large intraday exposures. as a result, repo investors, who were primarily worried about getting repaid each morning, were motivated to simply withdraw from the market. as short - term investors withdrew funding, the liquidity buffer of the troubled securities firm was quickly exhausted, particularly as other counterparties to that firm demanded additional collateral to secure their own exposures. structural weaknesses in the money market mutual fund industry — which was a major source of short - term wholesale funding to the securities industry and various non - bank financial corporations — also exacerbated the crisis. when lehman brothers failed, the value of its outstanding short - term obligations collapsed. the reserve primary fund “ broke the buck, ” and investors rushed to withdraw their funds from prime institutional money market mutual funds in a modern version of a classic “ bank run. ” the funds generally did not have sufficient cash available to meet these runs because they offered overnight liquidity at par value against a portfolio of assets with weighted average maturities that were considerably longer. another important source of instability was the large volume of bilateral otc derivatives positions outstanding among the major firms and the right of a firm to immediately close out such positions if their counterparty became insolvent. for example, when lehman brothers failed in september 2008, counterparties to lehman terminated otc derivatives in which the contract was in the money ( i. e., lehman owed money to the counterparty ) and liquidated the collateral held against 3 / 7 bis central bankers'speeches those obligations, but kept open obligations in which the exposure went the other way, from them to lehman. not only did this create an imbalance in the risk exposures of the failed firm, but it also generated significant market churn and risk as firms scrambled to rebalance their own risk exposures. the contagion generated by the complex web of outstanding bilateral otc derivative exposures significantly worsened the crisis and was responsible for much of the losses lehman incurred in its bankruptcy. 2 the near - collapse of the u. s. financial system underscores three critical lessons. first, financial institutions must be robust to stress. in particular, they need to have enough capital to be considered solvent even after sustaining significant losses, so that they can maintain the market access needed to recapitalize. they also need sufficient liquidity buffers so that they can respond to shocks without having to sell illiquid assets. the forced sale of illiquid assets can push asset valuations far below their

##d to the fed system its constitutional authority to manage the supply of money in the nation ’ s economy. the fed system is comprised of the board of governors in washington, d. c. – a federal agency currently led by chairman ben bernanke – plus 12 regional reserve banks that span the country. for example, the district overseen by the new york fed includes all of new york, the 12 northern counties of new jersey ; fairfield county, connecticut ; puerto rico and the u. s. virgin islands. each reserve bank is distinct, with its own charter and a board of directors drawn from its district, but overseen by the board of governors. the law that created the federal reserve made the central bank independent so that policymakers could make decisions about monetary policy – such as whether to adjust interest rates – in the national interest, somewhat insulated from political pressure. however, the fed is accountable to congress. congress has set an explicit objective for monetary policy : to pursue the highest level of employment consistent with price stability. this objective is often referred to as our “ dual bis central bankers ’ speeches mandate, ” because it combines two goals : high employment, and low and stable inflation. in order to promote these objectives, we also pay close attention to financial stability, because without financial stability, it is very hard to achieve our goals for jobs and inflation. the federal open market committee consists of the board of governors plus the presidents of each of the 12 district banks. it meets in washington, d. c., eight times per year to deliberate and vote on monetary policy, that is – should we change interest rates and, if so, how much. as the current new york fed president, i am vice chairman at these meetings. at these meetings, each committee member presents his or her current outlook for the economy. for these assessments, we augment input from our research departments with critical information about local economic conditions supplied by our boards of directors, regional advisory councils and conversations with local stakeholders. my visit to new paltz today is a part of these regional activities in which i learn first - hand about the economic and financial conditions important to you. one thing that makes my job even more interesting is that new york has some roles unique within the fed. for example, the new york fed is the reserve bank charged with implementing monetary policy. this means that at the direction of the fomc, we buy and sell treasury securities in order to adjust short - term interest rates. we are also the