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LOOKING BACK: A RET
R O S P E C T I V E C ON V E R S
AT ION W I T H W I L L I A M
POOLE | FEDER ALRESE
R V E B A N K O F S T. L O U I S
A N N UA L R E P ORT 2 0 0 7
LOOKINGBACK:ARETR
OSPECTIVECONVERSA
AT I O N W I T H W I L L I A M
POOLE |FEDERAL RESE
RVE BANK OF ST. LOUIS
ANNUAL REPORT 2007
LO OK I N G B A C K : A R E T R O
OSPECTIVECONVERSA

CHAIRMAN’S MESSAGE | 2007

essagechairman’s messagecha
I can’t think of a better way to characterize Bill
Poole’s 10-year presidency at the Federal Reserve
Bank of St. Louis than to summon an old expression: When sailing through rough waters, keep a
steady hand at the wheel.
Whether we’re talking about the national and
international economic scene or the changing
operating environment here at the Bank, choppy
surf has been the rule rather than the exception
over the past decade—a period during which the
St. Louis Fed was fortunate to have Bill, an avid
sailor, at the helm. On the Federal Open Market
Committee, Bill’s steady hand proved invaluable
during crises such as the Asian financial meltdown, the 9/11 terrorist attacks and the recent
subprime mortgage debacle.
What assuredly will be one of Bill’s lasting legacies was his advocacy of clear communications—
keeping surprises to a minimum while helping the
markets understand the underlying principles
behind FOMC decisions. Practicing what he
preaches, Bill gave nearly 150 speeches during his
presidency, often speaking on the record with
reporters afterward to answer their questions
and help eliminate confusion. Sometimes the
Federal Reserve is accused of being overly and
unnecessarily mysterious. Through his actions,
Bill sought to alleviate any misunderstandings or
misconceptions about the Fed.

Bon Voyage,
Captain Poole

2 | federal Reserve bank of st. louis

Despite serving as the Bank’s CEO for 10 years,
Bill likes to say that he is always an academic at
heart. And it’s the teacher in him that the Bank’s
directors, both past and present, really appreciated. Typically, we board members are neither
economists nor experts on the inner workings of
the Federal Reserve. We rely on the president to
educate us on the ramifications of FOMC actions,
as well as the best options for us to consider on
decisions we need to make. In this role, Professor Poole was unfailingly helpful to us.

airman’smessagechairman’smes
I have been a member of the Bank’s board of
directors since 2005 and have observed Bill deal
with change in a calm, yet nimble, manner that
befits a seasoned executive more than it does
a career academic. In fact, from the time Bill
arrived in 1998, he encountered a rapidly evolving
business model—one that private sector companies are used to, but the Fed was not. Nevertheless, Bill and his management team embraced the
changes and made decisions that proved beneficial both to the Eighth District and the Federal
Reserve System. An example of an innovative
efficiency during Bill’s tenure occurred in 2002,
when the St. Louis and Cleveland Reserve banks
formed a joint partnership to share sales and
marketing functions.
In support of System-generated efficiencies, the
St. Louis Fed was an early advocate of efforts to
reduce redundancies across Reserve banks by
converting to common software platforms for
human resources and certain accounting functions. Bill also contributed to the System by
serving a term as chairman of the Information
Technology Oversight Committee, whose responsibilities include approving overall technology
strategies and budgets for the Federal Reserve.
Identifying efficiencies, though, is only one part of
the story of Bill’s success. The Bank can also boast
of many areas of growth and leadership during
the Poole era. Three worth noting are:
• .S. Treasury support: Since 2001, the
U
St. Louis Fed has been the home of the
Fed’s Treasury Relations and Support
Office, which oversees all of the System’s
U.S. Treasury-related responsibilities and
manages the relationship between the two
organizations. In addition, the St. Louis Bank
provides a wide range of tax collection and
cash management applications and services
for the Treasury.

• orld-class economic data: The Research
W
division’s robust sets of online economic
information and data services are renowned
and relied upon worldwide. Led by the popular FRED (Federal Reserve Economic Data)
database, Research’s web pages received
around 60 million visits in 2007.
• ommunity connections: Under Bill, the
C
four offices in the District have redoubled
their focus on areas such as regional economic research, community development and
economic education. Maintaining a strong link
between the Fed and local communities is
critical. As we have learned with the subprime
mortgage crisis, many consumers have a dire
need for greater understanding of economic
and personal financial issues.
Before Bill embarked on his next journey—which
will include being a distinguished scholar in residence at the University of Delaware and a senior
fellow at the Cato Institute, and, naturally, sailing
on the Chesapeake Bay near his new Maryland
home—we caught up with him for a final interview. Here in the St. Louis Fed’s 2007 Annual
Report, I invite you to read Bill’s reflections.
Bill, on behalf of my fellow directors and the rest
of the crew here in the Eighth District, I thank
you for steering us through 10 often tumultuous
years. We will miss your guidance, insight and
wisdom, and we wish all the best to you and your
wife, Gerie.

