The Legal Position of the Central Bank The Case of the Federal Reserve Bank of New York

1
The Legal Position of the Central BankThe Case
of the Federal Reserve Bank of New York

• Thomas C. Baxter, Jr.
• General Counsel
• Federal Reserve Bank of New York

January 19, 2009 London School of Economics
Political Science
2
Timeline

• August 9, 2007
• BNP Paribas freezes redemptions for three
  investment funds
• ECB injects 95 billion into the interbank market
• August 17, 2007
• Federal Reserve announces Term Discount Window
  Program
• December 12, 2007
• Federal Reserve announces Term Auction Facility
• Federal Reserve announces Reciprocal Currency
  Arrangements
• March 11, 2008
• Federal Reserve announces Term Securities Lending
  Facility
• March 14, 2008
• Federal Reserve lends 10-15 billion to JPMorgan
  Chase to lend to Bear Stearns
• March 16, 2008
• JPMorgan Chase acquires Bear Stearns

3
Timeline (continued)

• March 17, 2008
• Federal Reserve opens Primary Dealer Credit
  Facility
• September 7, 2008
• United States bails out Fannie Mae and Freddie
  Mac
• September 14, 2008
• Bank of America buys Merrill Lynch
• September 15, 2008
• Lehman Bros. declares bankruptcy
• September 16, 2008
• Federal Reserve lends AIG 85 billion

4
Timeline (continued)

• September 19, 2008
• Federal Reserve announces ABCP Money Market Fund
  Liquidity Facility
• September 25, 2008
• Washington Mutual seized
• October 27, 2008
• Federal Reserve opens Commercial Paper Funding
  Facility
• November 24, 2008
• Federal Reserve announces Money Market Investing
  Funding Facility
• November 26, 2008
• Federal Reserve announces Term Asset-Backed
  Securities Loan Facility
• February 2009
• Term Asset-Backed Securities Loan Facility
  expected to go live

5
Section 13(3) of the Federal Reserve Act

• In unusual and exigent circumstances, the Board
  of Governors of the Federal Reserve System, by
  the affirmative vote of not less than five
  members, may authorize any Federal reserve bank,
  during such periods as the said board may
  determine, at rates established in accordance
  with the provisions of Section 14, subdivision
  (d), of this Act, to discount for any individual,
  partnership, or corporation, notes drafts, and
  bills of exchange when such notes, drafts, and
  bills of exchange are indorsed or otherwise
  secured to the satisfaction of the Federal
  reserve bank Provided, That before discounting
  any such note, draft, or bill of exchange for an
  individual, partnership, or corporation the
  Federal reserve bank shall obtain evidence that
  such individual, partnership, or corporation is
  unable to secure adequate credit accommodations
  from other banking institutions. All such
  discounts for individuals, partnerships, or
  corporations shall be subject to such
  limitations, restrictions, and regulations as the
  Board of Governors of the Federal Reserve System
  may prescribe.

6
Master Transaction Diagram
Maiden Lane LLC
BlackRock Investment Manager
State Street Custodian/Administrator/ Collateral
Agent
FRBNY
JPMorgan
Maiden Lane LLC
29.0 bn
Fed Senior Tranche A Loan up to
29.0 bn
TRS
Derivatives
P I on Tranche A Loan Residual
P I on Tranche B Loan
JPMorgan Tranche B Loan1.0 bn
1.0 bn
30 bn
30 bn market value of assets and hedges
Derivatives with Various Counterparties
Residential Loans
Cash Securities
Commercial Loans
7
Statement of Condition of All Federal Reserve
BanksDecember 31, 2008 ( billions)