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MEMORANDUM FOR THE RECORD

Type of event: Interview of Larry Lindsey


Date: January 20,2004
Special Access Issues: None
Prepared by: Emily Walker
Team Number: 8
Location: 11320 Random Hills Road, Fairfax, VA Suite 310 (The Lindsey Group)
Participants - Non-Commission: Larry Lindsey, former Assistant to the President for
Economic Policy and Director of the National Economic Council
Participants - Commission: Emily Walker, Mark Bittinger

Commission staff spoke with Mr. Larry Lindsey, former Assistant to the President for
Economic Policy and Director of the National Economic Council to gain greater
understanding of the role of the White House in the closure of the markets and the
economic issues the White House was concerned with on September 11, 2001.

Larry Lindsey said that once he made it into the bunker under the Executive Office
Building (the East Wing), he thought about the threat assessment of the events of Sept.
11,2001 on the economy. He saw the biggest concern as the payments system. He
spoke with Vice Chairman Ferguson who was acting in Chairman Greenspan's stead
(who was in Basle) early on in the day. He was concerned about a bank run, it was a
potential threat. People were panicking and they wanted to have liquidity. It was not just
a New York problem, but people were feeling the situation vicariously through the
television across the country. He gave as an example, the old days when people lined up
at tellers to get cash. When the banks were unable to pay, people went ballistic. He
pictured people standing at an ATM and not being able to get cash. The first one who
couldn't get cash withdrawn would start a domestic panic. He mentioned thatthe Federal
Reserve did a heroic and fantastic job of filling ATMs, not just in NY but around the
country to make sure that we did not run out of cash.

The second concern was check clearances. There were no planes flying. (On the side, he
mentioned that Greenspan asked him to get a plane to bring him back from Basle which
was difficult since all military planes were in use). Larry was worried that the Fed's
state-of-the-art operations center, the East Rutherford Operations Center (EROC) might
have been affected. But it was in operation and although there was a delay in clearing
checks due to no planes, it was not a problem. There was an issue of the Federal Reserve
Bank of New York (FRBNY) not being able to run cash and clear checks, but this was
not in the end a problem.

The real threat, he felt was the Money Market Funds (MMF). Many people had MMF's
for their "checking" accounts. These MMF's were backed by short-term debt

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instruments, which were traded. They were largely backed by US Government Bonds. If
the markets did not open to clear bonds, eventually MMFs would have to suspend
redemption and this would have been a huge issue. He spoke to Ferguson about the bond
issue and to Peter Fisher (Undersecretary of Treasury for Domestic Finance) and said that
this was of critical importance. (Fisher confirmed this in a separate interview).

Finally, Lindsey was concerned about the stock market. The US had been in a bear
market for 18 months. Liquidity pricing was needed regarding equities. "A stock is only
what you can sell it for. If you can't sell it, it is worth zero." A zero price would wipe
out a $10 trillion equity market comprising household wealth very quickly. He felt that
the market would trade down once it opened. But there was a need for liquidity. Larry
said that "There was a widespread feeling that the world as we knew it was coming to an
end." This was putting pressure on the equity market. And while he noted that it went
down 500 points the first day, it was not that huge of a drop (this was equivalent to $500
billion; half a trillion dollars). He said that they resisted putting on circuit breakers to
establish prices because they did not think it was the right thing to do. The concern was
to get the market open and running as quickly as possible.

Larry said he did not really look at the economic situation until 9/12. He was swamped
with calls on 9/11 from other segments of the economy. He cited the auto industry that
was having problems getting parts through the Canadian border. He was called at 7 a.m.
on 9112 by the industry saying that with their "just in time" (JIT) inventories, they barely
had enough parts to keep going and would have to shut down soon. The lead time on
these JIT inventories is approximately 11 hours. Larry called O'Neill at the Treasury
who called US Customs at the border. Customs said that there were no problems. What
Larry found out was that the problem was not US Customs, but the Canadian police who
were keeping trucks out of the downtown Windsor area in order to keep traffic moving
and this made an 18-mile back-up where the trucks could not get to the border. Larry
noted that while normally the industry would not call to solve problems; in a time of
crisis they called the White House. He said he spent the entire day putting out problems
or "fires" around the country with various industry heads, and this went on for weeks.

Larry called this situation like "working at the Kremlin." It was a command and control
White House. He said that "some in the Government wanted to move more to a
command and control economy." He wouldn't say who felt that way, but implied that
perhaps Vice President Cheney. He said that he wanted to try to keep as much private
sector decision-making as possible. He said that there was a perception in the White
House that "we were at war," and that the Government might need to override private
sector concerns in order to prosecute the war.

He said that the private sector was calling and asking "what do we do now?" .One
example of the involvement of the White House in the private sector was that his deputy
was called to get a generator to an exchange in NY (he did not say which one). In order
to accomplish this, his deputy purchased the generator and had a tug-boat bring it into the
harbor. He claimed this was highly unusual to be asked to get involved this way. Larry
said that in a crisis, normal decision-making patterns are eroded, and it this case they

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simply collapsed. He said that not only was he getting calls, but the National Economic
Council (NEC) had 6/7 special assistants handling different areas who were getting calls
as well. He said they spent the day "putting out fires."

He talked about the President's Working Group on Financial Markets which met to
discuss the crisis. He said he was an "ex-officio" member of the group and he did not
attend the meetings during 9/11. He also spoke with the President on the issue of the
market closing. He said the President stated that he wanted to return to normal as quickly
as possible, both for the national psychology as well as for the economy. He also
mentioned that there was significant confusion in the White House because no one knew
if "it" - the attacks - would continue. They were all looking for leadership from the
President and he felt that they received it and cited the President's speech. He said that
"each day was an eternity" in the White House.

In terms of the market opening, he said that "obviously an early opening was desirable."
By Wednesday night they realized they couldn't make it by Friday. He talked to the
President about this but he said the President had huge foreign policy concerns to deal
with immediately. He also said that "the great thing about 24-hours markets, is that there
were places to sell equities" and many of the US stocks were traded in London and they
could do futures and there were other ways to become liquid through foreign exchange
markets (albeit somewhat inefficient).

In terms of foreign exchange markets, he said that the dollar rallied after a short fall due
to flight to quality. He said that the Fed did intervene, but nothing like the recent
intervention of $40 bn by Japan this month so far. He also said we were "lucky there was
not a big run on the dollar."

When asked if Condoleezza Rice knew about the market opening issues, he only
mentioned that Rice, himself, O'Neill, Rumsfeld and Don Evans had lunch every 2/3
weeks and he met with Rice more frequently.

We discussed the Commission's possible recommendations on private sector


preparedness. Larry commented that from a preparedness perspective, the White House
was not prepared at all for the evacuation of their offices.

In answer to a question on whether preparedness could be viewed as a corporate


governance issue, he did not support that thought. He said that the liability issue once it
was made clear would be too great.

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