Irl F. Engelhardt

Chairman
Board of Directors
Federal Reserve Bank of St. Louis
2007 annual report | 3

4 | federal Reserve bank of st. louis

LOOKING BACK:

A RETROSPECTIVE CONVERSATION WITH WILLIAM POOLE

ANNUAL REPORT | 2007
2007 annual report | 5

ACKLOOKING BACKLOOKIN

he decade that you spent as president of
the Federal Reserve Bank of St. Louis was
marked by a series of crises, such as the
Asian financial meltdown of the late 1990s, the
9/11 attacks and the current subprime mortgage
crisis. How would you characterize the turbulent
era during which you served?
I used to think of monetary policy as dealing with
generally normal periods interrupted by shocks. I’ve decided
that it’s really the other way around. In fact, the Fed has had
to face a whole series of shocks interrupted by occasional
periods that we call “normal.” If you were to take the 10 years
as a whole and divide it between periods of shocks or the threat
of shocks vs. the “normal” periods, I think you’d find a lot more
months in the first category.
What have you learned about the best role for the Federal
Reserve to play during times of crisis?
To start with, central bank credibility and low and stable inflation expectations are of critical importance. Earning that confidence is the most important thing the Fed can do in dealing
with shocks as they occur. If the Fed doesn’t have that underlying confidence, then all sorts of things can go wrong and,
indeed, the Fed may find itself willy-nilly taking policy actions
intended to maintain or restore credibility rather than dealing
6 | federal Reserve bank of st. louis

2007 annual report | 7

Bill Poole’s seminal
contributions in the
area of monetary
theory and policy
are widespread and
span four decades.
Whether it be his contributions on monetary
policy under uncertainty, his early investigations of simple
rules for setting the
federal funds rate, or
his analysis of rational
expectations models
of the term structure
for monetary policy,
his theoretical contributions provided
fundamental insights
and played an important role in developing
what we now view as
the core of modern
monetary theory. He
has continued his contributions to monetary
policy as a member
of the FOMC, bringing the same sound,
thoughtful and consistent economic analysis
to policy deliberations.
I have known Bill for
nearly three decades
and have learned a
great deal from him.

Recent chairmen of the
Federal Reserve Board

Charles I. Plosser

President
Federal Reserve Bank of
Philadelphia

8 | federal Reserve bank of st. louis

Paul Volcker
1979-1987

Alan Greenspan
1987-2006

Ben Bernanke
2006-

with the current problem, whatever it might be.
So, most of the work in dealing with the crises
comes before they even happen. Where the Fed
is now is a consequence of earning that credibility
starting with Paul Volcker and then dealing successfully with a whole series of issues during the
Volcker, Greenspan and now Bernanke eras.
Does the public expect too much from the Fed in
response to crises?
You can probably address that question on several levels. There’s a natural tendency for people
in the markets to look to government to help
them. And, often, it’s very self-interested. They
want to be bailed out—it’s just that simple. They
want someone to fix their mistakes. You see it
across the board. People think that if the government will give them some money, why not take it.
… It seems that the people who most often talk
about regulation tying them in knots and being
costly are some of the first to come asking for
help and to be bailed out. So, there is nothing
Fed leaders can do except make sure to have a
correct, disciplined policy and then be visible in
explaining the rationale for the policies they
want to follow. You have to be prepared to
resist pressures from Congress and make use
of the independence that the Federal Reserve
structure provides.
Could you give a broad historical overview
of what you refer to as the monetarist vs.
fiscalist debate?
The word “monetarism” refers to the way the
debates were framed in the 1960s and ’70s.
Fundamentally, the argument at that time was
about a few propositions that have been largely
resolved. It’s also important to understand that

“ there is nothing F e d lea d ers can d o e xcept make sure to have a correct ,
d iscipline d policy an d then be visible in e x plaining the rationale for the
policies the y want to follow.”

the debate was really a pre-rational expectations
debate. (See explanation on page 23.) One of
the issues being argued was the relative power
or influence of monetary policy and fiscal policy.
The Keynesian tradition (page 23) coming out of
the 1930s was that monetary policy was pretty
much a sideshow, and the aggregate economy
was controlled by fiscal policy. Milton Friedman
(page 23) disagreed. He said that monetary policy
was central to understanding the business cycle.
How did the monetarists and fiscalists differ
when it came to their views on inflation?
The monetarists thought that inflation was
costly and damaging to the economy. The fiscalists argued that inflation wasn’t all that costly.
… The fiscalists believed that there could be a
constructive tradeoff in that you could actually
obtain lower unemployment if you were willing to
accept somewhat higher inflation. That view was
resisted at a somewhat intuitive level and then
at a very, very explicit theoretical level by Friedman in his presidential address to the American
Economic Association in December of 1966. There

