During the second maintenance period, it was widely assumed that the intermeeting announcement of lower rates at 3:15 p.m. on October 15 reflected an abrupt action to deal with one or two troubled institutions. This then caused an extreme level of discount window aversion over the subsequent days, particularly as you can see in the chart on October 16, 19, 20, and 21. We faced a trading range that was consistently above the target, the blue line, during the morning on those days as banks held on to as many reserves as they could to avoid late day surprises and the risk that they might have an overdraft on their reserve account.

With any troubled financial institution, but especially in the case of large institutions, I believe discipline will be better served in a context in which the authorities maintain a policy of what I like to call "constructive ambiguity" as to what they will do, how they will do it, and when they will do it.  In saying this, I recognize that financial market particants do not like uncertainty, but that is just the point.  Moreover, while I fully understand the yearning in some quarters for the cookbook approach to problems in financial markets or institutions--large institutions especially--I regret to say that in my judgment such a cookbook does not and never will exist.