Remarks By Bill Dudley At Australia Dodecatuple Secret Banker Meeting: Where We Have Been, Where We Are And Where We Need To Go

Tyler Durden's picture

Remarks at the Reserve Bank of Australia's 50th Anniversary Symposium, Sydney, Australia

The U.S. Financial System: Where We Have Been, Where We Are and Where We Need to Go

by William C. Dudley

Today, my remarks will focus on the U.S. and global financial systems:

  • What went wrong to produce the worst financial crisis in the past 70 years?
  • Where are we now?
  • What should be our top priorities to ensure that this never happens again?

As always, my views are my own and do not necessarily reflect those of the Federal Open Market Committee or the Federal Reserve System.

With respect to what went wrong, it is important to recognize that the financial crisis occurred for a host of reasons and, thus, there is no single silver bullet to avoid such crises in the future. At the heart of the crisis was a tremendous buildup in leverage, which our regulatory framework failed to prevent. Large amounts of opaque, illiquid, long-term assets were financed by short-term liabilities, and much of this financing occurred in the shadow banking system. When the housing bubble burst, financial asset prices fell and exposed the deep linkages and overall fragility of our system. Interbank funding markets seized up, the shadow banking system crumpled and several major financial firms—banks and nonbanks alike—collapsed or approached the brink of collapse. Extraordinary interventions of governments and central banks around the world were necessary to prevent a complete collapse of the financial system and the broader economy.

As a general matter, regulators did not appreciate beforehand how vulnerable the system was to shocks. In particular, there was a failure to appreciate the important interconnections among the banking system, capital markets, and payment and settlement system. For example, the disruption of the securitization markets caused by the poor performance of highly rated debt securities led to significant problems for major financial institutions. These banks had to take assets back on their books, backstop lines of credit were triggered, and banks could no longer securitize loans, thus increasing the pressure on their balance sheets. This reduced credit availability, which increased the downward pressure on economic activity, which caused asset values to decline further, and in turn, increased the degree of stress in the financial system.

Moreover, regulators did not adequately understand how the dynamics of the system tended to exacerbate shocks, rather than dampen their impact. For example, with respect to capital, firms under stress had incentives to continue to pay dividends to show that they were strong. These dividend payments actually depleted capital, making the firms weaker and vulnerable to credit rating downgrades. When credit ratings were indeed cut, that increased collateral calls, which intensified the pressure on scarce liquidity resources.

Regulatory gaps were another important factor in causing the crisis. American International Group, Inc. (AIG) is a case in point. AIG Financial Products, a subsidiary of the AIG parent company, provided guarantees against default on complex collateralized debt obligations, leveraging the AAA rating of the AIG parent company in the process. This activity was conducted with inadequate regulatory oversight, poor risk management and insufficient capital.

Finally, many of the incentives built into the system ultimately undermined its stability. The problems with incentives were evident in a number of areas, including faulty compensation schemes and risk management that was too narrowly focused on one business area without regard for the broader entity. These incentives created important externalities in which participants did not bear the full costs of their actions.

Turning to where we are now, the U.S. financial system is in much better shape today than it was a year ago. The capital markets are generally open for business—with the important exception of some securitization markets—and the major securities dealers that survived the crisis have seen a sharp recovery in profitability. The largest U.S. bank holding companies, which went through the Supervisory Capital Assessment Program exercise, have more and better quality capital, having raised more than $100 billion of common equity over the past year in the capital markets and generated nearly as much common equity via preferred stock conversions and from gains on asset sales.

However, many smaller and medium-sized banks remain under significant pressure. This reflects several factors. First, such institutions hold assets that are carried mainly on the books on an accrual basis. Compared with mark-to-market assets, such assets adjust much more slowly to changes in market conditions and the economic environment. Second, many of these banks have a much more concentrated exposure to commercial real estate, a sector that remains under considerable pressure. Not only have capitalization rates risen sharply—meaning the investors will pay much less for a dollar of rental income than before—but the rental income streams on these properties also have declined as the performance of the U.S. economy has declined. Together, these two factors have pushed U.S. commercial real estate prices down by about 40 percent to 50 percent from the peak reached in 2006. Loan losses in commercial real estate and consumer and mortgage loans seem likely to continue to pressure smaller banks for some time to come. This in turn means that credit availability to households and small businesses will still be curtailed.