continued to be an argument for a while. The
fiscalists would say, “We understand Friedman’s
theory, but the world doesn’t really work quite
that way, and, in fact, there is a tradeoff.” The view
that there was a tradeoff had a great deal to do
with Federal Reserve policy mistakes because that
was the prevailing view of the Federal Reserve—
with the lone exception of St. Louis. … There was
a whole series of policy mistakes that led to gradually rising inflation—sometimes not so gradual—
at costs greater than anticipated, including, lo and
behold, costs in terms of employment and certainly economic stability. So, over the course of
the ’70s, the debate was resolved in favor of what
had been the monetarist position.
Four decades later, where does the theory of
monetarism stand? Furthermore, have you
changed your views about monetarism over
the years?
Monetarism has become mainstream economics.
We know now the following: Inflation is costly,
only the central bank is responsible for inflation,
the Phillips Curve (page 23) is vertical in the long

2007 annual report | 9

Bill Poole (seated at far end) at a recent FOMC meeting. Chairman
Ben Bernanke is seated at the center of the facing side of the table.

run, and there is no inflation/employment
tradeoff. Those are all part of macroeconomics
today. … There is another issue that was not
directly connected with monetarism, but you
might say was sort of a fellow-traveler issue:
Friedman was very much a believer in the market
system and distrustful of government. He had
great respect for market efficiency and great
skepticism about government efficiency. So, the
people who were on the monetarist side of the
debate tended to have that same view. I don’t
know of any activist government interveners who
are monetarists. They just didn’t ever go
together. Monetarists generally have great
respect for markets. It’s not to say that market
decisions are infallible, but you will ask a question
two, three, four times before you decide that
10 | federal Reserve bank of st. louis

markets are making a mistake. And I think that
part of it certainly survives as being extremely
important in my thinking. The immediate successors of the monetarist debate of the ’60s are
people like Bob Lucas and Tom Sargent (page 23)
and the rational expectations theorists. They
were the immediate intellectual heirs of the
debate. I certainly come from that tradition, and
a lot of my speeches have been oriented toward
developing the practical application of those
ideas to understanding and managing monetary
policy. I don’t think my views on monetarism
have changed in particular. Those views are still
very much a part of my thinking.
Does the Federal Reserve’s decentralized structure still make as much sense now as it did when
the Fed was created?
I think the rationale has changed over time. Part
of the rationale was that regional Reserve banks
could pursue different monetary policies to
address differing regional needs. That argument
has disappeared—there can be only one national
monetary policy. But part of the original rationale
has survived. If you look back at the Federal
Reserve Act in 1913, there was tremendous distrust
of Washington and New York. That’s one reason
why you had Reserve banks spread around the
country—so that you would have decentralized
power. The argument for decentralized authority
still stands, but this case is not very well appreciated by the general public. A lot of people think
of a centralized system as being more efficient,
perhaps more democratic, if it’s run out of Washington. I think those views are fundamentally
wrong because I believe that the original conception of not having all the authority concentrated in
New York as the financial center or Washington as
the political center remains valid.

Has the FOMC reached a good state in terms of
its communication, or do you think there is more
work to be done?
There is more work to be done. One of the biggest innovations came in 1994 when the FOMC
began to disclose what its policy decision was
after each meeting. The communication since
then, however, has sometimes been a bit muddled. I don’t think there is a settled view in the
FOMC about the value of essentially forecasting policy, or trying to give hints about where
you’re going to go. I’ve become skeptical of that
approach because I think the correlation between
where you go and where you can see yourself
going in advance is very low. … I also think that
there is unfinished business with regard to clarity of objectives. I’ve been an advocate since the
first day I came here of a formal inflation target,
and that issue is still unresolved. There is a huge
amount of unfinished business in trying to define
and communicate the Fed’s reaction function
(page 23). … One of the problems right now is
that the FOMC itself doesn’t have its reaction
function very well specified. I think more discussion about regularity of the reaction function
would be very helpful and would help the communication strategy by narrowing the range of
uncertainty so that the FOMC has more predictable policy.
What can the FOMC do to further demystify its
actions and decisions?
In the public relations profession, where there is
a lot of concentration on communications strategies, people will tell you that you have to be sure
of what your message is. You don’t just throw
a whole lot of information out there. What are
Continued on Page 14

