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Bernanke Inherits an Experienced Fed Staff

By Nell Henderson
Washington Post Staff Writer
Tuesday, January 31, 2006

Alan Greenspan was unreachable on the morning of Sept. 11, 2001, as terrorists destroyed several blocks in the financial heart of New York City. Returning from a bankers' conference in Switzerland, the Federal Reserve chairman was flying in a jet over the Atlantic -- depriving the central bank of its vaunted crisis manager at a daunting moment.

But the Fed did fine without Greenspan that day, led by several people who have worked alongside him during other crises over his 18 years running the central bank. Fed officials and senior staff members swiftly reassured the world, through words and actions, that the U.S. financial system would keep working -- earning the chairman's praise when he returned the next day.

As Greenspan, 79, prepares to step down today, he leaves some uncertainty in financial markets about how the Fed will handle future crises under his successor, Ben S. Bernanke, who awaits Senate confirmation.

However, as Sept. 11 illustrated, Greenspan's legacies include a Fed full of battle-tested veterans who helped him calm the markets and steer the U.S. economy through the 1987 stock market crash, the international currency crises of the 1990s and two recessions, according to analysts and other observers.

"These people are competent and cool and have been through the wringer," said former Federal Reserve Board member Edward M. Gramlich.

These Fed officials and senior staffers, both in Washington and at the 12 regional Fed banks, will be a critical resource for the new chairman. Bernanke, 52, a former Fed board member, steps into the job with academic expertise and experience in monetary policy. But he has no experience in the business world or as a crisis manager, leaving analysts unsure how he would respond to financial shocks such as a stock market crash, dollar collapse, hedge-fund meltdown or another terrorist attack. He was unavailable for comment.

"He's unproven, but there are a lot of other people in the Federal Reserve with plenty of experience," said William Dudley, advisory director of Goldman Sachs U.S. Economics Research. "The institution is more than the chairman."

At the top of the list are Fed Board Vice Chairman Roger W. Ferguson Jr., 54, Fed Board member Donald L. Kohn, 63, and Fed Bank of New York President Timothy F. Geithner, 44.

Ferguson, an economist and a lawyer, was the only board member in Washington on Sept. 11, 2001, and led the central bank's response.

Through his office window at the Fed's headquarters on Constitution Avenue NW, Ferguson could see smoke rising from the Pentagon, while his television showed pictures of the burning World Trade Center towers in New York.

"Roger was leading meetings as the buildings were going down," recalled Gramlich, who was in Tucson that day and reached the Fed by telephone about two hours after the attacks. "They had gone through things pretty thoroughly asking, 'What can get screwed up and what can we do?' "

Ferguson worked closely that day with Kohn, then one of the Fed's top staff members, having risen through the ranks since 1975. He worked with Greenspan during the 1987 stock crash and through the currency crises of the 1990s and was among the chairman's closest advisers on monetary policy.

Kohn "was the key guy you'd go to when there was financial instability," recalled former Fed board member Laurence H. Meyer. "He sorts things out in a reasonable way."

One of the Fed's big concerns the morning of the terrorist attacks was the possibility of a credit crisis because the damage to Lower Manhattan had made it impossible for some financial institutions to receive and make payments. The danger was that other businesses might stop making payments because they worried about not being paid.

In every major crisis of the past two decades, the Greenspan Fed has sought to prevent panic from spreading by dousing it with "liquidity," the availability of cash or credit. One way the Fed does this is by lending directly to banks in need, a path referred to as its "discount window." Another other way is by declaring its intentions publicly.

By mid-morning on Sept. 11, 2001, Ferguson issued the central bank's only public statement that day: "The Federal Reserve is open and operating. The discount window is available to meet liquidity needs."

The action echoed Greenspan's decision on Oct. 20, 1987, the day after the stock market crashed, to put out a one-sentence statement affirming the Fed's readiness to "serve as a source of liquidity to support the economic and financial system," followed by aggressive behind-the-scenes efforts to keep credit flowing.

Ferguson's team also used a variety of other methods to keep the credit spigots wide open on Sept. 11, 2001, and in the days that followed. And he served as the Fed's liaison to the White House's working group of officials focused on the financial fall-out from the attacks.

Greenspan reached Ferguson by telephone at about 3 p.m. on Sept. 11, 2001, after his commercial flight was sent back to Switzerland. After being ferried by military planes back to Washington, he arrived at the Fed the next day to find Ferguson and his team had made exactly the decisions he would have made, he has told associates.

"It was a very impressive performance," Gramlich said.

Another individual Bernanke can turn to when the financial markets are shaky is Geithner, who was a key member of the Clinton administration's Treasury Department team that responded to the 1995 Mexican peso crisis, the Asian financial crises of 1997-98 and the Russian debt default in 1998.

"He's a cool head in a storm," said Gene Sperling, who directed Clinton's National Economic Council from 1996 through 2000. "He's developed an almost instinctive feel for the dynamics and behavior that occur during a crisis and is able to stay very cool and practical."

Associates use similar language to describe Greenspan's behavior in a crisis. Although he prefers to let financial markets work out their imbalances without government intervention, Greenspan is open-minded and pragmatic, say former colleagues.

"On balance, he was more sympathetic to market solutions, but he also thought that the markets could get it wrong and there was a role for government" in resolving crises, said Edwin M. Truman, a former director of the Fed's division of international finance.

Greenspan achieved global celebrity as a crisis manager. He was prominently featured on a 1999 Time magazine cover photo, along with former Treasury secretary Robert E. Rubin and former deputy Treasury secretary Lawrence Summers, as "The Committee to Save the World." In April 2001, as markets welcomed the Fed's response to the recession, the Economist magazine depicted the chairman on its cover as a muscled lifeguard heading into choppy waters next to the headline: "Greenspan to the Rescue."

A hard act to follow. And until Bernanke faces his first crisis, Dudley said, "we just don't know how he'll do."

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