The improvement in the overall health of the financial system and in market function has allowed the Federal Reserve to phase out many of the special liquidity facilities that were enacted in response to the crisis. These facilities were generally successful in achieving their objectives—helping to restore confidence and rebuild market liquidity in a way that safeguarded the taxpayers' interests. When a full accounting of the special liquidity facilities is complete, it seems likely that the facilities will have generated substantial incremental earnings that the Federal Reserve will remit to the Treasury. Although these incremental earnings were not the objective of these facilities, they are a pleasant outcome relative to the alternative.

As the crisis has abated, our attention has shifted to what we need to do to prevent another crisis in the future. We need to take the necessary steps to build a strong and resilient financial system. In my opinion, three broad sets of actions are needed:

  • Effective macroprudential supervision. By this, I mean conducting supervision not just vertically institution by institution, but also horizontally across institutions and markets. We need to better understand how the system operates as a whole and how problems in one area can affect financial stability elsewhere. This means both how the overall system affects individual firms and how the activities of a single firm or market affects the entire financial system.
  • Make financial institutions and market infrastructures more robust to withstand shocks and become less prone to failure.
  • Change the system so that no financial firm is "too big to fail."

Macroprudential supervision is essential for two reasons. First, it addresses the problem of gaps in the regulatory regime and the regulatory arbitrage that such gaps can encourage. Second, macroprudential supervision is needed because the financial system is interconnected. Siloed regulatory oversight is not sufficient. Supervisory practices must be revamped so that supervision is also horizontal—looking broadly across banks, nonbanks, markets and geographies. This also means that regulatory standards need to be harmonized across different regions. Without harmonization, there will inevitably be a "race to the bottom" and regulatory arbitrage will be encouraged, rather than inhibited.

Many steps are needed to make financial institutions and infrastructure more robust. For example, we need to strengthen bank capital requirements, improve liquidity buffers and make financial market infrastructures more resilient to shocks when individual firms get into trouble.

In terms of capital requirements, many changes are needed, including global capital standards that put more emphasis on common equity, establish an overall leverage limit and better capture all of the sources of risk in the capital assessment process. Improved risk capture, for example, includes the trading accounts of banks. Some institutions had clearly not set aside adequate levels of capital given the risks that were embedded in their trading positions.

It would also be very desirable to develop a mechanism to bolster the amount of common equity available to absorb losses in adverse economic environments. This might be done most efficiently by allowing the issuance of debt instruments that would automatically convert to common equity in stress environments, under certain pre-specified conditions. Such "contingent capital" instruments might have proven very helpful had they been in place before and during this crisis. Investors would have anticipated that common equity would be replenished automatically if a firm came under stress, and this knowledge might have tempered anxieties about counterparty risk. At a minimum, contingent capital instruments might have enabled common equity buffers at the weaker firms to be replenished earlier and automatically, thereby reducing uncertainty and the risk of failure.

On the liquidity front, there are a host of initiatives underway. The Basel Committee on Banking Supervision is working on establishing international standards for liquidity requirements. There are two parts to this. The first is a requirement for a short-term liquidity buffer of sufficient size so that an institution that was shut out of the market for several weeks would still have sufficient liquidity to continue its operations unimpaired. The second is a liquidity standard that limits the degree of permissible maturity transformation—that is, the amount of short-term borrowing allowed to be used in the funding of long-term illiquid assets. Under these standards, a firm's holdings of illiquid long-term assets would need to be funded mainly by equity or long-term debt.

With respect to financial market infrastructures, the Federal Reserve is working with a broad range of private-sector participants, including dealers, clearing banks and tri-party repo investors to dramatically reduce the structural instability of the tri-party repo system. Similarly, over-the-counter (OTC) derivatives clearance activity is being pushed toward central counterparties and exchanges. In addition, the Federal Reserve and others are evaluating how greater transparency with respect to OTC derivatives prices would improve financial stability. The Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions are doing a review of standards for payment, clearing and settlement systems. This work will inform the efforts of the Financial Stability Board to strengthen such standards.

There is also work underway on the problem of how to ensure that financial institutions have compensation structures that curb rather than encourage excessive risk-taking.

Finally, it is critical that we ensure that no firm is too big to fail. This is about both fairness and having proper incentives in the financial system. Having some firms that are too big to fail creates moral hazard. These firms are able to obtain funding on more attractive terms because debt holders expect that the government will intervene rather than allow failure. In addition, too big to fail creates perverse incentives. In a too-big-to-fail regime, firms have an incentive to get large, not because it facilitates greater efficiency, but instead because the implicit government backstop enables the too-big-to-fail firm to achieve lower funding costs.