2007 annual report | 11

rdon the recordontherec
excerpts from some of bill poole’s speeches

Synching, Not Sinking, the Markets (1999)
Speaking at a meeting of the Philadelphia Council for Business Economics: “When the markets
and the Fed are in synch, both will have a common reaction to incoming data, and the markets
will correctly anticipate Fed policy actions. An environment in which markets correctly anticipate
Fed actions implies a situation in which Fed policy is widely understood, regular and predictable.
The fact that Fed policy actions sometimes take the markets by surprise shows that we have not
reached ‘perfection’ yet.”
Central Bank Transparency: Why and How (2001)
During a session at the Philadelphia Fed Policy Forum about how transparent a central bank should
be: “The case for why transparency is clear. Transparency promotes accountability, improves
market efficiency and probably improves the clarity of policymaking itself. How transparency is
just plain hard. It is easy to find communications gaps, but not at all easy to fill them.”
Housing in the Macroeconomy (2003)
In a speech at the Office of Federal Housing Enterprise Oversight Symposium in Washington, D.C.,
Poole said the housing market could be at risk because government-sponsored enterprises like
Fannie Mae and Freddie Mac, the biggest players in the mortgage market, are also the least capitalized. “Just three firms—Fannie Mae, Freddie Mac and Ginnie Mae—account for over 40 percent of
the residential mortgage market. Ginnie Mae is backed by the full faith and credit of the U.S. government. Fannie Mae and Freddie Mac are not so backed and hold capital far below that required
of regulated banking institutions. Should either firm be rocked by a mistake or by an unforecastable shock, in the absence of robust contingency arrangements the result could be a crisis in
U.S. financial markets that would inflict considerable damage.”
The Fed’s Monetary Policy Rule (2005)
Speaking at the Cato Institute in Washington, D.C.: “At a minimum, the FOMC can and should
aspire to policy statements that are clear and do not themselves create uncertainty and ambiguity. The record since 2000 suggests that the balance-of-risks statement and more recently the
‘forward-looking’ language included in the press releases have provided consistent signals about

12 | federal Reserve bank of st. louis

cordontherecordonther
the direction of future policy actions. … Federal Reserve policy has become highly predictable in
recent years, and in the future this predictability will, I am sure, be seen as one of the hallmarks of
the Greenspan era.”
Inflation Targeting (2006)
In a speech at the Junior Achievement of Arkansas Inc. in Little Rock: “I believe that having a formal
inflation objective will further enhance the Fed’s credibility and, consequently, its ability to engage
in countercyclical monetary policy. The reason is simple. The more open and precise the Fed is
about its long-run inflation objective, the more confident the public will be that the Fed will meet
that objective.”
Thinking Like a Central Banker (2007)
In a speech at Market News International in New York City: “A central bank cannot fix the level
of employment or its rate of growth, or the average rate of unemployment. However, the central
bank can contribute to employment stability. Avoiding, or at least cushioning, recessions is an
important goal. This goal should not be viewed as in conflict with price stability. The most serious employment disaster in U.S. history was the Great Depression, which was a consequence of
monetary policy mistakes that led to ongoing serious deflation. Similarly, the period of the Great
Inflation saw four recessions in 14 years. Price stability is an essential precondition for overall
economic stability.”
Dollars and Sense (2008)
Speaking to the Financial Planning Association of Missouri and Southern Illinois in St. Louis: “Will
housing sector problems push the economy into recession? It is too early to tell right now, but
what we can do is to examine the current situation closely and try to learn from it. Perhaps
‘relearn’ is a better word, because the mistakes that brought us to this point have been made
before. There are no new lessons here. The lessons are familiar ones that need to be more forcefully driven home and incorporated in standard financial practice in the future. … If borrowers,
lenders and investors can refocus on financial basics and re-emphasize critical lessons about
credit and risk, the financial future can be brighter than the second half of 2007.”
For the full text of all of Bill Poole’s speeches, visit www.stlouisfed.org/news/speeches.html.

2007 annual report | 13

“ W hat we nee d to d o is not increase the material that we put out there , but
we nee d to increase the interpretation an d e x planation , an d we nee d to
clarif y the message .”

Continued from Page 11

you trying to convey? I think that, to too great
an extent, we’ve been throwing information out
there without being clear in our minds what the
message is. … And the way I’ve made this point in
several speeches is that the issue is not transparency, but communication. Transparency implies
that you throw back a curtain and let everybody
look in. We too often dump the data without
explaining what to make of it and why we’re
doing it. What we need to do is not increase the
material that we put out there, but we need to
increase the interpretation and explanation, and
we need to clarify the message. I don’t think
there is enough of that happening.
Speaking of communication, you have had a
reputation as one of the more outspoken Reserve
bank presidents, whether it be your willingness
to speak on record with the media or the nearly
150 speeches you have given. Why do you feel it
has been so important for you to maintain such
high visibility?
When I came here and began to give speeches, I
asked myself: What exactly am I trying to do? And
what purpose is being served? Here I am, out there
representing the Federal Reserve, knowing that
expectations are very important. And while expectations are obviously intimately connected with
policy decisions of the Federal Reserve, they also to
some extent reflect what comes out of the mouths,
or pens, of Federal Reserve officials. So, I started to
think through what to do and how to do it.

St. Louis Mayor Francis Slay congratulates Bill Poole during
the grand opening of the Bank’s pedestrian plaza in 2005.

