“The proliferation of credit risk transfer instruments was driven in part by an assumption of frictionless, uninterrupted liquidity.”

“more significant concentrations of risk were present than was apparent at the time.”

“Uncertainty about the future, and the greater complexity of leveraged structured products, created a dense fog around estimates of potential loss, making institutions and markets more vulnerable to an adverse surprise when conditions changed, and making it harder to manage the many principal agent problems inherent in the financial business.”

“As market participants have moved to reduce exposure to further losses, to step on the brake, the brake became the accelerator, amplifying the shock.”

“The rational actions taken by even the strongest financial institutions to reduce exposure to future losses have caused significant collateral damage to market functioning.”

“These measures—the Term Auction Facility and swap arrangements—have had some success in mitigating market pressures, in part by providing a form of insurance against future stress.”

“The regulations that affect incentives in the U.S. financial system have evolved into a very complex and uneven framework, with substantial opportunities for arbitrage, large gaps in coverage, significant inefficiencies, and large differences in the degree of oversight and restraint upon institutions that engage in very similar economic activities.”

Timothy Geithner, President and Chief Executive Officer, FRBNY

Remarks at the Council on Foreign Relations Corporate Conference 2008, New York City