To solve the too-big-to fail problem, we need to do two things. First, we need to develop a truly robust resolution mechanism that allows for the orderly wind-down of a failing institution and that limits the contagion to the broader financial system. This will require not only domestic legislation, but also intensive work internationally to address a range of legal issues involved in winding down a major global firm.

Second, we need to reduce the likelihood that systemically important institutions will come close to failure in the first place. This can be done by mandating higher capital requirements, improving the risk capture of those requirements and by requiring greater liquidity buffers for such firms.

Although the raging crisis appears to be over, our work is not close to being complete. Making sure this work keeps moving forward and is coordinated internationally is hugely important. Differences in views across countries and regions should not divert the international community from the more important prize—taking the actions collectively that will ensure a robust and resilient financial system.

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dumpster's picture

What went wrong to produce the worst financial crisis in the past 70 years?


went off the gold standard  ..used keynesian economics to justify monetary expansion. 

regulatory agencys were bought off sold out .. and were corrupt.. politicans as usual looked out for their selves and the people who bought them off.. the cuture of war,, and government deceitl

used propaganda to turn the population inot herds of lemmings..

the fed reserve was a unneccesary adjundt to mislead the world ..

if i have control of the money i could care less who makes the laws  

jeff montanye's picture

you could care less but you choose not to.

Anonymous's picture

>went off the gold standard

Gold-standard produced some of the worst bouts of continued deflation AND also inflation. Read some history books instead of Schiff / Paul / blathering net-idiots to understand why.

>used keynesian economics to justify monetary expansion.

Sigh. Have you ever read a single piece of Keynes? Do you understand the difference between the modern faux-keynesian and the writings of Keynes. Go back, read a book, educate yourself.

>regulatory agencys were bought off sold out

I would add that they were silenced effectively by those in power. So politicians were bought, who then in turn silenced or made ineffective the regulatory framework.

>used propaganda to turn the population inot herds of lemmings

One only gets what one deserves - although the teachings of Edward Bernays might have helped.

>fed reserve was a unneccesary adjundt to mislead the world

adjundt? unneccessary? Does not compute.

>if i have control of the money i could care less who makes the laws

Two penny misquotes do not systemic understanding make.

People - don't take the net board drivel as gospel. Educate yourself. Use intellectual self-defense.

Otherwise you'll just go from a frying pan into the fire : from one brain-washing truth to the next.

THINK FOR YOURSELF. Read history. Ask: cui bono.

besodemuerte's picture


Do you disagree with an asset backed currency?  What do you propose as ideal?


Granted we aren't using pure Keynesian economics, can we agree that we've employed 'bad' economics and move on?




/agree again, but you can't expect everyone to be a critical thinker.  Some of our fellow humans are um...yea...

-fed reserve

/agree he poorly phrased it, although he was quickly summarizing.  do you promote the debt/money system and generally support our central banking system?


are you mocking him here?  surely you appreciate and acknowledge the concept that money = control in this world


I'm curious to read what your Edward Bernays has to say, but I think you were a bit harsh on this poster.  I consider myself no lemming, I'm only neck deep in the rabbit hole.  However, I'd like to know what you think put us in the shitty mess we find ourselves in today.

tom a taxpayer's picture

Hey, Dudley - Talk is cheap.

"Many steps are needed to make financial institutions and infrastructure more robust." How come prosecution is not one of those steps? 

Hey Dudley, why don't you tell us about your personal role in the financial crisis in 2008. You  can start with your role as Geithner's  accomplice at NY Fed. Then you could tell us why Stephen "no conflict of interest" Friedman and Geithner fought for your promotion to replace Geithner as NY Fed President.  Geithner argued that Friedman needed to remain chairman of the N.Y. Fed board to find a suitable replacement for Geithner as he moved on to be secretary of the Treasury. Geithner and Friedman insured that William Dudley, former Goldman Sachs executive, got Geithner's job of NY Fed President. Stephen "no conflict of interest" Friedman was chairman of the search committee, and Geithner lobbied the NY Fed to appoint Dudley-do-right-by-Goldman-Sachs as NY Fed President.