14 | federal Reserve bank of st. louis

Another question I asked myself was: What can I
infer and interpret from fluctuations in financial
data about inflation expectations or expectations
about monetary policy? These are things that are

important to Federal Reserve decision-making.
I came to the view that I can only make sense of
all this if I put it in very simple abstract terms.
And that’s where the speech came from in 1999
that was called “Synching, not Sinking, the
Markets.” (See page 12.) I said, let’s go back to the
basic literature of the 1970s and the basic macroeconomic model—the rational expectations
equilibrium. The desirable equilibrium is that the
central bank behaves as the market expects, and
the market behaves as the central bank expects.
That’s the nature of the equilibrium: When there
is new information, such as data on industrial
production or housing starts, the equilibrium
requires that the Federal Reserve and the markets
respond to the same data in the same way. A
number of my speeches have been oriented
around that theme, and that provides a unifying
theoretical view that ties together lots of different
problems. For one thing, this view gives me a very
easy way to address the questions that keep
coming, such as: “How’s the Fed going to set
interest rates at its next meeting? What are you
guys going to do?” Then I can say, “What we’re
going to do will depend on what the new information is. I can’t predict unpredictable information.
And you would not want me to commit—you
would not want the FOMC to commit—as to
what it is going to do come hell or high water.
It wouldn’t make any sense for us to ignore
important new information.”

When we hired Bill
10 years ago, we
knew that he was an
outstanding economist and would be
a valued participant
on the FOMC. My
perception is that he
has more than lived
up to that expectation. What we did
not know is whether
he would be able
to adapt to a major
executive role in
leading such a large
institution as the
St. Louis Federal
Reserve Bank.
He has, in fact,
exceeded our expectations in that
capacity, which just
proves that an old
academic can learn
new tricks.
John F. McDonnell

James S. McDonnell Foundation
Former Chairman of the Federal Reserve
Bank of St. Louis Board of Directors

I always tell people, “I’m not being coy with you.
I’m telling you that I can’t predict what the inflation rate is going to be in next week’s CPI report.
If it’s an outsized shock, with no extenuating circumstances to it, then the Fed needs to take that
into account when forming its inflation outlook,
and that ought to affect our policy decision.”
2007 annual report | 15

Bill Poole has had an
enormous impact on
the Eighth District and
the Federal Reserve
System as a leading economist. I also
had the opportunity
to see Bill excel in
another Fed role, as
a participant in the
System’s strategic
direction project during my time as chairman. There, he helped
define the evolving
roles of the Reserve
banks and helped
bring clarity to the
principal governance
issues associated with
the evolving role of
the Reserve banks and
the Board of Governors. Bill was a leader
in setting a framework
to help the banks and
the governors achieve
the mission of the
System for the next
decade. His respect
for and understanding of the history and
the future of the Fed
served our Bank well.
Walter L. Metcalfe Jr.

Bryan Cave LLP
Former Chairman of the Federal Reserve Bank
of St. Louis Board of Directors

16 | federal Reserve bank of st. louis

The rational expectations model says that the
market has to understand what the central bank
is doing. The market understands what the central bank is doing, in part and maybe even mostly,
through inferences from observed central bank
actions—how we set the federal funds rate. But
the communications strategy can deepen the
market’s understanding of what we’re doing and
why we’re doing it, and that helps to produce a
better equilibrium. That’s the reason to be as
open and forthright as possible.
Earlier, you mentioned inflation targeting. Is the
announcement of an inflation target being hamstrung and hung up by concern about the Federal
Reserve’s dual mandate?
Probably. I think that, putting political pressures,
which are real, aside, it’s possible to explain all
this easily within the framework of the dual
mandate (page 23). If you look back in history,
you see that the largest problems on the employment front have come from inflation and price
instability. You look at deflation during the Great
Depression, the biggest economic disaster in
U.S. history by far, and then you look at the ’60s
and ’70s, when inflation was rising, the business
cycle fluctuations became more extreme, and the
average rate of unemployment rose—and I don’t
think it’s an accident that price-level stability and
employment levels are connected. So, we ought
to be able to explain that achieving sustained,
high and stable employment requires inflation
stability. We can assist in maintaining inflation
stability if we have great clarity as to the objective. That’s an argument that I believe and that
I’ve made in some of my speeches. And I don’t
see any reason why the FOMC shouldn’t adopt
that as its official view.

