The September 11, 2001, attacks significantly affected the financial markets that the U.S. Treasury (Treasury) relies on. To understand how Treasury could obtain funds during a future potential wide-scale financial market disruption GAO examined (1) steps Treasury and others took during the September 11 attacks and after to assure required debt obligations and payments were made on time and ensure liquidity in the markets, (2) major actions Treasury and others have taken since the attacks to increase the resiliency of the auction process, and (3) the opinions of relevant parties on the main design features of any backup funding options. We conducted interviews with Treasury officials and others and reviewed appropriate documents.
Matter for Congressional Consideration
|Congress may wish to consider providing the Federal Reserve the explicit authority to lend directly to Treasury as a last resort when other options are not viable during a wide-scale disruption. Developing a direct draw authority would require careful consideration and determination of design features and any other requirements to support Treasury's need for an effective funding source, the Federal Reserve's independence, and congressional oversight and accountability concerns. An approach that appears promising would be to require that both the Secretary of the Treasury and Chairman of the Federal Reserve approve any draw and agree on specific amounts and duration at the time of any draw. This might balance independence and accountability concerns with the need for sufficiently prompt action and flexibility.|
Recommendations for Executive Action
|Department of the Treasury||1. The Secretary of the Treasury should examine in detail the implementation requirements for establishing a line of credit and a private placement of a CM bill with a range of appropriate private sector financial institutions, select the most appropriate option(s), and take steps to put required frameworks into place for use during a wide-scale disruption. Implementation details to be considered for both options include determining the design features discussed earlier, including situations or criteria for use, how to determine the appropriate financial institutions to rely upon, and the amount needed. For the private placement of a CM bill, the cost or price determination method would have to be analyzed since price discovery may not be possible in a significantly degraded financial market. For a credit line, ways to reduce the cost of an understanding or a guarantee of credit would have to be explored, such as a prearranged proposal process that determines the fees (if any) and terms of the transaction. As Treasury explores these options, it should consider how other countries have implemented alternative funding options to obtain any useful insights on its design, recognizing that the U.S. Treasury market has a unique role as the largest and most active debt market in the world.|