Cistercian's picture

 Prosecution?Yes, that would help a great deal indeed.And how about fining everybody involved at a truly apocalyptic rate?The hell with taxing bonuses...fine the bastards for the systemic damage they caused.Liquidate all of their assets, ban them from the industry and sentence them to work at a fast food counter for 10 years, with 5 years of prison for every time they mess up on the job.Yes...I would like to see that!!!

Rainman's picture

......Dude Dudley says " macroprudential supervision " is the better answer.

Too funny. A new choir song for non-regulation that will be lapped up by the choir only.

In other words.....In a financial world buried under tons of bullshit, the solution is to sling more on top of it and bury it deeper. 

tom a taxpayer's picture


The" macroprudential supervision " needed to reform the Fed and U.S. financial system is " macroprudential supervision " provided by state and federal prison guards over the 20 years-to-life hard time prison sentences for the hundreds of criminals in Wall Street RICO crime syndicate including the mortgage industry, rating agencies, the Fed, Treasury, SEC, and Congressional aiders and abetters.


jeff montanye's picture

as brian wilson said, wouldn't it be nice.

dnarby's picture

Howabout we start by mandating open books, transparency in all instruments, leverage limits, automatic jail time for breaking banking rules and reducing the size of the financial industry 75%?

THAT oughta do it!

kurt_cagle's picture

I find it most interesting that the assumption here is not that poor policies of the Federal Reserve, including a failure to anticipate the effects of gunning the markets and eliminating the notion of moral hazard from the marketplace, culminated in a widely anticipated and destructive collapse in the markets, but that it was the fault of the regulators to not put into place some kind of stop to the action.

The regulators have been successively defanged by the Clinton and Bush administration, and by many indications Obama looks to be following suit. Most of this came at the behest of the banks and other financial institutions, of which FOMC is largely comprised. Somehow it's hard to see Dudley as being a credible person to being laying blame.

pros's picture


What a joke--

we have no better mechanism for dealing with the next financial crisis than we had 2 years ago--

Because they want to just throw money at it in the middle of a crisis when there is no time.


putbuyer's picture

"Although the raging crisis appears to be over, our work is not close to being complete"

Mr. Dudley, did you know you do not have the biggest dick in the world, and that biggest dick in the world is in need of a massive dose of Viagra.

Cistercian's picture

 I think this is easy to sum up: we were caught totally unawares, golly gee!And we have more to do by gosh!


 Epic Fail


Going Down's picture




What went wrong to produce the worst financial crisis in the past 70 years?

Well, since you were with Goldman Sachs, you really needn't ask.

Where are we now?

Under investigation or so I hear.


What should be our top priorities to ensure that this never happens again?


Kill the beast.



Anonymous's picture

Dudley - you should lay off the pot.

buzzsaw99's picture

Whenever there is a financial crisis the solution is always simple and always the same. Dump money out of helicopters directly into banker bonus pools.

deadhead's picture

Beware of any person who uses the word "robust".


Bear's picture

Delist ... Delish ... C at One 

Cistercian's picture

 The only way to do that would be to immerse the HFT platform in liquid helium and use superconductors for the connection to the exchange.I think they are working on that.....

Bear's picture

'Change the system so that no financial firm is "too big to fail."' ... That's easy let C fail and everyone will sit up and take notice

Anonymous's picture

They could do it in 2 ways: let one fail to set an example, or slice and dice all the risky ones into smaller pieces.

Anonymous's picture

So there is a rumor Iran will demand gold for their oil or peg their oil to the yuan on February 11. Any thoughts?

1984's picture

"or peg their oil to the yuan"


Uhhh...  Isn't that the same as pegging it to the dollar?  What's the news?

jdrose1985's picture

Question...will we still be assured of a robust and resilient system as the Dow approaches 3k?



Anonymous's picture

roflmao, commona man intepretation, So too prevent problems, we should do our jobs, you know the jobs we were suppose to do and did not.

Jeeze, makes me more bearish.