2007 annual report | 17

Poole Continued
the St. Louis Fed
Tradition
During his 10 years as president of
the Federal Reserve Bank of St. Louis,
Bill Poole was widely regarded as one
of the more influential members of
the Federal Open Market Committee.
His speeches received frequent
notice in the press, and he gave many
interviews throughout his tenure.
Followng a tradition of St. Louis Fed
i
presidents, Poole has been an outspoken advocate of directing monetary
policy toward achieving the goal of
price stability. Dating back to the term
of Darryl Francis, who was president
of the St. Louis Bank from 1966 to 1976,
St. Louis Fed presidents have consistently advocated policies to achieve
and maintain low inflation.
President Francis led the St. Louis
Fed during a time of generally rising, but also highly variable, inflation—a period many
people now refer to as the Great Inflation. At the time, many economists and policy
makers blamed the inflation on rising costs, the exercise of monopoly power and
government budget deficits. Francis, however, was convinced that the Fed was responsible for inflation. Citing research from his team of economists as supporting evidence,
Francis argued that inflation would not end until the growth of the money stock was
brought under control. Francis’ forceful advocacy of controlling inflation by limiting the growth of money, and the supporting evidence produced by the St. Louis Fed’s
Research department, marked the St. Louis Bank as a maverick.
The St. Louis Fed is no longer regarded as a maverick institution. Although presidents
of the Bank have consistently held the monetary view of inflation and advocated policies directed toward price stability, these positions are now very much in the mainstream. President Poole built upon and continued the St. Louis Fed tradition through
his unwavering and outspoken advocacy of establishing price stability as the paramount
objective of monetary policy. It is his view that a central bank can best promote a
stable financial system and maximum sustainable economic growth through a firm,
credible commitment to price stability.

18 | federal Reserve bank of st. louis

In the late 1960s and early 1970s, St. Louis Fed President Darryl Francis and Research Director
Homer Jones consistently and vociferously argued that price stability could only be restored if
the Fed articulated and implemented a systematic policy that restrained monetary growth. The
St. Louis Bank became known as the “monetarist bank.”
By the 1990s, economists understood that, in principle, other systematic approaches to monetary policy can provide a nominal anchor for the economy. Critical for the success of such
approaches to policy is that consumers and firms believe that future inflation will be low and
stable. For policy to succeed, the general public must understand the Fed’s long-run inflation objective and how the FOMC will respond to short-run economic fluctuations. Bill Poole
has been a leader, perhaps the leader, within the Federal Reserve System in pushing for greater
policy transparency by the FOMC and a clearer articulation of a systematic implementation of
monetary policy aimed at achieving price stability. In this sense, Bill has adapted and carried on
the tradition of the St. Louis Fed in the 21st century.
Robert H. Rasche

Senior Vice President and Director of Research
Federal Reserve Bank of St. Louis

Switching to an issue that brought a lot of
attention to you a few years ago: governmentsponsored enterprises (GSEs) like Fannie Mae
and Freddie Mac. You made a speech in March of
2003 (page 12) in which you questioned the longterm financial viability of these agencies. Where
does this issue stand today?
That speech caused a little stir. I don’t think
anything constructive by way of reform has happened since. I don’t take credit for disclosing the
accounting irregularities, but when I look back, is
there something I wish I had said or not said? The
answer is no. One of the reasons I went down

that track is that I have a vivid memory when I
was at the Council of Economic Advisers in
Washington. We had many discussions and were
all very well aware of the problems being covered
up in the savings and loan industry. That experience led me to rather deep regret that I had not
raised that issue publicly. I might not have been
in a position to do it because it was a very politically difficult issue, and many people were trying
to cover it up, sweep it under the rug and ignore
it. But I wish I would have somehow found a way
to raise that issue and improve public consciousness. If I had been able to do that in 1982 or 1983,
and if there had been some earlier action, it
2007 annual report | 19

“... historically y ou d on ’ t fin d significant changes in monetary arrangements
in the U nite d States absent of a big problem or screw - up of some sort .”

might have saved taxpayers quite a bit of money.
It probably wouldn’t have made any difference,
but I would have felt better.

and on the Federal Reserve System. He had much
more impact on dealing with monetary policy
issues than I have had to date on the GSE issue.

So, part of the reason that I did push the GSE
issue was a feeling that I was in a position to
understand the issue and the potential gravity
of it. And that’s exactly what an office like this is
for. I have an audience simply by virtue of speaking from this office that I would not have had as a
Brown University professor; so, why not? That’s
consistent with my predecessors. That’s what
Darryl Francis did. (See sidebar on page 18.) He
went out campaigning about the inflation issue
and about monetary policy. He did not change
policy at the time, but I think he had very substantial long-run influence on the national debate

Looking at the operating environment of the
St. Louis Fed itself, what do you regard as the
most significant changes that affected the Bank
during your tenure?

20 | federal Reserve bank of st. louis

There’s no question in terms of the scale of the
effects, it’s the consolidation in financial services
that led to ending check and cash operations in
two branches (Little Rock and Louisville) and selling the buildings there. That was an enormous
change, going from branches that each had 150
employees down to about eight. We have more
of that coming in St. Louis and Memphis because

