THE $2 TRILLION MAN
Executive vice president of the Federal Reserve Bank of New York, Brian Sack ’92 is in the thick of working to restore America’s financial stability
by Eric Lipton ’87
Brian Sack can hardly resist looking at his watch as he sits in a sandwich shop a few blocks from the Federal Reserve building in Washington, D.C. In less than fifteen minutes, the Federal Reserve will issue a statement detailing the outcome of its most recent meeting—its up-to-date prescription for how to steer the nation out of the worst economic crisis since the Great Depression.
Financial markets around the world will likely either rally or tank in the minutes after the oracle that is the Fed speaks.
On this August afternoon, Sack, a 1992 UVM grad, knows exactly what is going to be said—that’s not what has him anxious. As the recently appointed executive vice president of the Federal Reserve Bank of New York, Sack was there inside the secretive chamber earlier in the afternoon, along with Ben Bernanke, the Federal Reserve chairman, and other top policy makers, when the latest decisions were made.
The only open question is how the world financial markets will react—and how the reaction might impact his staff back in New York, which every day buys something like $7 billion worth of securities. (Yes, $7 billion.)
“How’s it looking?” he asks his aide back in New York as the news release is finally blasted out to financial reporters. “What’s happening in the markets?”
MORE THAN ZERO
It is hardly the spot Sack expected he might end up when he enrolled at UVM two decades ago. He was a math whiz who just happened to take enough economics classes by his senior year to earn a math/economics double major. But this journey launched in Burlington has taken him, at a relatively young age, to an extraordinary and historic place.
To help pull the nation out of the recession, the Federal Reserve has pursued a policy approach that was detailed in part in a research paper Sack co-wrote with Bernanke in 2004—“Monetary Policy Alternatives at the Zero Bound”—which addressed the fundamental question of what further measures the Federal Reserve can take if it has already cut interest rates to zero. The answer, as the paper predicted, is a lot—as the Fed has since demonstrated.
And now, as head of the New York Fed’s market desk since June, he has been in charge of managing the Fed’s portfolio, which has ballooned from about $700 billion to more than $2 trillion in its desperate attempt since late 2008 to unfreeze credit markets.
Sack is still hardly known outside financial circles, unless you happen to be addicted to CNBC, where he was a frequent guest before he took the senior job at the Fed. But for several years now, he has been considered a go-to guy for financial reporters in Washington and New York for his subtle understanding of the intricate interplay of the Federal Reserve’s actions with financial markets and the global economy.
Sack points to classes in macroeconomics at UVM with Professor Jane Knodell as the place where the mechanics of it all first started to click. Knodell, currently interim provost at the university, still remembers Sack well.
“He was one of these quiet, but hard-charging and very intense students,” she says.
The son of a math teacher and Wall Street equity trader (no surprise there), Sack grew up in suburban Philadelphia and first visited Burlington on his way to a tour at Dartmouth College. But after looking around the UVM campus and the city, he knew he’d found his school.
“My take on UVM was that if you wanted to get a great education and be challenged, you could certainly do that,” he says. “If you wanted to have a great social life, hands down, you could do that. If you wanted to goof off and go skiing a lot, you could do that as well.”
So what did Sack do? “I did some of each,” he says, smiling. There was another bonus of life at UVM—while at a Sigma Phi Epsilon fraternity party one weekend during his sophomore year, he met this intriguing, attractive education major named Amy Noyes ’91.
“We just clicked from that first night—we wanted to spend time together,” he says. “The rest is history.”
They have been married now for sixteen years and have two children, three-year-old Jessica and seven-year-old Cristian. The family lives in Larchmont, New York, outside New York City.
A doctoral program in economics at Massachusetts Institute of Technology followed Sack’s undergraduate work at UVM. From those early days, he developed a fascination with understanding how actions by the Federal Reserve could produce largely predictable, even measurable, impacts on the economy, particularly depending on how they were communicated to the public.
