Financial crisis

Wall Street pushed Federal Reserve for Europe action

Wall Street executives, in a private meeting with a top Federal Reserve official in late September, recommended a coordinated effort by central banks to remedy the European financial crisis, according to Fed documents received in an open-records request.

The meeting, led by Louis Bacon, founder of hedge fund Moore Capital Management, preceded a joint action Wednesday by the world's major central banks, which banded together to provide liquidity to the markets through cheap U.S. dollar loans.

But analysts say Wednesday's broad stock-market rally was partly fueled by investors' expectations that central banks will do more to ease the crisis, such as the kind of central-bank coordination recommended by the members at the September meeting.

Mr. Bacon is one of 12 Wall Street members of a 14-member Fed panel, the Investor Advisory Committee on Financial Markets, set up in the wake of the financial crisis to give New York Federal Reserve Bank President William Dudley a pipeline into investors' thinking.

The Sept. 27 meeting with Mr. Dudley exemplifies the private meetings some Wall Street investors have with top Fed officials, in which they can gain access to potential early clues about Fed actions. Hedge funds have been pushing to get more information about the inner workings of the Fed, according to people familiar with the situation, as detailed in a Wall Street Journal page-one article Nov. 23.

The Fed's meetings with investors present a delicate situation for U.S. officials. They must balance the need for information from investors about the markets against the Fed's internal policy discouraging employees from arranging meetings with investors that would confer a commercial advantage.

The Fed's Mr. Dudley declined to comment. In a statement, Mr. Bacon defended the meetings, saying, "The Fed and Treasury canvass market opinions extensively through a variety of private-sector committees, contacts and trading desks in their task to fund the nation's exploding debt load, stabilize markets and optimize economic outcomes."

Members of the Investor Advisory Committee on Financial Markets include some of the biggest names on Wall Street, including Keith Anderson of Soros Fund Management; Mohamed El-Erian of Allianz SE's Pacific Investment Management Co.; Peter Fisher of BlackRock Inc.; Joshua Harris of Apollo Management LP; Alan Howard of Brevan Howard Asset Management; Deryck Maughan, a former chief executive of Salomon Brothers who now is at Kohlberg Kravis Roberts & Co.; and David Tepper of Appaloosa Management LP.

There is no indication the meeting had any impact on the participants' own investments. Minutes of the meeting obtained by The Wall Street Journal include notes taken by Fed staff members—but no record of comments by Mr. Dudley or any Fed officials at the meeting.

Mr. Dudley previously has said in a statement that he is in "listening mode" during the meetings and that he is careful not to provide "insights into our thinking" during meetings with investors.

He also said it is important the Fed understand investors' thinking during periods of stress and that he filters out investors' suggestions on policy that reflect their own interests. Committee members have said the questions asked by the Fed in advance of the meeting can give clues to the Fed's thinking.

The bulk of the three-hour meeting with Mr. Dudley on Sept. 27 at the New York Fed headquarters addressed the fallout from the financial crisis in Europe. Mr. Bacon, who was asked by Fed staff members to lead the discussion, began by saying he felt a Greek default was "likely" and he believed there was a "sizable risk of an accelerated Greek bank run," according to meeting minutes.

Committee members also said they believed a default by Greece would lead to increased pressure on the already weak position of French banks and create funding strains for European banks, according to the minutes.

The group suggested a number of ways to address the European crisis, including "coordinated credit easing and/or quantitative easing by" the European Central Bank. The group also urged "central bank guarantees of sovereign debt," "investments in European sovereigns and banks," "implementation of capital controls" and "government guarantee of bank funding and/or depositors," as well as "recapitalization of the IMF," according to the minutes.

A draft agenda in advance of the September meeting included questions about U.S. fiscal and monetary policy as well as the crisis in Europe, according to the Fed documents.

The committee members held a conference call Sept. 14 to discuss the draft agenda, according to an email obtained through the open-records search. Following the call, the agenda items relating to Europe expanded, according to the records.

Among the questions of the final agenda: "What steps should policy-makers consider to cushion any adverse market and economic impacts in Europe and elsewhere of a credit event?"

Mr. Bacon has been asked to speak about Europe during meetings with the Fed a number of times. In an email exchange Sept. 20, a Fed official asked Mr. Bacon to lead the meeting. "I was wondering if you would consider leading off the discussion on Europe, as you did at a meeting last year," the official said in the email.

Mr. Bacon responded the same day in an email, saying: "Ok, I will take it on. All Europe, all the time—getting weary."

(Published by WSJ - December 1, 2011)

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