we’ll be closing down check operations in these
locations. And there is consolidation in other
services, too; so, we are much less a stand-alone
company than we were 10 years ago. Some IT and
HR services that used to be here, for example,
are now elsewhere. What’s happened here is not
unlike what’s happened to a lot of companies
that have outsourced support operations. It’s not
unique to the Fed.
What do you think the Federal Reserve might
look like 10 to 20 years from now?
Who is it that said, “Forecasting is difficult, especially about the future?” How do I come to grips
with that question, beyond saying that there’s
always uncertainty, and if anyone looks back at
this annual report, they’ll probably laugh at what
I’ll say, but that’s the way these things always are.
First of all, historically you don’t find significant
changes in monetary arrangements in the United
States absent of a big problem or screw-up of
some sort. … I would not expect the Federal
Reserve Act to be opened and revised in any
important respect in the absence of a significant
monetary problem.
That means that we’ll probably have the same
basic framework in the law. It seems to me that
the main thing that the Reserve banks need to do
and probably will do is to manage themselves
efficiently enough—which I think we do a pretty
good job of doing—and provide public services
through economic education, economic research
and so forth that are regarded in the public
debate as being worth what we spend on them.
From time to time, there will probably be some
attacks on us from Congress. That happens. But
if we continue to perform pretty well on the
macroeconomic front, I don’t think we’re going

The most important
aspect of the Federal
Reserve System is
its decentralized
structure. In this
system, the job of
regional Reserve
bank president
encompasses many
duties, but among
the most important
is serving as the connection between the
business and industry of the individual
districts and the
Federal Reserve’s
national monetary
policy mission. In
his tenure at the
St. Louis Federal
Reserve Bank, Bill
has been very much
committed to his
role in the monetary policy process,
bringing his insight
and analysis to the
deliberations.
Thomas M. Hoenig

President
Federal Reserve Bank of Kansas City

2007 annual report | 21

to be very vulnerable, and the attacks that occur
from time to time will not have any material
effect on the law. That means that the Federal
Reserve banks will shrink in terms of their operating responsibilities. I think we need to get used
to the prospect of Reserve banks being smaller
in terms of employment, and more vigorous and
more rigorous in terms of our intellectual output.
What will you miss most about being president
of the St. Louis Fed?
I’ll miss the excitement and challenge of the monetary policy process. That’s been very interesting
to observe and be part of.
Least?
I don’t think anybody likes doing performance
reviews and some of that administrative stuff
(laughter). Fortunately, though, the scale of it is
pretty small. I have said to many people, and I
really believe it, that there is nothing I’ve done here
that is as awful as grading a huge stack of exams
over winter break. I’m glad I left that behind.
Are there any closing comments you would
like to make?
I am through and through an academic, and I had
no managerial experience coming into this job.
I really enjoyed learning about a lot of modern
management practices, and I felt fortunate to
have some very good people do all the hard work.
There are a lot of really good people here. n

22 | federal Reserve bank of st. louis

akpoolespeakpoolespeakpo
An explanation of key terms

Pre-rational Expectations Debate – In the 1970s, macroeconomic models of how monetary and fiscal policies affect the economy began to focus on how the public forecasts future values of economic data and
policies. Macroeconomic models that incorporate rational expectations assume that the public uses all
relevant information when making projections about future values of data and policy actions. Thus, in
such models, monetary and fiscal policies have no permanent effects on output or employment because
the public will anticipate and, acting in its best interest, take actions that offset the impact of policy on the
growth of output and employment.
Keynesian Tradition – Refers to John Maynard Keynes (1883-1946), an English economist who proposed
that high unemployment, being a result of insufficient capital spending by business, could be relieved by
government-sponsored programs. He also advocated deficit spending by governments to stimulate
economic activity.
Milton Friedman – The 20th century’s most prominent economist advocate of free markets. A winner of
the 1976 Nobel Prize in Economics, Friedman (1912-2006) was noted as a proponent of monetarism and for
his opposition to government intervention in the economy.
Phillips Curve – An inverse relationship between inflation and unemployment first observed in data for
the United Kingdom by the economist A.W. Phillips. Monetarists argued, and most macroeconomists now
agree, that there is no long-run relationship between inflation and unemployment, and that monetary
policy cannot affect the unemployment rate in the long run.
Lucas and Sargent – Refers to Robert Lucas, Nobel Prize winner and professor of economics at the University of Chicago, and Thomas Sargent, professor of economics at New York University. Both were leading
proponents of macroeconomic models that incorporate the rational expectations assumption.
Reaction Function – Refers to how policymakers adjust their policies in response to new economic data and
other information.
Dual Mandate – Refers to the fact that the Federal Reserve Act (as amended) directs the Federal Reserve to
pursue monetary policies to achieve the goals of both maximum employment and stable prices.

2007 annual report | 23

24 | federal Reserve bank of st. louis

BOARDS OF DIRECTORS | 2007

THANK YOU

retiring board members
We bid farewell and express our gratitude to those members of the
Eighth District boards of directors who have recently retired.
Our appreciation and best wishes go out to the following:
MEMPHIS
Levon Mathews
ST. LOUIS
Cynthia J. Brinkley
Jay Fitzsimmons
Lewis F. Mallory Jr.

Note: Lewis Mallory now serves as the
Bank’s Federal Advisory Council member.