It is a point of view that reflects the decidedly activist approach to economic policy of Federal Reserve Chairman Bernanke, who as an academic had spent years studying the Great Depression and the so-called Lost Decade in the 1990s in Japan, concluding that strong intervention by the Federal Reserve was necessary during the most recent recession to steer the country out of the crisis.
Much of Sack’s research—while in graduate school and then at the Federal Reserve, where he first worked as a researcher from 1997 until 2004—involved extremely complicated mathematical equations, overlaid by economic theory, which attempted to explain how actions by the Federal Reserve would play out in the economy.
Consider his so-called “Five-Year, Five-Year Forward Breakeven Inflation Rate,” a calculation that he developed in 2001 to measure investor expectations of inflation. It proved to be so informative that the Federal Reserve has since adopted it to help set policy. Sack moved up quickly during this first stint at the Fed, ultimately becoming the head of its Monetary and Financial Markets Analysis section. He now has a framed copy of the formula’s daily output, signed by former Federal Reserve Chairman Alan Greenspan, which his colleagues gave him when he left the agency in 2004 to go to work for an economics consulting firm in Washington.
The recession started while Sack was working at this private firm, Macroeconomic Advisers, which advises bond market investors and hedge funds about likely changes by the Federal Reserve in interest rates. His predictions would drive hundreds of millions of dollars worth of investments, meaning some very unhappy clients if he ever made a forecast that turned out to be wrong—and yes, at times, he did.
Sack was at the New Jersey shore on the fateful weekend in September 2008 when negotiations to save Lehman Brothers failed—and the investment bank prepared to file for bankruptcy. At first, he couldn’t believe that the Federal Reserve and the Bush administration would let Lehman fail. The consequences, he knew, would be catastrophic. Sack became so anxious he left the beach to drive back to work that Sunday to prepare notices for clients to be sent out on that Monday morning.
“We knew this was going to be one of the most historic days in U.S. financial history,” he says. “And it was.”
A UNIQUE UNDERSTANDING
When Timothy Geithner was nominated in January to become Treasury secretary, one of the top executives at the Federal Reserve Bank of New York, William Dudley, took over Geithner’s old job at the New York Fed. And Dudley then recruited Sack as his replacement, urging him to return to the Federal Reserve to become head of its so-called Open Markets desk, which manages day-to-day operations of many of the central bank’s rescue programs.
“He brings to the bank a unique understanding of the interplay of economics and finance and has a combination of real world experience and public service that will be invaluable to the New York Fed,” Dudley, the New York Fed president, said when he announced the appointment of Sack.
This past summer, on any given week, Sack’s staff of 370 economists, analysts, and Wall Street veterans were buying $25 billion dollars worth of mortgages and another $10 billion worth of Treasury securities. These giant purchases by the Federal Reserve were a centerpiece of its recession exit strategy—to send boatloads of extra money into the economy, hopefully helping to gradually unfreeze credit markets, and get businesses nationwide borrowing and spending again.
Given that Sack started his current job after much of this buying by the Fed had already taken place, his biggest task over the coming few years will be to figure out how to best manage or even sell off big chunks of this $2 trillion portfolio of Fed assets without disrupting economic growth. As the Fed never really wanted all this stuff—buying it, essentially, to kick-start the economy—selling it all off may prove more complicated.
At the Federal Reserve meeting in August, for example, Sack recommended how the agency could start to make the transition away from its buying spree, tapering the purchases out in a gradual and predictable way so that Wall Street investors were not surprised. Surprise typically generates unease, and unease triggers sell-offs.
Which is why on that nervous summer afternoon in Washington, Brian Sack was anxiously awaiting word from Wall Street. In hindsight, he could have eaten his sandwich in peace. In the days and weeks that followed, the stock markets surged, more steps forward on the long road back.
A reporter in The New York Times Washington, D.C. bureau, Eric Lipton ’87 is currently focused on the economic crisis. He is a recipient of the Pulitzer Prize for Explanatory Journalism, which he received in 1992 for his reporting on flaws in the Hubble Space Telescope.