The September 2001 terrorist attacks and the subsequent collapse of the twin World Trade Center towers damaged more than 400 structures across a 16-acre area, and claimed almost 2,800 lives. Financial services industry employees accounted for about 74 percent of the victims. Dust and debris blanketed the area, creating difficult and hazardous conditions that complicated recovery efforts. Many financial organizations lost telecommunications service when the 7 World Trade Center building collapsed and debris struck a major Verizon central switching office that served approximately 34,000 businesses and residences. Over 13,000 customers also lost power. To accommodate the rescue and recovery efforts and maintain order, pedestrian and vehicle access to the area encompassing the financial district was restricted through September 13, 2001. The attacks severely disrupted the secondary markets for government securities and money market instruments primarily because of the impact on the brokers that facilitate trading among dealers (broker-dealers) and on one of the clearing banks for those trades. Two banks—the Bank of New York (BONY) and JPMorganChase—provided clearing and settlement services (and still do) for many major broker-dealers in the government securities market. Clearing banks transferred funds and securities for their customers that purchased or sold government securities based on instructions received by the Government Securities Clearing Corporation (GSCC). As a result of the attacks, BONY had difficulty reestablishing its connections with GSCC and its own account at the Federal Reserve, and its customers had difficulties connecting with BONY. These problems contributed to the disruption of the secondary government securities market. BONY had to evacuate four facilities, including its primary telecommunications data center and over 8,300 staff, because they were located near the World Trade Center. By September 14 BONY reestablished connectivity with GSCC and began receiving and transmitting instructions for securities transfers. Both the Federal Reserve’s Fedwire Securities Service, which provides safekeeping, transfer, and settlement services for securities issued by Treasury and other federal agencies, and its Fedwire Funds Service, which provides payments services associated with securities sales and other large-value transactions, continued processing transactions without interruption. Although the Federal Reserve Bank of New York (FRBNY), which manages the Fedwire services, sustained damage to some communication lines, the Fedwire services were not interrupted because the facilities that process transactions were not located in lower Manhattan. Over 30 banks initially lost connectivity to Fedwire services, but most were able to reestablish connections through backup systems, and most payment system operations continued with minimal disruption. The Federal Reserve, Treasury, and primary dealers all play important roles in Treasury auctions. The Federal Reserve and its associated Federal Reserve banks function as the United States government’s fiscal agent and perform a variety of services for the Treasury including handling Treasury auctions, accepting bids, communicating bids to Treasury, issuing Treasury securities to winning bidders, and collecting payment for securities. Treasury borrows the money needed to operate the federal government and manages the government’s outstanding debt subject to a statutory limit. Treasury’s primary debt management goal is to finance the government’s borrowing needs at the lowest cost over time. To meet this objective, Treasury issues debt through auctions in a “regular and predictable” pattern across a wide range of securities. Treasury publishes a schedule with tentative announcement, auction, and settlement (issue) dates up to 6 months in advance of regular security auctions. Depending on the type of security, Treasury typically auctions and then issues a security within a week or less. Treasury generally issues short-term regular bills with 4-, 13-, and 26-week maturities every Thursday and issues 2- and 5-year notes at the end of each month. Three- and 10- year notes are issued in the middle of each quarter. Treasury reopens 10-year notes—or increases the amount outstanding for these notes—1 month after their initial issuance. In addition, Treasury issues Treasury Inflation-Protected Securities (TIPS) in 5-, 10-, and 20-year maturities in certain months according to the TIPS’ maturity. Finally, Treasury issues 30-year bonds in February and August and reopens these issues in May and November, respectively. Treasury supplements its regular and predictable schedule with flexible securities called cash management (CM) bills. Unlike for other securities, Treasury does not publish information on CM bills on its auction schedule. Instead, Treasury generally announces CM bill auctions anywhere from 1 to 4 days ahead of the auction. The term to maturity—the length of time the bill is outstanding—varies according to Treasury’s cash needs. CM bills allow Treasury to finance very short-term cash needs—for as little as 1 day—while providing short notice to market participants. As of the end of fiscal year 2005, about 46 percent of marketable Treasury securities held by the public will mature during the next 24 months. As these securities mature and are replaced by new debt, the cost to finance the federal government’s debt will vary with changing interest rates. The bidders in Treasury auctions include depository institutions, individuals, dealers and brokers, pension and retirement funds, insurance companies, investment funds, foreign and international