On the morning of 11 September 2001, when Federal Reserve Vice Chairman Roger W. Ferguson, Jr. arrived at work in his office in the Federal Reserve Bank in Washington, DC, he was alone. I don’t mean there weren’t other people in the building it’s just that it was a busy day and all the other members of the Fed Board of Governors who are normally in Washington were traveling. In fact, Ferguson was the only member of the Board who was anywhere near the District. Alan Greenspan, the Chairman of the Fed, along with William J. McDonough, President of the Federal Reserve Bank of New York (which is, in case you didn’t know, the first among equals in the Fed system) were both in Zurich, Switzerland at a meeting of central bankers. Actually, it was worse than that, Greenspan was on a commercial plane in route back to the US and was out of contact with his staff. (Remember, this was before wifi was available on flights.)

Ferguson, considered a deliberative and thoughtful man by his staff, settled into his office and turned on his television to keep track of the markets. When the second plane hit the World Trade Center no one had to tell Ferguson, he knew the country was under attack and he already knew that the attack was aimed at the financial backbone of the world, lower Manhattan. Ferguson declared an emergency and all over the Fed stunned staff found assurance in going through emergency procedures for which they had prepared. The Joint Y2K Committee Ferguson had so recently headed proved to be a windfall of emergency planning and the entire Fed system referred back to those decisions and the associated training throughout the 9-11 crisis. By the time employees could all hear the muffled thump coming from the direction of the Pentagon and smoke could be seen out the windows the staff had secured themselves and the premises and they had started to organize their war room. The President, George W. Bush, was still reading a children’s book.

At 9:25AM ET the Federal Aviation Administration ordered all planes grounded.

Even as all of Washington dithered between evacuating or sheltering-in-place fearing the rumored fourth plane, Ferguson was already worrying about the next disaster, the crash of the entire US financial system. Within forty-one minutes of the second plane hitting the World Trade Center Ferguson issued as simple clear statement, via Fedwire, to all member banks and institutions assuring them that the federal fund transfer system was “fully operational” and that Federal Reserve Banks would “stay open until an orderly closing could be achieved.” In other words, we are here and we are fully functional. And that was just the first 41 minutes. Alan Greenspan was still on a plane with no knowledge of events and the President was just getting to Air Force One.

Greenspan’s plane was one of the lucky ones. Instead of being grounded in Iceland, Greenland or Newfoundland as had so many other international flights, Greenspan’s flight was able to return to Zurich. He had no idea why until the plane landed some time later.

Meanwhile, things at the Federal Reserve Bank of New York weren’t just chaotic, they were terrifying. Even before the first tower fell Protection staff had locked the vaults, secured the facility and cleared the street in front of the Fed for emergency vehicles. Key personnel equipped with special frequency radios were in touch with the FedNY back-up location in New Jersey letting staff know that there was an emergent situation and to prepare for accepting the operational responsibility of the Bank. Down in the lobby Protection staff began to pull in injured pedestrians so that they could be treated by on-site Fed medical personnel and as the towers fell this trickle of pedestrian refugees became a flood. Someone on the physical plant team thought to turn off the ventilation systems immediately in order to preserve the air quality inside the building and Fed staff handed out face masks and wet paper towels to ash-covered survivors. Housekeeping staff divided their efforts between cleaning up as much of the ash as possible near the entry points where it was worst and cleaning the cafeteria. Incredibly, by noon the cafeteria was up and running and was providing beverages and snacks to the refugees, until they were able to evacuate, and then meals to staff and emergency responders. The Fed continued to feed fire and police personnel around the clock. The FedNY also provided space for first responder trauma counseling, a service much needed and much used during those early days.

Back in Washington, DC the capitol area was under an evacuation order. Most FedDC staff left but about one hundred remained to help Ferguson run the Bank. By now employees knew that at least one other plane had been bound for Washington but still they remained. Ferguson had reached out and spoken with members of the Board and the Federal Open Markets Committee (FOMC) and by noon the Fed publicly released a statement which proved to be both elegant and powerful in effect,



The Federal Reserve System is open and operating. The discount window is available to meet liquidity needs.

