Power Glitch Holds Up Fed Transfers, Generates Panic

The communications system that is used to transfer billions of dollars between U.S. banks was disrupted Thursday by a glitch in a backup power generator that has been in use at the Federal Reserve Bank of New York since a power outage struck Manhattan Monday.

The glitch forced the New York Fed to delay the opening of the so-called Fedwire, a step that drove up short-term interest rates and backed up the processing of big interbank transactions. The 2 1/2-hour delay also panicked dealers in government securities, whose transactions are completed through the computerized system and who also use it to arrange financing.

Fed officials were able to start up the system only by rerouting the flow of computer information through a backup system in Pearl River, N.Y., across the Hudson River and about 25 miles north of Manhattan.

The disruption was the second demonstration this week of the vulnerability of the nation’s financial infrastructure.

On Monday, a fire in a Manhattan electrical station cut off power to much of Wall Street, halting trading at the American Stock Exchange and five New York futures and options exchanges, and curtailing market activity through much of the United States. It was that outage that forced the New York Fed to turn to the backup diesel generator.

E. Gerald Corrigan, president of the New York Fed, said at an afternoon news briefing that the disruption was “Exhibit ‘A’ of the relevance and importance of the plumbing of the financial system.”

Although he sought to minimize the difficulties, he said the Fed was “not out of the woods yet.” The transfer to a backup system is “incredibly complicated,” he added.

The Fedwire has been called the central nervous system of the nation’s banking system and functions somewhat like a trillion-dollar checking account run by the central bank. The primary electronic transfer system among banks, savings and loans, credit unions and U.S. government agencies, it handles about $900 billion in financial transfers on an average day.

Fed officials were told Thursday morning of difficulties with the diesel generator and quickly decided to halt the usual 8:30 a.m. opening, a spokesman said.

A failure poses the risk that records of billion-dollar transactions could be lost.

Corrigan said the technical problems developed because the backup system had been working “full blast” since the Monday outage.

Fed officials spent the first hours of the morning consulting with officials of government and major banks, while technical personnel arranged changes in the computer protocols and software needed to reroute transactions through the Pearl River computer operation. Many banks also needed to reroute their computer connections.

But as preparations were under way, some of the nation’s banks couldn’t wait for the opening to arrange overnight loans that they need to finance part of their assets. They began bidding up the overnight loans and raising the so-called federal funds rate to as much as 8.5% during the day from 8%.

“That half-point doesn’t seem like much, but it adds up,” said Paul Kasriel, vice president and economist with Northern Trust Bank in Chicago. “At a time when a lot of banks are feeling earnings pressure, it’ll hurt.”

Fed officials hope to return to the regular system this weekend.