necessary for their safety, then met with them Mondaymorning to answer their questions.Even before Monday's emergency rate cut, it was obvious to Fed officials that the economic recovery they'd allhoped would soon be under way was going to be compromised; just how much, nobody knew. Americanconsumer confidence, already under pressure, was bound to slide further. Business investment, the primarysource of the economy's weakness, could suffer further as companies factored an added risk premium in theirplans. The gravity of the situation was obvious enough that even before Monday's move, five of the Fed's regionalbanks had voted, either at scheduled meetings or by teleconference, to request a half point rate cut.Almost as important as the Fed's actions at home were its efforts to limit the damage of the crisis abroad. TheEuropean Central Bank, in particular, had a dilemma: how to help European banks that couldn't finance theirsizable dollar positions in New York? Banks in the U.S. were unwilling or unable to lend them dollars, partlybecause of difficulties in arranging the required collateral. And if foreign central banks wanted to get the dollars inthe open market, they risked destabilizing exchange rates.Two alternatives were considered. The first was for the Fed to swap dollars for euros and pounds so that the ECBand other European central banks could then lend to commercial banks in Europe. But formal swap agreementsbetween U.S. and European central banks had lapsed and there were some immediately legal problems inreinstating them amid everything else that was going on Wednesday.So the Bank for International Settlements in Basle, the central banks' central bank, worked on an alternative:Because it is a gilt-edged credit, the BIS was able to arrange unsecured loans of dollars from U.S. commercialbanks that it was prepared to lend to European central banks. This didn't prove necessary. Early last Wednesdaythe Fed announced it had reached a swap arrangements of up to $50 billion with the ECB. On Friday, itannounced a $30 billion swap agreement with the Bank of England and expanded an existing swap line with theBank of Canada to $10 billion from $2 billion.Page 4 of 4 © 2022 Factiva, Inc. All rights reserved.In a statement, the BIS said, "We had contacts with the major central banks, and put in place contingencyarrangements to supply foreign exchange liquidity if need. In the event, other means were available to supply theliquidity required."Meanwhile, central bankers and finance ministers also acted on the political front. The night of the attacks,Canadian Finance Minister Paul Martin spoke by phone with Secretary O'Neill in Tokyo. The Canadians thendrafted a statement for the Group of Seven most industrialized nations, then sent it to the Italians. The Italianstook it to the European ministers, who were meeting in Brussels on Wednesday.There was some debate within the G7 about the wording, particularly the phrase "We will monitor economicdevelopments and financial markets closely and stand ready to take further action as necessary." Some of thecentral bankers, especially the Fed, wondered exactly what further action the group was willing to pursue,particularly on the fiscal front.In the end, though, the language stayed in the G7 statement. "We are committed to ensuring that this tragedy willnot be compounded by disruption to the global economy," it said. "Our central banks have indicated that they willprovide liquidity to ensure that financial markets operate in an orderly fashion."The global coordination continued through the weekend. And on Monday, in the most synchronized monetarypolicy move since the crash of 1987, the ECB, the Bank of Canada and Swiss National Bank joined the Fed inslashing interest rates all outside their scheduled meetings. Central banks in Canada, Switzerland and Swedenalso eased policy. The Bank of Japan intervened in the currency markets to weaken the yen, a move that canhelp stimulate the economy. The Bank of England was conspicuous by its absence: It held steady after itsgovernor said last week that a coordinated move across the globe was unlikely.The scope and speed of the moves reflect the feeling among central bankers that the damage goes well beyondproperty and lives. Many economists now the American economy will fall into recession, pulling down othereconomies.In Europe, the ECB's move is certain to alter the bank's reputation for inflexibility and late acting. As recently asWednesday, ECB president Wim Duisenberg had said interest rates were fine where they were and that a policyresponse would smack of panic. Feelings began to change over the next few days. At a regular meetingThursday, some ECB council members acknowledged a cut in Europe might be necessary. By Monday's hastilyarranged afternoon conference call, this had become the majority view, but it still took lengthy debate before theECB decided to cut its key rate to 3.75% from 4.25%.Document wsje000020010918dx9i0000b

Attack on America: The Consequences - Y2K Blueprint Helps Banks Coordinate Intervention

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