quickly on a companion facility that would transmit liquidity to parts of the market where it could be most powerful. this is what led the board of governors of the federal reserve system to approve the establishment of the primary dealer credit facility on march 16. under section 13 ( 3 ) of the federal reserve act, the board of governors is empowered to authorize a federal reserve bank like the new york fed to lend to a corporation, such as an investment bank, in extraordinary circumstances under which there is evidence that the corporation cannot “ secure adequate credit accommodations from other banking institutions. ” the board of governors needed to make the statutory finding that the circumstances were exigent and extraordinary, and it did so, based on the situation prevailing in the financial markets and the distinct possibility that absent an assurance of liquidity to major investment banks the deterioration in financial conditions likely would have continued with substantial effects on the economy. we recognized, of course, that the use of this legal authority was, in itself, an extraordinary step. at the same time, we were mindful that congress included this lending power in the federal reserve act for a reason, and it seemed irresponsible for us not to use that authority in this unique situation. even with an agreement in place that might reduce the probability of a default by bear, we decided that independent of that outcome, it was important to get assured liquidity to primary dealers by monday morning, to address the accelerating process of deleveraging and tightening liquidity seen in the financial system. on sunday morning, executives at jpmorgan chase informed us that they had become significantly more concerned about the scale of the risk that bear and its many affiliates had assumed. they were also concerned about the ability of jpmorgan chase to absorb some of bear ’ s trading portfolio, particularly given the uncertainty ahead about the ultimate scale of losses facing the financial system. in this context, we began to explore ways in which we could help facilitate a more orderly solution to the bear situation. we did not have the authority to acquire an equity interest in either bear or jpmorgan chase, nor were we prepared to guarantee bear ’ s very substantial obligations. and the only feasible option for buying time would have required open ended financing by the fed to bear into an accelerating withdrawal by bear ’ s customers and counterparties. we did, however, have the ability to lend against collateral, as in the back - to - back nonrecourse arrangement that carried bear into the weekend. after extensive discussion

under the circumstances prevailing in the markets the issues raised in this specific instance extended well beyond the fate of one company. it became clear that bear ’ s involvement in the complex and intricate web of relationships that characterize our financial system, at a point in time when markets were especially vulnerable, was such that a sudden failure would likely lead to a chaotic unwinding of positions in already damaged markets. moreover, a failure by bear to meet its obligations would have cast a cloud of doubt on the financial position of other institutions whose business models bore some superficial similarity to bear ’ s, without due regard for the fundamental soundness of those firms. the sudden discovery by bear ’ s derivatives counterparties that important financial positions they had put in place to protect themselves from financial risk were no longer operative would have triggered substantial further dislocation in markets. this would have precipitated a rush by bear ’ s counterparties to liquidate the collateral they held against those positions and to attempt to replicate those positions in already very fragile markets. in short, we judged that a sudden, disorderly failure of bear would have brought with it unpredictable but severe consequences for the functioning of the broader financial system and the broader economy, with lower equity prices, further downward pressure on home values, and less access to credit for companies and households. following that initial call with the sec on march 13, my colleagues in new york and in washington spent the night focusing on the implications of a large - scale default by bear and how we might contain the consequential damage. bear renewed conversations that began earlier that day with jpmorgan chase, which is bear ’ s clearing bank for its repo arrangements, to explore a range of possible financing options. the new york fed dispatched a team of examiners to bear stearns to look at its books so that we could get a better handle on what could be done. we gathered the best information we could, evaluated the risks involved, and explored a range of possible actions. at 5 : 00 a. m., we participated in a conference call with our colleagues at the board of governors and the treasury to review the options and decide on the way forward. after careful deliberation, together we decided on a course of action that would at least buy some time to explore options to mitigate the foreseeable damage to the financial system. with the support of the secretary of the treasury, chairman bernanke and the board of governors agreed that the new york fed would extend