* 2007-08 minutes another glimpse of how crisis was missed
* Misread warning signs on subprime mortgages, banks
By Jonathan Spicer
NEW YORK, Dec 14 Top officials at the Federal
Reserve Bank of New York expressed growing but uneven concerns
about the brewing mortgage-market crisis in 2007 and 2008,
according to minutes of board meetings that underline how
authorities failed to grasp the real dangers the economy faced
at that time.
The New York Fed on Friday unveiled minutes from board
meetings from 2007 to mid-2012, as part of post-crisis efforts
to shed more light on internal operations at the U.S. central
The heavily redacted minutes give another glimpse into how
top U.S. regulators and policymakers missed or misread warning
signs that emerged from the subprime mortgage market, which was
headed toward a collapse that would lead to a recession that
still hampers the world economy today.
As far back as January 2007, then-New York Fed President
Timothy Geithner discussed the risks posed by derivatives, which
ultimately proved a key conduit and multiplier of reckless bets
placed by the world's biggest banks and financial institutions.
At one board meeting that month, Geithner, now U.S. Treasury
Secretary, cited "substantial progress" in the regional Fed
bank's efforts to identify financial market risks and to
According to the minutes, "initiatives" were planned on
counterparty credit risk management, hedge funds, and regulatory
efficiency - all pieces of the financial system that regulators
continue to struggle with today.
To be sure, the Fed and other financial regulators have
acknowledged missing the alarm bells of pending crisis. The
massive Dodd-Frank financial reform legislation of 2010, which
regulators are enforcing or implementing, aims to stop such
crises from recurring.
It was back in 2006 that U.S. home prices peaked.
By 2007, lenders started to feel the pain from the brewing
subprime crisis, which eventually sparked a brutal financial
crisis that claimed Lehman Brothers and prompted a massive
government bailout of Wall Street, before spreading globally.
The New York branch of the central bank is the most powerful
of the 12 regional Fed banks, and it is responsible for Wall
Street oversight. Minutes from its board meetings show concerns
among top officials intensified as signs of the mortgage market
In January 2007, Joseph Tracy, an executive vice president,
discussed a surprisingly sharp contraction in housing, but noted
"it was difficult to determine whether the housing adjustment
had ended," according to the minutes.
Yet officials seemed unsure how worrying were the signs.
William Dudley, who would succeed Geithner as president two
years later, warned in February 2007 that a further
deterioration in subprime lending could result in market
consolidation. But, he said, "at this point any decline was not
expected to materially impact economic conditions more broadly,"
the minutes show.
At the same meeting, Tracy suggested the U.S. economy
appeared to be poised for a soft landing.
As it happened, the United States fell into a deep recession
in December 2007. The worst recession in decades ended in early
2009, but the country has yet to recover, with gross domestic
product (GDP) growth still tepid and unemployment high at 7.7
In July 2007, Dudley, who at the time ran the Fed bank's
market operations, said that contagion from the deteriorating
subprime market "appeared to be limited," according to the
minutes. By September of that year he said it had "triggered
confidence issues and a contraction in the securitization of
'THE RECENT FINANCIAL CRISIS'
In an ironic twist, by October 2007 - one year before the
worst of the financial crisis would hit and the month in which
U.S. stocks hit a record high - Geithner spoke about efforts to
develop "lessons learned from the recent financial crisis" to
identify weaknesses in the system.
At the same meeting, Dudley noted the mortgage market had
improved but that the risk of recession remained.
As it turned out that year, GDP growth in the third quarter
was 3 percent and dropping sharply.
In June 2008, Richard Peach, a New York Fed senior vice
president, predicted real GDP was expected to rebound in the
second half of the year and that "downside risk to growth had
abated somewhat over the near term."
The next month, Dudley said liquidity and funding conditions
at the four largest regional banks had fallen "but that
liquidity and funding conditions remained generally stable."
By October 2008, a month after the Lehman bankruptcy and the
severe market contraction, Peach said that "growth prospects had
been downgraded substantially and that there remained
substantial downside risk to the economy."