Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

I will be very brief, Mr. Chairman. I do want to say, with respect to the short-term issues, that I fully support the plan that you laid out. I certainly favor keeping these facilities in place beyond September. Even if their use diminishes, I agree with the point that it doesn’t necessarily indicate that they are not playing a tremendously important role. The ramping up of our oversight of these institutions in the agreement with the SEC is a very important part of continuing these facilities.

On the long-run issues, it is a wonderful list of questions. I don’t know the answers to the questions. I think we really need to dig in very rapidly and do serious work on them. They are fundamental. President Rosengren raised a list of issues about this, the same ones that have been very much in my mind. What institutions? It is not obvious to me that the right list of systemically important institutions is the primary dealers. I think someone—maybe President Rosengren—raised the issue of Countrywide, a huge mortgage company. I certainly worried last summer that it had created systemic risk, and it is not just the primary dealer there. I also think there is an issue with respect to hedge funds, similar to those that arose with Long-Term Capital Management. This raises very troubling issues to me about our trying to identify and take on supervision of all systemically important institutions. This is a very tough issue that I don’t know the answer to.

But also, what is going on raises fundamental issues about how we conduct consolidated supervision. Even if all the systemically important institutions were primary dealers or mortgage companies within bank holding companies that currently we do have umbrella supervision over, I am not at all convinced that the way we are carrying out supervision now would have prevented a Bear Stearns-type of episode within an institution that is currently solidly under our supervision. Last summer I was pleased in some ways that we had lost direct supervision of Countrywide to the OTS. But it might well have been in our domain—six months earlier it would have been—and it could have created a systemically important problem if it had failed. So just the nature of how we carry out this Fed-lite approach, is that really the right way? I see us as very focused on process in our supervision of holding companies. We don’t do a lot of transaction testing. Obviously, this raises very fundamental issues, even within our existing domain, about how we carry out comprehensive umbrella supervision. I don’t have any answers, but we clearly need to get on it quickly.

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