I know, it doesn’t sound like much but if you are JP Morgan Chase Bank and you have not only had to evacuate your primary clearing facility but may well have entirely lost it, this statement translates to, “We are in this with you. Let us know what you need and we will back up the dump trucks of money.” Bankers everywhere took a tiny breath and thought, probably for the first time that day, their bank might live to see the close of business. You see, only a handful of banks were directly effected but among them were the Bank of New York (BoNY) and Chase so the resulting earthquake would shake almost all banks due to the interrelated structure of the industry. Chase and BoNY, among many other critical functions, hold the clearing accounts for one hundred percent of the primary dealers and interdealers for the securities market. It was fortunate that Chase was already in the process of moving its clearing operations to Florida. While it appears they have never heard of global climate change they were able to resume operations to an increasing degree as the week went on. The BoNY was harder hit and their ATM network crashed and remained down until the 19th. (BoNY did refund all customers the fees associated with using the ATMs of other banks.)

As far away as the Federal Reserve Bank of Chicago non-essential employees were also evacuating and the back-up location was being warmed up. The Fed in Chicago is one short block from the Sears Tower and while others around the country may not remember, Chicago was very much in fear of attack. Chicago staff decided not to shift to the back-up because they knew that DC and NY would need them and they felt the time it would take to move was not time the system could afford. Gordon Werkema, a Vice President at the Chicago Fed said, "Closing the Fed would be like shutting down the fire department because there are too many fires." From their offices in Washington the Department of the Treasury Office of the Comptroller of the Currency (OCC) had issued a statement saying that banks around the nation could close early at their discretion. Several in the neighborhood of the Sears Tower took them up on it.* In the war room of the Chicago Fed one employee wrote, “JUST THE FACTS” up on the white board at the front of the room. It was going to be that kind of day.

[*Bank of America and Wachovia, both located in tall towers in Charlotte, NC, also elected to close for the day and, wisely, erred on the side of employee safety.]

When Seven World Trade Center fell steel I-beams scissored into a major Verizon communications hub. Switching equipment which handled 40% of the land lines in lower Manhattan and 20% of the lines for the New York Stock Exchange (NYSE) were instantly cut. This included all their internet, voice, PBX and data lines. Other providers were also hit though none quite as deeply. That the FedNY was still up and running was a tribute to their (clearly smarter-than-your average-bear) IT staff who had managed to keep the computers and networks functioning, for the most part, with intended emergency systems working as planned. During the Ferguson-led Y2K emergency planning it was determined that key employees should carry two cell phones from two different providers and pre-load them with a master list of phone numbers including their key co-workers, key bank customers, banking regulators, utility service providers and the like. In many cases they had multiple numbers for specific contacts at each organization. It was this kind of planning which proved invaluable at all the Fed Banks across the country. That essential people were able to reach one another was a significant cog in the process. For those that the Fed, in particular the NYFed, were unable to locate, industry organizations stepped in and tracked down their people linking them back to the Fed and freeing Fed employees to put out other (metaphorical) fires.

Elsewhere in lower Manhattan virtually every bank and financial institution was forced to evacuate. This included the New York Stock Exchange, the Nasdaq, which was closed for the very first time, and the New York Mercantile Exchange. The American Stock Exchange, known as “the curb”, had been located in the Towers and the New York Board of Trade had been in Four World Trade Center. Both were now without a home but still had their people. In the surrounding area 18,000 small businesses were disrupted, damaged or entirely destroyed. Outside of the US, other exchanges, including London, closed out of an abundance of caution. The money markets and foreign exchange markets were seriously disrupted but did manage to stay open throughout the day.

In Chicago the Fed had their back-up ready, just in case, by 10:30 AM. They remained in constant touch with Fed officers around the country including Jack Wixted, Chicago’s Vice President of Supervision and Regulation (S&R), who had been in Washington, DC for a meeting and was now assisting Ferguson, Chicago’s Senior Vice President and CFO, Carl Vander Wilt, who happened to be at the NYFed for a meeting and stayed to assist through the long day there and two of Chicago’s S&R staffers who were in San Francisco at the Fed where they managed to get a rental car to drive the long way home. All the Fed branches were able to communicate with one another throughout the entire crisis.

Back in Washington Ferguson was only just getting started. Alan Greenspan, finally on the ground and with a phone in his hand, had called Ferguson and told him that he “trusted him” and that he knew Ferguson would make the right decisions. Ferguson immediately got out every tool in the Fed’s great big tool box and brought them all to bear opening up the taps of liquidity.

