As Bernanke Departs, Wholesale Funding Reforms Left Unfinished

WASHINGTON — In his last public appearance as Federal Reserve Board chief, Ben Bernanke on Thursday highlighted the role the central bank played in strengthening the wholesale funding market, a piece of the reform effort still left unresolved.

Bernanke, who steps down Jan. 31, said in a Q&A at the Brookings Institution that the Fed's liquidity injections during the crisis aimed at stopping runs in the repurchase, commercial paper and money markets get little attention compared to other interventions policymakers took to save financial institutions from the brink of failure.

Those liquidity injections "were less visible, but probably occupied a much greater portion of our time," Bernanke said, adding they "were at least as important, if not more important, in terms of stabilizing the financial system" than other actions regulators took.

Bernanke said the Fed's moves to rid the unease of the 2008 crisis were indeed influenced by Walter Bagehot, a 19^th-century British writer whose theories about the need for central bankers to be lenders of last resort were said to have motivated steps taken by regulators in the most recent crisis.

At the height of the crisis, the Fed strove to find ways to adapt Bagehot's advice to the modern U.S. financial system, Bernanke said. While the country was not witnessing the pervasive and devastating classic bank runs that it had in the 1907 panic — which led to the Fed's lender-of-last-resort authority — the central bank was dealing with a different set of runs on a new variety of wholesale short-term lenders.

"While the analogies between 'It's a Wonderful Life' and people running on the thrift are not always immediately obvious, there was in fact a very close parallel throughout the whole process," he said. "It was a different institutional context, but very much an approach that was entirely consistent with Bagehot's recommendations."

But his recollection about how the crisis affected short-term wholesale funding markets is noteworthy as the Fed continues to press ahead with efforts to reform those markets, a key issue still left over from the crisis. Top Fed officials, including Bernanke, have stressed the need to eradicate their susceptibility to runs. A proposal is expected in the near term, but no specific timing has been offered yet.

Still, under the Dodd-Frank Act, the U.S. central bank will never again be able to provide emergency assistance to an individual institution like it did during the crisis. (The tool had not been used since the Great Depression.)

It's a change in the Fed's authority, however, that Bernanke has welcomed.

"We were supportive of those changes and we're totally comfortable," said Bernanke.

Meanwhile, he praised Title II of the law, which establishes an "orderly liquidation authority" to safely unwind failed institutions. He noted the U.S. bankruptcy code has limitations for financial institutions. While the interest of creditors is a priority under bankruptcy, it does not address concerns tied to stability of the financial system.

Title II changed all of that by creating a "much more structured and much more flexible approach" in addressing a critical firm failing in the middle of the crisis, Bernanke said.

While the Fed may no longer have its so-called "13(3) powers" — which had previously allowed it to save individual institutions — it still has the ability to intervene on a broader basis in markets tied to commercial paper, asset-backed securities and other instruments, as long as the Treasury secretary grants permission.

Reflecting on the intervention by regulators and the government during the crisis, Bernanke lauded his "strong partnership" with both former Treasury Secretary Hank Paulson and Tim Geithner, who was president of the Federal Reserve Bank of New York and then went on to succeed Paulson.

Despite different backgrounds and different personalities, all three men recognized the calamity of the situation and the need for cooperation, Bernanke said.

Bernanke also spoke about how difficult it was to gain assistance from Congress in passing legislation to create the unpopular Troubled Asset Relief Program, which took two floor votes before it could pass the House of Representatives. Regulators were close to the brink before lawmakers enacted the legislation.

"There was no chance of a Tarp-type program before it was becoming evident how badly the situation was going to be," Bernanke said. "That was the Catch-22 we were in, basically. We had no choice but to involve Congress, and I was very clear about that."

The legacy of Bernanke, who taught at Princeton before entering government, will likely be tied to his calm approach in dealing with one of the worst financial crises in U.S. history. But he said he does not consider himself the Buddha of central bankers — the label Geithner once gave him. He was only focused on the task at hand.

"It's in my nature, I think, to kind of focus on the problem. I was so absorbed in what was happening and trying to find a response to it that I wasn't really in that kind of reflective mode," he said.

The Fed chairman, whom history may remember someday as having saved the financial system from going off a cliff, described it another way. "If you are in a car wreck, you are mostly involved in trying to avoid not going over the bridge, and then later on you say, 'Oh my god.' "