Every regional reserve bank of the Federal Reserve operates independently and is not merely a subsidiary of the head office in Washington DC. The San Francisco Reserve Bank is well known because the salary of its president is higher than that of the Fed chair in DC. The New York Reserve Bank, however, is famous for arranging two major rescues during the financial crisis of 2008. Many people believe these rescues were conducted by the Fed’s head office in DC, but in reality, the Reserve Bank in New York played a critical role.
The first crisis occurred in March 2008 when Bear Stearns, the fifth largest investment bank in the US, faced severe financial trouble. Timothy Geithner, president of the New York Federal Reserve, arranged for JP Morgan to purchase Bear Stearns, effectively resolving the situation. However, just six months later in September 2008, Lehman Brothers, one of the four largest investment banks, encountered financial distress. Geithner, with the help of Treasury Secretary Henry Paulson, gathered the ten strongest commercial banks in the world to form a group in hopes of rescuing Lehman Brothers.
After reviewing Lehman’s financial condition, the banks concluded that there were too many deep-seated issues and demanded the Federal Reserve in DC guarantee their funds. They insisted that if they pooled their money to rescue Lehman and suffered losses, the Fed should reimburse them as it had done in the case of Bear Stearns.
The Federal Reserve reported the situation to the Treasury, which in turn informed the Economic Committee of the White House. A joint meeting was held with President George Bush in attendance. After deliberation, they all agreed to let Lehman Brothers go bankrupt, believing the free market would correct the excesses and eliminate bad practices on its own.
On the deadline day, the top floor meeting room of the New York Fed was filled with bankers. They agreed only to contribute funds to maintain market stability but failed to anticipate the chaos that would follow. Lehman Brothers was allowed to collapse. Fed chair Ben Bernanke then urged the Treasury Secretary to purchase toxic assets, but this effort failed.
The financial tsunami erupted at precisely midnight on September 14th (Sunday) in New York when Lehman filed for bankruptcy. This immediately triggered panic selling in Tokyo at noon on September 15th (Monday).
Barack Obama was sworn into office on January 20, 2009. Just six days later on January 26, Timothy Geithner was confirmed by the Senate as Treasury Secretary. Originally, the president of the New York Fed reported to the Fed chair, and the Fed chair reported to the Treasury Secretary. Yet after these events, Bernanke, who had been Geithner’s superior, now found himself reporting to Geithner.
This entire story was detailed in The Bullion Express of 2008 and 2009.