First up was the discount window. The Federal Reserve Act of 1914 was intended to bring stability and flexibility the financial system through the creation of the Federal Reserve Bank and sets as one of its objectives the necessity to “furnish elastic currency.” Certainly this was well in evidence during the week that followed 9-11. Each Fed Bank was instructed to reach out to all their depository customers to find out if and how much they would need to borrow from the discount window on the night of the 11th. Fed Banks across the country had staff working until midnight to help banks make assessments and close their day. Interestingly, during Y2K planning the Fed had arranged with depository institutions to set aside some pre-pledged collateral and it was against these emergency funds that most banks drew thus saving the time and the regulatory checking usually necessary. [If you want to learn more about the discount window that will be the subject of my segment of The After Show next week on Thursday morning. If I’m lucky I’ll get time to write a diary as well.] As a point of reference, in the year preceding 9-11 the discount window averaged $200 million dollars in lending a night. On 9-11 that jerked up to $37 billion, then to $46 billion on the 12th. The thing that made this level of lending acceptable was that the need for the lending was driven not by insolvency but rather by true liquidity and this was the very sort of problem for which the Fed’s “elastic currency” capability was intended.

Ferguson had also directed and communicated that Fedwire would remain open until 10:45PM ET but even the significant extension of time did not change the fact that many banks were not yet in a condition to communicate. The illiquidity of banks became evident when, by the close of the Fedwire day, transfers were down by more than 40%. The NYFed New Jersey back-up site had taken over NYFed Fedwire operations on 9-11, leaving the remaining core team to deal with larger issues including the fact that commercial paper (short-term loans) due to roll-over on the 11th or 12th were unable to do so. An example of why this was problematic was seen up at the Chicago Fed where a large customer and employer was due to roll-over one of these loans and use the profit for payroll. With the markets closed and access to normal liquidity choked off, the Chicago Fed, who had staff in direct touch with this company, made a loan not to a bank but directly to the corporation involved. Repayment was made immediately after markets reopened.

In New York, once it was deemed relatively safe, all non-essential FedNY staff left but a core continued on despite extraordinary conditions and worked only three blocks away from what was now Ground Zero. They worked until nearly midnight making discount window loans to customers who, themselves, were staggering into their back-up facilities, shaking off the ash and trying to save their banks. This FedNY core team stayed through to Wednesday afternoon when the fire department finally required them to evacuate due to fears that the One Liberty building would collapse on the them.

As the core employees left the NYFed all around them they could see not only the dangers and tragedy of the day but the obvious logistical issues which would have to be resolved before they or any of the rest of the financial industry would be able to return to their primary facilities. Thousands of phone lines were cut, including the Verizon lines described above. Debris damaged or destroyed not just the area right around Ground Zero but the ash had floated into electronics and buildings air systems making them non-functional. Fires and water also left their mark. Transportation and power joined telecommunications in being seriously compromised. Even more directly applicable to the financial industry was the fact that while most companies had back-up sites they had never tested all those sites working together. Beginning as early as 9-11 itself, the IT team at the NYFed started working with customers to get them back into communication with the industry. IT staff worked around the clock throughout the week and all through the extensive weekend testing for the NYSE and the Nasdaq in order to ensure that trading could resume on Monday, the 17th. They were assisted in this by employees of Verizon, Con Edison and FEMA. FEMA, the State of New York and the City of New York also prioritized sending structural inspectors out to verify the integrity of any buildings which were in question.

The staff at Chicago Fed, like all the branches across the country, was working twelve to sixteen hour days and many worked those hours straight through the weekend. Different Fed branches have different areas of expertise. Chicago Fed, due to its proximity to the Chicago Board of Trade and the Chicago Mercantile Exchange, was given the responsibility for collecting data and coordinating with the futures markets. Chicago also has the Customer Relations & Support Office (CRSO) for the entire Fed system. Every Fed depositor has a “personal” Fed CRSO banker and each person in customer support has access to multiple ways to reach their prime designated contact at all of the fifty largest banks in the country. This allowed Fed customers to deal directly with people they already knew and who already knew them. When it came to calming fears and providing liquidity options, this person-to-person approach proved to be invaluable. CRSO also kept their webmaster busy adding constant updates to their website so that all Fed customers would have access to the most current information immediately. Like so much of the Chicago Fed, CRSO employees stayed each night until 11PM in order to assist their customers with daily closing. Even more determined than that were the Chicago loan officers who kept the discount window open until midnight and then came back and did it all again for the next three days.

