(2013), Haldane (2009), Gai and Kapadia (2010)). As we might expect, the distribution of outcomes from such robust-yet-fragile systems are lumpy and non-normal. Relative to the smooth contours of the bell curve, they generate a clustering of extreme outcomes as systems tip the wrong side of the cliff edge. The distributions have “fat tails”. In simple terms, this tells us that catastrophes are much more likely than if God were rolling a dice (Haldane and Nelson (2012)). This fat-tailed property has been found in most connected webs on the planet: in natural networks, such as rainforests and oceans; in physical networks, such as electricity grids and computer networks; in social networks, such as epidemics and social media sites; and in economic networks, such as trade networks and interbank payment systems (Newman (2005)). For all of these systems, the abnormal is normal, the exception the rule, the local global, the tails fat. If fat tails are the unavoidable consequence of deeper integration, then the global financial crisis provides no better example. This was preceded by an unprecedented period of stability – the “Great Moderation” (Bernanke (2004)). A key cause of such stability was felt to be  3  2  http://www.foreignaffairs.com/articles/139104/kenneth-neil-cukier-and-viktor-mayer-schoenberger/the-rise-of-big-data. BIS central bankers’ speeches  improved risk-sharing. The integrated global financial system had scattered risk to the four winds, dispersed and diffused. The web appeared robust. Robust yet, as subsequent events have shown, also fragile. At the same time financial integration was calming the waters on shore, it was brewing a storm at sea.

Bear Stearns With this important context, let me return to the actions taken by the Federal Reserve in response to the situation that arose at Bear Stearns. That response was shaped in roughly four stages: (1) the decision on the morning of March 14 to extend a non-recourse loan through the discount window to JPMorgan Chase so that JPMorgan Chase could in turn lend that money to Bear Stearns; (2) the decision on March 16 by JPMorgan Chase and Bear Stearns for JPMorgan Chase to acquire Bear and guarantee certain of its liabilities, along with an agreement in principle that the Federal Reserve Bank of New York would provide certain financing in the context of that acquisition; (3) the launching of the Primary Dealer Credit Facility; and (4) the events of the following week, culminating in the March 24 announcement of revised merger agreement and guaranty terms between JPMorgan Chase and Bear, and the finalizing of the terms and structure of the associated loan from the Federal Reserve Bank of New York. Let me begin with the market situation in which Bear was operating in the days leading up to March 13. Fixed-income traders had begun hearing rumors that European financial institutions had stopped doing fixed income trades with Bear. Fearing that their funds might be frozen if Bear wound up in bankruptcy, a number of U.S.-based fixed-income and stock traders that had been actively involved with Bear had reportedly decided to halt such involvement. Many firms started pulling back from doing business with Bear.