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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
evaluations of Enron. The scandal cost Citigroup, JP Morgan, CIBC, Merrill Lynch,
and other financial institutions more than million in settlements with the SEC;
Citigroup, JP Morgan, CIBC, Lehman Brothers, and Bank of America paid another
. billion to investors to settle class action lawsuits. In response, the Sarbanes-
Oxley Act of required the personal certification of financial reports by CEOs
and CFOs; independent audit committees; longer jail sentences and larger fines for
executives who misstate financial results; and protections for whistleblowers.
Some firms that lent to companies that failed during the stock market bust were
successfully hedged, having earlier purchased credit default swaps on these firms.
Regulators seemed to draw comfort from the fact that major banks had succeeded in
transferring losses from those relationships to investors through these and other
hedging transactions. In November , Fed Chairman Greenspan said credit de-
rivatives “appear to have effectively spread losses” from defaults by Enron and other
large corporations. Although he conceded the market was “still too new to have been
tested” thoroughly, he observed that “to date, it appears to have functioned well.”
The following year, Fed Vice Chairman Roger Ferguson noted that “the most re-
markable fact regarding the banking industry during this period is its resilience and
retention of fundamental strength.”
This resilience led many executives and regulators to presume the financial sys-
tem had achieved unprecedented stability and strong risk management. The Wall
Street banks’ pivotal role in the Enron debacle did not seem to trouble senior Fed of-
ficials. In a memorandum to the FCIC, Richard Spillenkothen described a presenta-
tion to the Board of Governors in which some Fed governors received details of the
banks’ complicity “coolly” and were “clearly unimpressed” by analysts’ findings. “The
message to some supervisory staff was neither ambiguous nor subtle,” Spillenkothen
wrote. Earlier in the decade, he remembered, senior economists at the Fed had called
Enron an example of a derivatives market participant successfully regulated by mar-
ket discipline without government oversight.
The Fed cut interest rates aggressively in order to contain damage from the dot-
com and telecom bust, the terrorist attacks, and the financial market scandals. In Jan-
uary , the federal funds rate, the overnight bank-to-bank lending rate, was ..
By mid-, the Fed had cut that rate to just , the lowest in half a century, where
it stayed for another year. In addition, to offset the market disruptions following the
/ attacks, the Fed flooded the financial markets with money by purchasing more
than billion in government securities and lending billion to banks. It also
suspended restrictions on bank holding companies so the banks could make large
loans to their securities affiliates. With these actions the Fed prevented a protracted
liquidity crunch in the financial markets during the fall of , just as it had done
during the stock market crash and the Russian crisis.
Why wouldn’t the markets assume the central bank would act again—and again
save the day? Two weeks before the Fed cut short-term rates in January , the
Economist anticipated it: “the ‘Greenspan put’ is once again the talk of Wall Street. . . .
The idea is that the Federal Reserve can be relied upon in times of crisis to come to