On top of everything else, Chicago had banks who needed to be resupplied with cash and though the Fed had plenty on hand they could not get armored truck carriers to come into downtown Chicago due to fears, fanned by the media, associated with the Sears Tower. With banks beginning to run low and one bank needing as much as $1.2M right away, Chicago Fed employees found “alternate methods” of getting the currency delivered within two hours.

Ferguson and his team in Washington remained in close contact with Fed branches around the country and were only too aware that another tsunami of a problem was beginning to break. The Federal Reserve had, at that time, a fleet of aircraft that moved 46,000 pounds of checks around the country each day to be processed at the various clearing centers. The fleet also delivered new currency from the Bureau of Engraving and Printing to the Fed branches. Yep. That’s what they did. And all of them were grounded by the FAA. (It seems to me, a mere rabbit, that some sort of conversation might have been appropriate…?) So here’s what used to happen when the Fed planes didn’t fly. Checks that were drawn on banks other than the bank of the person who wrote them got flown around, delivered to the appropriate Fed branch, processed and cleared into the receiving bank. Lots of those checks were tiny but some of them were huge. Therefore, some banks had way too much money in their accounts, from checks written but not cleared out, and others were way too short, from checks not yet cleared in. In the ten months prior to 9-11 there had been a total of $766M in check float. Between 9-11 and the 17th there was $150B in check float. Though used in an unprecedented way, check float is a positive liquidity action and represents just another creative way the Fed found to pump money into the economy when needed. Usually, of course, the Fed charges what amounts to overdraft fees for float since it constitutes an implicit, non-collateralized loan, but Ferguson made sure banks knew that they would not be punished for conditions which were out of their hands. In 2014, of course, the percentage of physical checks being written has dropped dramatically and a very high percentage of transactions are by EFT but 2001 was still all about paper.

The biggest aspect of the check float issue was that by allowing this previously untried tool to leverage the economy, the Fed was able to keep consumer confidence in the banking system in tact and avoid any serious runs on banks. Businesses and individuals alike continued to be able to access their money via the normal methods. The only exceptions to this were that in some locations either banks or ATMs ran short of currency while waiting for the Fed to deliver more. By the weekend of the 15th and 16th banks actually had higher than normal amounts of currency in their vaults because armored trucks had delivered cash (finally!) but consumers decided to stay home for the weekend and didn’t withdraw the normal amount of “weekend” money.

Which brings me to the next problem–paper. The trading between securities dealers, called interdealer trading, begins with repos (repurchase agreements) at 7AM and then the interdealer securities start selling at about 8AM. By 9AM interdealer trading is done. This meant that on 9-11 by the time the towers were attacked the trading day had nearly finished. Located on floors 101 to 105 of One World Trade Center was Cantor Fitzgerald, the single largest interdealer broker, who alone controlled 25% of the volume in securities. On 9-11 $500B in repos and $80B in securities had been traded but the settlement instructions were burned when American Airlines Flight 11 exploded into the tower only two floors below. In most cases, the only side of the trade data that remained was with the company on the other side of the trade. In some cases even that was problematic. As traders everywhere began to worry the Fed instructed regulators to work with dealers to determine the original instructions as best as could be done and for regulators to sign-off accordingly. This work was painstaking and it took many weeks to complete. Fed regulators worked many long, over-time hours to accomplish this task in as timely a manner as possible. In days to come the Fed further provided auditors with special instructions regarding materials/data entirely lost in the disaster.

Perhaps the most staggering story within the general financial community is about Cantor Fitzgerald. Obviously, the tragic deaths of 658 of their 960 New York employees was devastating in many, many ways. Cantor Fitzgerald Chairman, Howard Lutnick, whose brother was among the victims, was however resolved to bring the company back and when trading resumed, on the 17th, with the help of their London office, Cantor was again trading. Lutnick pledged to give twenty-five percent of the profits of the company to the families of the employees for each of the next five years. This resulted in a distribution of $180M with an additional $17M raised by a charity set-up by the Lutnick family. Cantor also paid for the health insurance for the families of these employees for ten years following 9-11. In case you missed it, that was $180M which was NOT distributed to partners in the firm but to families instead.

