November 2008 was an extremely busy month for authorities in the US. The financial markets had just undergone panic the month before, but rather than dissipate there were lingering indications that all was not yet over. On November 23, 2008, the Treasury Department, the FDIC, and the Federal Reserve issued a joint statement on Citigroup. The first two had agreed to issue protection against losses on $306 billion of various MBS and mortgage loans structures, with the Fed agreeing to a liquidity backstop of “residual risk”, all in exchange for an “investment” in the struggling bank.

Just eleven days before that bailout, Treasury Secretary Hank Paulson had announced that TARP would be repurposed to a general bailout fund rather than the “bad bank” model many in Congress and the public envisioned during the process of its passage. Six days after the highly controversial decision, the Secretary, along with FDIC Chairman Sheila Bair and Federal Reserve Chairman Ben Bernanke, faced Congressional ire expressed in the charge of “bait and switch.” Paulson told angry Members:

When the facts changed and the circumstances changed, we changed the strategy. We didn’t implement a flawed strategy. We implemented a strategy that worked.

Five days later Citi received its salvation. No more institutions would fail after Lehman, but saving individual firms from liquidation is not anywhere close to the same as saving the system from the same tendency. The Fed in particular had become hyper-active from the middle of September 2008 on, but like the Treasury Department it shifted dramatically in early November 2008, too. From the timing and coincidence of both, we can only conclude that all the relevant agencies were in agreement that what was being done before wasn’t working (in other words, stating the obvious).

The major change in monetary policy was in how it would “absorb” so much additional “liquidity.” The Fed through various acronymed programs was rapidly expanding its balance sheet, to try to get money into disparate parts of a financial system starved of liquidity capacity. Yet, that condition would only continue even though the Fed was engaged well into hundreds of billions of dollars. The asset side of its balance sheet swelled as it did those things, leaving the level of bank reserves on the other side to do similarly.

The Fed tells us even to this day that the result of so much added reserves was the federal funds rate coming in far below target. The Federal Reserve Bank of New York declared it had:

…encountered difficulty achieving the operating target for the federal funds rate set by the FOMC, because the expansion of the Federal Reserve’s various liquidity facilities has caused a large increase in excess balances. The expansion of excess reserves in turn has placed extraordinary downward pressure on the overnight federal funds rate.

To address this major deficiency, it had before November attempted to “absorb” as many of those reserves as it could. FRBNY was instructed to engage in reverse repos transactions, which are today more familiar in their role within an “exit” strategy (already seemingly at odds with those times). Primarily, however, this absorption technique was to fall on the Supplementary Financing Program (SFP). In the middle of September 2008, the Treasury Department had agreed to sell short-term debt securities and place the funds in a special account with the Federal Reserve. The Fed explained: