, the unemployment rate is anticipated to average more than 10 % in 2010, considerably higher than the consensus economic forecast. the stress assessment will unfold in three steps. first, each bank holding company will be asked to evaluate the credit losses that are likely to occur under an adverse economic environment. these losses would then be evaluated relative to the bank holding company ’ s ability to absorb those losses. second, if this analysis indicated that the banking organization was likely to fall short of wellcapitalized in the stress environment, the bank holding company would be able to obtain additional capital via mandatory convertible preferred stock purchased by the treasury. third, if the stress scenario were actually to occur, generating losses that depleted common equity capital below what is deemed adequate, then the mandatory convertible preferred would be available to be converted into common equity. the government ’ s mandatory convertible preferred investment is, in some sense, contingent capital that is available to be converted into common equity only as needed. i believe this program is very important if we are to break the adverse dynamic that i outlined early. as i mentioned earlier, many bank holding companies don ’ t have an incentive to raise sufficient capital to ensure that they can handle a very bad outcome. that is because such capital - raising would severely dilute existing shareholders. this implies that, left to their own devices, banks might end up being undercapitalized in a stress environment. the risk of this outcome makes these banks ( and their counterparties ) very cautious in terms of their behavior. this cautiousness, which is rational for each bank and counterparty individually, is bad for the system because it constrains the supply of credit and results in tighter financial conditions. this, in turn, makes the bad economic outcome more likely. the stress assessment regime that is being implemented should help to break this dynamic. banking institutions will end up with sufficient capital to withstand even an adverse environment. this should reassure banks and investors that the banking system will remain resilient. with more capital in place, more lending should take place. this, in turn, should reduce the likelihood that the bad economic scenario will, in fact, be realized. the result : a virtuous rather than a vicious circle! the point of the stress assessment is not to pick winners or losers, but instead to ensure that the banking system and all the major banks have sufficient capital to withstand a very adverse environment. following the conclusion of the stress assessment process, the government is committed to supplying whatever amount of capital

overall financial system. a healthy banking system is always essential. but never has that been more true right now given what has happened to the securitization markets and the broad “ shadow ” banking system. so where are we now? in my view, the deleveraging process is still far from complete. hedge fund redemptions have soared. it would not be surprising that when we ’ re done, hedge fund assets ( before leverage ) will have fallen in half or more from their peak of about $ 2 trillion. of course, the madoff scandal and other episodes of misappropriated funds have further undermined confidence, reinforcing the redemption pressure. most importantly, the pressure on the financial system has been exacerbated by the deterioration in the economic outlook following the lehman failure. before last fall, the causality ran mostly from the turmoil in the financial system to the real economy. since then, the real economy has contracted sharply and this has reinforced the balance sheet pressure on banks and the forced deleveraging process. so where do we go from here? well fortunately, it is not all bad news – there are a number of programs that have been enacted that have already made a difference. and several new initiatives are being enacted now that should help to support and bolster the financial system. those areas where the federal reserve and the federal government have responded in force are doing somewhat better. banks and dealers have plenty of access to liquidity. the term auction facility or taf – in which funds are auctioned off to banks – and the term securities lending facility or tslf – in which auctions are held to borrow treasuries from the federal reserve – have recently been undersubscribed, indicating that the facilities have been sufficiently sized to meet the demand for liquidity. the fdic has also guaranteed bank and bank holding company funding through its temporary guarantee liquidity program. as a result, bank term funding spreads have narrowed a bit this quarter. however, while the federal reserve can provide liquidity to the banks and dealers and the fdic can reduce counterparty concerns via its guarantee program, these steps cannot force banks and dealers to on lend these funds to their customers. this is where several new initiatives may show the way forward. first, the federal reserve has begun to bypass the banks and dealers, which are balance sheet constrained, and instead has begun to provide liquidity directly to borrowers. one of these programs, the commercial paper funding facility or