A Tale of Two Unknowns: The Fed's Second 2007 Emergency Meeting
NEW YORK ( TheStreet) -- The Federal Reserve seriously was concerned it didn't have enough staffing to service the discount window in 2007.
Transcripts from the Federal Open Market Committee -- the Fed's policy-making wing -- from the early days of the financial crisis suggest that Fed members sometimes found themselves unfamiliar with the financial instruments that were beginning to cave and frightened by the prospects of encouraging more banks to approach its discount window to remain liquid.
During a second emergency meeting on Aug. 16, 2007, FOMC members debated the impending statement it would release the next day that said the central bank would reduce the primary credit rate -- one of three discount window programs it offers -- by 50 basis points to 5.75% in an effort to encourage banks to request loans from the regional Reserve banks.
Six days prior to this meeting, the FOMC had held its first emergency conference call of the approaching financial crisis to inform members that the central bank would be issuing a statement later in the day to say that it would provide liquidity to maintain "orderly functioning" of the financial markets. Troubles with Washington Mutual and Countrywide (now part of Bank of America (BAC) ) had tormented markets and the commercial paper markets in Europe and the U.S. started to face pressures.
But banks rapidly became more illiquid than the Fed had anticipated in the first meeting, and members opposed a bailout option. Members avoided bailouts as an option because it wasn't clear in August 2007 just how unhealthy conditions would later become. General worry among Fed bankers, according to the transcript, was that illiquidity was spreading and banks were afraid to approach the discount window.
The discount window -- where banks go to ask the Reserve banks for loans -- carried a negative stigma.
The argument split into two directions: What if virtually none of the banks approach the discount window, despite a drop in the rate? Or, what if the "8,000 banks and many more depository institutions than that" all clamor at once to the window?
The latter situation raised some concern.