As the new day, the 12th, dawned the FedNY back-up site was up in New Jersey was running and ready for the tumult of work that was coming. Alan Greenspan had come back to Washington on a special military flight and the FOMC, which he chaired, ordered the Desk to buy every proposition offered for sale at the Federal funds rate. The Desk is the arm of the Fed, located at the NYFed, which handles all the Open Market Operations (OMOs), the buying and selling of US Treasury instruments. Translation of the FOMC directive? Every authorized primary dealer who offered to sell the Fed treasuries was accepted. This is never the case in a normal day and, in fact, on 9-11 prior to the crisis the FOMC had already decided not to either buy or sell anything (called, cleverly, “taking no action”). Because of the attack the Desk was unable to trade on 9-11 regardless. On the 12th by buying back Treasuries the Fed was effectively pouring liquidity out into the economy through a truly huge pipe. Where it is normal for the Fed to view OMOs through the lens of what is best for the Treasury, during a crisis the lens is reversed and the Fed views all OMO transactions based upon being of advantage to the dealers. In the three days following 9-11, the Desk purchased $190B in Treasuries and $8.75B in repos and they stayed open until nearly midnight so that dealers would have time to assess their positions. Additionally, since many dealers did not have the normal communications capabilities in their back-up sites, the Desk worked manual systems (ie telephone, pen and paper) to accommodate all sellers. In a speech given in 2003 at Vanderbuilt University, Ferguson describes the employees on the Desk during that time as having “performed heroically in running the open market operations.”

As in Chicago the previous day, other members of the NYFed team worked to get additional currency delivered to banks in Midtown and elsewhere in the NYFed’s region. ATM withdrawals were up 31%, which was to be expected, and the Fed had plenty of currency available. What it did not have was armored car companies willing to make the pick-ups or deliveries. This problem was resolved when employees from the back-up office coordinated with police from New York and New Jersey to bring $425M in from New Jersey to shore up banks that were low. Between Tuesday, 9-11 and Sunday, the 16th about $5B in currency was distributed around the country by Fed branches which was, all things considered, quite reasonable. Fortunately, credit card processing was unaffected nationwide and while most consumers stayed home and did not spend, increased spending was noted in groceries and gas, the latter presumably because flights were grounded and because in times of uncertainty people like to have a full tank in case they need to evacuate suddenly.

Also running low on currency were several foreign banks and financial institutions with branches in the US. They were requesting dollars from their “home” central banks but the banks didn’t have enough. In order to address this unusual situation, the Fed arranged currency swaps with the Bank of England and with the European Central Bank. The Bank of Canada also requested an increase in the ceiling of their currency swap agreement from $8B to $10B. A currency swap is when a foreign central bank agrees to give us X amount of their currency in trade for Y amount of our currency. In a given amount of time later, perhaps a month, they return our currency to us plus the Federal funds rate and we return their currency to them. Ultimately, between the three central banks, $90B in currency swap agreements were signed creating additional liquidity as needed.

As per the quiet and consistent Fed leadership out of Washington, all branches of the Fed continued to aggressively inject as much liquidity into the financial system as the system requested. Further, the Fed encouraged member banks to work closely with any of their customers directly effected by 9-11 and added that it was recognized that the banks may need to expand their balance sheet and/or extend unusually favorable terms. The Fed provided its S&R teams with directives to work closely with banks and to provide all necessary assistance within the law. This, of course, upends what is (supposed to be) an adversarial relationship and it was widely commented upon (approvingly) by the financial industry at the time.

While all of the Fed monetary tools remained fully engaged between the 11th and the 14th, it was the check float which caused the most concern because it was so far outside the norm. The Federal Reserve Bank of Atlanta, which had just opened their new facility earlier in the year, manages both currency operations for the entire Fed system and also includes the Fed Retail Payments Office which includes FedACH (automatic, electronic check processing). Obviously, the check float tsunami was storming in their direction in a big way. Their solution was to go back to basics. They got out maps of the country (“See, dear, I TOLD you that AAA membership would come in useful.”) and while some employees were creating a hub and spoke system for driving checks around the country, other staffers were contracting with trucking companies. Still other members of the team were coming up with a way to perform “check triage” so that high value checks and those traveling a long distance would move through the system first.

