The Federal Reserve's Role in Providing Liquidity during the Global Financial Crisis

Erika Johansson, Delphi, Professor Johnson, Berit Salheim, AmCham and
Clas Romander, Delphi

The U.S. Federal Reserve committed hundreds of billions of dollars in unprecedented lending activities and purchases of mortgage-backed securities during the global financial crisis. Such actions were critical given the virtual complete collapse of both long term and short term credit. The Federal Reserve engaged in these efforts based on its authority under the Federal Reserve Act, and particularly upon its interpretation of Section 13(3), a formerly untested and unused clause in the Federal Reserve Act. Such efforts effectively doubled the size of the Federal Reserve’s balance sheet. This expansion of authority exercised by the Federal Reserve not only has significance in today's financial crisis but also sets a precedent for future Federal Reserve actions.

The Federal Reserve relied on Section 13(3) to authorize its controversial lending actions with respect to Bear Stearns, AIG, Citigroup and Bank of America. It also relied on Section 13(3) to create various liquidity programs such as the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, and the Commercial
Paper Funding Facility. The Federal Reserve also greatly expanded its traditional lending to financial institutions and central banks through the creation of the Term Auction Facility and Central Bank Swap Facility. Finally, in an effort to stabilize the residential real estate market, the Federal Reserve has purchased over $1 trillion of mortgage-backed securities through the Federal Reserve’s MBS purchase program. This presentation will analyze these actions and discusses their current and future implications.

Prior to joining The University of Utah faculty two years ago, he spent 13 years at Loyola University Chicago School of Law. Professor Johnson has taught law school courses on finance, derivatives and tax. Professor Johnson has published 4 books and over 36 articles on these topics. Currently Professor Johnson’s research interests focus on the legal reforms to the over-the-counter derivative markets and the U.S. regulatory response to the great financial crisis.

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