When you're mea culpa is full of "we didn't know" and "robust whatever BS", you know biz as usual

Ropingdown's picture

Was it not widely assumed that the TP subsidized rescue of Bear Stearns was really a rescue of JPM's tri-party repo operations?  JPM and BNYMellon both were facing a crisis.  Creating the impression that it was about Bear Stearns was successful.  So too, the impression that AIG's rescue was about "millions more jobs lost and thousands of factories closed" rather than about GS may also succeed. Why Geitner gets away with vague and exagerated hand-waving (no detail), when the "bail out the CDS purchasers" was so clear, stuns me. The PR technique, though, is well-established, gets Congress off the hook apparently, and befuddles the average MSM viewer.  Interesting that bankers sans-regulation are viewed, even by Dudley, as inclined to race to the bottom.  With TP backstops, why not?  They didn't race to the bottom 40 years ago, as partnerships.

IKEA Is Swedish's picture

He has a dog named Minsky.

Anonymous's picture

Did Dudley Do Rite really finger Apalachin New York as his first choice for the meeting site? The board must have voted that choice down after finding out that the most significant outcome of the first Apalachin meeting was that it helped to confirm the existence of a National Crime Syndicate.

The Average American lost 40% of his retirement savings in the collapse, I'll wager Dudley and his companions made money on it.

glenlloyd's picture

His little discussion fails to account for the Fed's role in all this, proposes an enhanced structure that smells a lot like the mess we here in the US call the DHS, puts forward a lot of solutions without addressing the nuts n bolts of how it will all get done (which it never will), and suggests that the crisis is actually behind us at this point.

I really get offended when after-the-fact we hear all about the shoulda woulda coulda things that weren't there when they were needed. I'm especially offended by the, "Extraordinary interventions of governments and central banks around the world were necessary..."

percolator's picture

Slightly OT, but everyone should vote for the dynamite prize as there are some worthy candidates:


Anonymous's picture


The world financial system got the blue screen of death.

CS:1111010101110101010101 ES:10101110001010101010101

DS:1010101111110101010101 SP:11000110101010101010101



bchbum's picture

Nice.  5 stars!

Anonymous's picture

Translation for Joe 6Pak:

What caused the problem?

The clown car was overloaded and ran out of gas. But we filled the tank with pure ethanol, kicked out the Lehman clowns and now we are good to go. (Even though the remaining clowns gained a bunch of weight.)

What do do?

We admit we didn't have a clue last time around, but now we do. Trust us. We are going to look busy and try all kinds of shit this time.

faustian bargain's picture

One would think that people attending an octuple-secret meeting of the controllers of the world, people who were truly interested in solving intractible problems, would look toward out-of-the-box thinking. Not purely predictable more-of-the-same wrongness.

There are three possible conclusions I can come up with: they aren't interested in solving the problems, they're idiots, or they are trying to provoke someone else to 'provide' the solution.

London Banker's picture

It's time to take the keys away from the central bankers.  The objective of the central banks - and of public policy generally - should be to secure an economy which provides optimal economic returns for the people of the country.  It should not be to provide for the security and profit of the financial sector at the expense of the rest of the economy and the taxpayers.

Dudley's remarks convince me further that the Fed has completely lost the plot of what it means to serve the public interest. 

I don't know how it can be done, but control of the money supply and allocation of scarce capital from taxpayers to Wall Street cannot be trusted to these jokers anymore.  And other central bankers should actively disown them and publicly deride them.

Altan311's picture

remind me what happened to america's first and second central banks?

faustian bargain's picture

I don't know what 'optimal economic returns' means, but the objective should be to protect freedom and individual rights. Any objective that smacks of 'taking care of the people' is doomed to failure from the outset, whether via corruption or unintended consequences. Policy should take care of rights, people should take care of themselves. I'm tired of Father Knows Best...I think we've seen once and for all, He Doesn't.

Central Banks need to die, the sooner the better. Return economics to the free market.

exportbank's picture

Health Care is the full time focus of the government so there can't possibly be any problem that's more pressing.

Hephasteus's picture

"With respect to what went wrong, it is important to recognize that the financial crisis occurred for a host of reasons and, thus, there is no single silver bullet to avoid such crises in the future. At the heart of the crisis was a tremendous buildup in leverage, which our regulatory framework failed to prevent."

LOL regulation doesn't prevent it. Using an INCORRECT high interest based model to represent underlying devalueing assets and then over producing ficticious money to compensate for it is what caused that little snafu. It's built into the cake. You know. I know it. Stop feigning ignorance.

Sirreal's picture

Procecute all participants, sieze their assets using asset forfiture due to fraud. Return to the victims what was stolen. Hang those who have caused death. Return to Constitutional money. Happy days are back. The planet will not miss them.

Tom123456's picture

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