By Friday, when the Fed fleet was once again cleared to fly nearly seventy-five percent of the checks which had backed up had been delivered via ground transportation to the correct Fed branches. The rest arrived throughout the day on Friday and Saturday. Employees at the new check clearing center at Chicago Midway, where most checks from the Midwest processed at that time, describe Friday afternoon as “the dam break(ing).” Bags of checks were piled high and were everywhere. Employees could not see over the piles.



Senior Processor, Andrew Hall, said, “We started to wonder when they were going to stop. Right after you made a dent and could see over a pile of checks more would come.” Chicago alone processed more than six million checks over the weekend. Hall added, “The newer people were helped by the more experienced ones. We pulled together and got it done.”

The sun rose on Monday morning the 17th and, in Washington, the FOMC had met and prior to the opening of the markets released a statement announcing that the Federal funds rate was being reduced from 3.5% to 3.0%.



The statement went on to say, “The Federal Reserve will continue to supply unusually large volumes of liquidity to financial markets, as needed, until more normal market functioning is restored. As a consequence, the FOMC recognizes that the actual funds rate may be below its target on occasion in these unusual circumstances.”

By the time the bell rang on Wall Street the markets were off to the races. By the closing bell a record shattering 2B shares had been traded with virtually no malfunctions. The NYSE was joined on its floor by the newly homeless specialist traders of the American Stock Exchange (AMEX) who were welcomed to function as floor brokers. The most impressive accomplishment of the NYSE was that a mere nineteen short days after 9-11 normal trading volumes and patterns had returned. The market had calmed.

It should not go without saying that the futures markets, except those located in New York, did resume normal operations on the 13th. The New York Mercantile Exchange was able to get back into their site and re-open on the 17th and the New York Board of Trade, made homeless by the events of 9-11, relocated to their Queens back-up site and re-opened reasonably smoothly on the 17th as well.

In the days and weeks which immediately followed 9-11 analysts drew together important data and lessons (hopefully) learned which inevitably came out of this shared, national experience. The first and most important is that our monetary system, with its redundancies and unusually diverse brain trust was able to absorb a blow intended to, quite literally, disintegrate it. Great human tragedy was not magnified by a financial meltdown which would have spread another form of tragedy nationwide. The virtue of the Feds great big toolbox and the way in which all the tools interact with one another during a crisis was in evidence daily. Certainly, no other organization within the government was positioned to respond as quickly and to reach as deeply down into the fabric of the emergency as was the Fed. Not to be underplayed was also the value the Fed had come to place on person-to-person relationships. On a day when “trust me” really meant something the Fed was able to draw upon well established positive relationships in order to keep the economy of the United States and of the world moving.

But never, ever, should we forget the cost of that day not only in irreplaceable human lives but in the 430,000 jobs that were lost, $2B in lost wages, the $36B in clean-up cost, $30.3B in lost GDP to the City of New York, the cost for the new World Trade Center which continues to rise well past $20B, the insurance claims of $40B and all of that is before the additional cost of homeland security and, the worst of it all, the trillions of dollars and the precious, precious blood of our soldiers given in two wars.

Still, while our President was posing for photo ops and our Vice President was hiding under a mountain, colleagues of Roger Ferguson speak of him as having been “cool under fire without being overbearing” and they praise him saying he “nailed it” when it truly mattered. Kenneth A. Gunther, President and CEO of the Independent Community Bankers of America, said, “The Federal Reserve’s response on September 11th ensured a fully functioning payments system when the private sector could not…. The Fed’s dual roles [as provider of services and regulator of the payments system] are an essential element of the ongoing homeland security of the United States.”

Personally, I like best what Jerry Jordan, President of the Federal Reserve Bank of Cleveland said to his people on the 11th,



In responding to this crisis, don’t think of yourself just as a representative of our Bank but as central bankers of our nation.

WOW!!! blush Thanks to all for your kindness in recommending this diary to the "Recommended List". I am honored.

When I posted this diary I thought, because it was so long and on the subject of the Federal Reserve, that about four people would struggle through to the end. I am absolutely overwhelmed by the response. It has inspired me. You have inspired me. Thank you one and all.