NEW YORK Jan 18 As the United States teetered
on the edge of financial crisis in 2007, one prescient voice
within the Federal Reserve was all but silenced when he warned
that problems at Wall Street bank Bear Stearns were not
contained and posed "enormous risk."
It was at the U.S. central bank's policy meeting in June
2007, where policymakers discussed Bear Stearns' recent bailout
of two of its hedge funds hit by losses on subprime mortgages.
Though the Wall Street bank would later prove among the
first dominoes to drop in a brutal crisis and global recession,
then-New York Fed President Timothy Geithner and others largely
agreed that the situation was contained. It was far different,
they said, than that of Long-Term Capital Management, the hedge
fund that collapsed in 1998 and nearly caused a global crisis.
But Richard Fisher, the former hedge fund manager and then
president of the Federal Reserve Bank of Dallas, challenged his
colleagues around the table. He argued there were indeed
worrying similarities between Bear Stearns and LTCM, including
an over-reliance on computer-based stress tests and uncertainty
around the true value of underlying securities.
"I would argue - having been in the business, although the
business wasn't as sophisticated when I used to be in it - that
this has broader dimensions than those we had before," Fisher
said, according to a meeting transcript released on Friday.
"If you look at the growth rate of these instruments -
again, without any underlying sense of what you ultimately can
cash in if you're pressed - it has been a straight upcurve.
"The numbers are quite huge," Fisher added. "I don't think
the issue is contained. I do think there is enormous risk."
Fisher, who remains the outspoken head of the Fed's Dallas
branch, then asked that all policymakers be briefed on the Bear
Stearns situation so that they are on the same page if asked
publicly for their take on it. "That's just a request," he said.
That's when Geithner, currently U.S. Treasury Secretary who
at the time was vice chair of the Fed meeting, said: "I don't
think, Richard, you need to be in a position to offer an opinion
on what happened in Bear Stearns in particular.
"I don't think you need to or want to be in the business of
doing that in that particular case."