I want to thank President Yellen for the detailed discussion of the role of the Federal Reserve in supporting IndyMac in its final weeks. It reiterates some of the fears I have of what we may face going forward. Extending the term of the TAF to 84 days may compound the adverse selection process whereby those banks that anticipate difficulties may be those most likely to want to go for the 84-day period and bid up the rate that they are willing to pay because they would be anticipating some of the difficulties that we just heard recited.
More than that, we in Dallas are worried about the reputation of the Federal Reserve if there is a series of such follow-up events to IndyMac and how it is going to look for you, Mr. Chairman, if you have to testify before the Congress, which has the benefit of 20/20 hindsight and will criticize us for making loans for which foresight is far from perfect: “How could you have made such a loan to a bank that everybody who reads the Wall Street Journal and the New York Times and looks at the Internet knows was in trouble, and how could you do it on such preferential terms?” Such questions damage the reputation of the Fed. In addition to the credit risk aspects, we have the problem of the Fed’s reputational risk, particularly in the halls of the Congress, during a particularly troubled time going forward.
On balance, I think the TOP program does no harm. We in Dallas are willing to support it, but we still have some reservations. One of my concerns is that, in the document that was sent out yesterday for the FOMC vote on the TSLF options authorization, there is no mention in the first paragraph on page 3 about this being a special, short-term, end-of-month, end-of-quarter option. It is just left there in general terms that we are going to offer up to $50 billion in additional draws on the facility, and there seems to be a lack of clarification. One question I have is, Is the System going to put out a list of frequently asked questions or something of that nature to add clarity? Another concern that I have is Bill Dudley’s earlier statement that the Fed has other means of easing its balance sheet constraints should the new facilities tie up more funds or encumber more funds on our balance sheet. We didn’t really have any follow-up on that point. What are the plans to ease our balance sheet constraints should it become necessary, and does this conflict with the fed funds targets that the FOMC is trying to hit? We need some explicit discussion of that or at least to raise the questions as we go forward, perhaps at the next FOMC meeting. Thank you, Mr. Chairman.