entities, the Federal Reserve, and others. In recent years the percentage of U.S. Treasury securities held internationally has increased. Although the categories of bidders are diverse, primary dealers, other commercial bank dealer departments, and other nonbank dealers and brokers received almost 60 percent of auction awards of marketable securities between August 2001 and May 2006. Federal Reserve banks received almost 21 percent during that same time period for their own accounts. Primary dealers are banks and securities brokers that trade in U.S. government securities with the Federal Reserve. Primary dealers have functioned for over 40 years as the distribution and support system for Treasury debt and play a “vital” role in the price discovery process. The FRBNY designates primary dealers based on certain capital requirements, and requires primary dealers to participate meaningfully in both Federal Reserve open market operations and Treasury auctions to maintain their designation. However, the Federal Reserve does not have regulatory authority over dealers acting in the primary dealer role. In the past, outside of the auction process, Treasury had access to a cash draw authority intended for emergencies. Intermittently between 1942 and 1981, Treasury was able to directly sell (and purchase) certain short-term obligations to (and from) the Federal Reserve in exchange for cash. Treasury used the cash draw authority infrequently and mostly in times of war or armed conflict. Congress last granted the authority in 1979 and limited the amount Treasury could draw to $5 billion. Congress allowed this authority to expire in 1981 (see app. II for more background information). Although the existence of a previous draw authority is relevant, we are not suggesting restoration of this authority in its previous form due to certain limitations. To understand the steps that Treasury and the Federal Reserve took during the week of the September 11 attacks and during the following weeks to assure required debt obligations and payments were made on time and ensure liquidity in the financial market, we conducted interviews with knowledgeable Treasury and Federal Reserve officials and staff. We also reviewed prior audit reports and other documentation from GAO, the Federal Reserve, and Treasury. We analyzed and examined these sources to develop a time line with key actions and to determine actions and financial market behavior that are informative when considering alternative funding sources for Treasury. To understand major actions Treasury, the Federal Reserve, and primary dealers have taken since the September 11 attacks to increase the resiliency of Treasury’s auction process and participation, we interviewed Treasury and Federal Reserve officials and staff involved in conducting primary dealer visits, the auction process, and systems. We reviewed Treasury contingency and continuity of operations (COOP) plans and other documents that described contingency sites, staff training topics, contingency exercise results, and other Treasury summaries. We also interviewed executives and staff involved and familiar with resiliency efforts at 14 primary dealers and executives involved with emergency planning at The Bond Market Association, the industry association representing participants in the government securities and other debt markets. In addition, some of our work was based on internal knowledge derived from Treasury audits we have conducted in the past. To describe the opinions of relevant parties on the main design features of any cash draw authority and how the features affect accountability and congressional oversight, enhance Treasury’s operations, affect Federal Reserve operations, and influence the views of capital market participants, we interviewed Treasury officials involved with debt management, policy, operations, fiscal management, auctions, and legal matters. Further, we interviewed Federal Reserve officials involved with monetary affairs, open market and discount window operations, and Treasury auction staff and researchers. In addition, we communicated with foreign debt management officials, and conducted interviews with executives and staff involved with Treasury auctions at 14 primary dealers and senior executives at two major commercial banks. We also spoke with other capital market participants, and had discussions with senior congressional staff concerned with oversight. We analyzed relevant Treasury, Federal Reserve, and capital market documentation to obtain government and capital market perspectives. We validated, with relevant parties, main design features for consideration when structuring an alternative cash draw arrangement and looked for emerging funding options based on discussion with relevant parties. We conducted our review in Washington, D.C., and New York, N.Y., from March 2006 through September 2006 in accordance with generally accepted government auditing standards. Treasury took a number of steps in reaction to the September 11 attacks to ensure it met its obligations during a time of disrupted financial markets, as summarized in figure 1. It canceled an auction scheduled for September 11, withdrew compensating balances held in depository institutions across the country, communicated with the FRBNY about the status of markets, and resumed its normal auction schedule within 1 week of the attacks. Treasury decided to postpone and then cancel a planned auction of $10 billion worth of 4-week bills because of financial market degradation due to the September 11 attacks. In addition, various infrastructure concerns at the FRBNY made it unclear whether it could have conducted an auction.