When the crisis materialized and firms began to experience material distress or even fail, US law did not have a framework for achieving an orderly resolution of a systemically important institution at the corporate level. It had tools that have proved highly effective in managing corporate restructuring and depository institution receiverships, but none tailored for a major financial group. Instead, when large financial groups began to fail, policymakers relied on ad hoc interventions. Some of the immediate interventions involved use of the Federal Reserve’s “lender of last resort” functions. It was at this point that “Section 13(3)” entered the lexicon of modern central banking. For those few who are unaware, Section 13(3) was added to the Federal Reserve Act during the Great Depression. It gave the Board of Governors broad authority to permit a Reserve Bank to lend in exigent and unusual circumstances provided that the Reserve Bank was secured to its satisfaction. Prior to the crisis, Section 13(3) loans had last been made during the Depression, to such enterprises as a typewriter manufacturer and a vegetable grower. 4 Fed policy makers and their advisors pulled Section 13(3) back off the shelf, perhaps brushing some metaphorical dust off its cover. In 2008, loans made pursuant to Section 13(3) facilitated JPMorgan Chase’s purchase of Bear Stearns. Loans under 13(3) also prevented the potentially catastrophic failure of American International Group (AIG). Innovations under 13(3) also underpinned many of the Fed’s broad-based facilities to provide market liquidity.
Last month, the Dow Jones Industrial Average reached an all-time high. Recent data suggest that families’ incomes have increased between 2013 and 2016, although they also suggest that the wealth gap is widening.3 People, too, have changed. Even at the New York Fed, now, over 50 percent of staff were not with us at the time of the crisis. I suspect that the same is true at banks and law firms, where many professionals have practiced for less than a decade. These junior bankers and lawyers have not even experienced a turn of the business cycle let alone have a memory of the financial crisis. Now, I recognize that the crisis and its aftermath is well trod ground. Indeed, my boss Bill Dudley delivered a speech on this very topic last week. That said, I think it is worth traveling down this well-worn path again. In doing so, I am mindful of a few aphorisms. First, those who fail to remember history are doomed to repeat it. Second, generals (and economists and even lawyers) tend to fight the last war. The third, which I will steal from a mutual fund prospectus, is that past performance is no guarantee of future results. All of this is to say that while it is critical to remember and draw lessons from what happened in that period of 2007–2009, and the response to it, it is also equally critical to remember that the next shock to the system is likely to look quite different in material ways.