BOARDS OF DIRECTORS | L ittle Ro c k

26 | federal Reserve bank of st. louis

Cal McCastlain
Chairman
Partner
Pender & McCastlain P.A.
Little Rock, Ark.

Phillip N. Baldwin

Sonja Yates Hubbard

President and CEO
Southern Bancorp
Arkadelphia, Ark.

CEO
E-Z Mart Stores Inc.
Texarkana, Texas

Sharon Priest
Executive Director
Downtown Little Rock Partnership
Little Rock, Ark.

William C. Scholl
President
First Security Bancorp-Searcy
First Security Bank
Little Rock, Ark.

C. Sam Walls

Robert A. Young III

CEO
Arkansas Capital Corp.
Little Rock, Ark.

Chairman
Arkansas Best Corp.
Fort Smith, Ark.

2007 annual report | 27

BOARDS OF DIRECTORS | Louisv ill e

Gary A. Ransdell
Chairman
President
Western Kentucky University
Bowling Green, Ky.

Gordon B. Guess
Consultant
Marion, Ky.

John L. Huber
Consultant
Louisville, Ky.

Barbara Ann Popp

President
Wabash Plastics Inc.
Evansville, Ind.

L. Clark Taylor Jr.

Steven E. Trager

CEO
Ephraim McDowell Health
Danville, Ky.

28 | federal Reserve bank of st. louis

John C. Schroeder

CEO
Schuler Bauer Real
Estate Services
New Albany, Ind.

Chairman and CEO
Republic Bank & Trust Co.
Louisville, Ky.

2007 annual report | 29

BOARDS OF DIRECTORS | memphis

30 | federal Reserve bank of st. louis

Nick Clark
Chairman
Partner
Clark & Clark
Memphis, Tenn.

Meredith B. Allen

Charles S. Blatteis

Vice President, Marketing
Staple Cotton Cooperative
Association
Greenwood, Miss.

Member (Partner)
The Bogatin Law Firm PLC
Memphis, Tenn.

Thomas G. Miller
President
Southern Hardware Co. Inc.
West Helena, Ark.

David P. Rumbarger Jr.
President and CEO
Community Development
Foundation
Tupelo, Miss.

Hunter Simmons
President and CEO
First South Bank
Jackson, Tenn.

Not pictured:
Susan S. Stephenson
Co-Chairman and President

Independent Bank
Memphis, Tenn.

2007 annual report | 31

BOARDS OF DIRECTORS | St. Lo uis

Irl F. Engelhardt
Chairman
Chairman
Patriot Coal Corp.
St. Louis

Steven H. Lipstein

Paul T. Combs

Deputy Chairman
President and CEO
BJC HealthCare
St. Louis

President
Baker Implement Co.
Kennett, Mo.

Gregory M. Duckett
Senior Vice President and Corporate Counsel
Baptist Memorial Health Care Corp.
Memphis, Tenn.

Robert G. Jones
President and CEO
Old National Bancorp
Evansville, Ind.

Chairman and CEO
Simmons First National Corp.
Pine Bluff, Ark.

David R. Pirsein

A. Rogers Yarnell II

President and CEO
First National Bank in Pinckneyville
Pinckneyville, Ill.

32 | federal Reserve bank of st. louis

J. Thomas May

President
Yarnell Ice Cream Co. Inc.
Searcy, Ark.

2007 annual report | 33

INDUSTRY COUNCIL | AGR IBUS IN E S S

Keith Glover
Sam J. Fiorello
Larry Clarke

Donald Danforth
Plant Science Center
St. Louis

Bunge North America Inc.
St. Louis

Producers Rice Mill Inc.
Stuttgart, Ark.

Richard Jameson
Jameson Farms
Brownsville, Tenn.

David Williams, Ph.D.
Burkmann Feeds
Danville, Ky.

John King III
King Farms
Helena, Ark.

Not pictured:
Bert Greenwalt, Ph.D

Arkansas State University
State University, Ark.

Leonard Guarraia, Ph.D.
World Agricultural Forum
St. Louis

Ted Huber

Huber’s Orchard & Winery
Starlight, Ind.

34 | federal Reserve bank of st. louis

INDUSTRY COUNCIL | HEALTH CAR E

Jeffrey B. Bringardner
Jan C. Vest
Calvin Anderson

Blue Cross Blue Shield
of Tennessee
Memphis, Tenn.

Signature Health Services Inc.
St. Louis

Humana-Kentucky Inc.
Louisville, Ky.

Bob Gordon

Baptist Memorial Health Care
Memphis, Tenn.

Stephen A. Williams

Norton Healthcare
Louisville, Ky.

Not pictured:
Russell D. Harrington Jr.
Baptist Health
Little Rock, Ark.

Dick Pierson

University of Arkansas for
Medical Sciences
Little Rock, Ark.

Sister Mary Jean Ryan

SSM Health Care System
St. Louis

2007 annual report | 35

INDUSTRY COUNCIL | R EAL ESTATE

Mary Singer
Jack McCray
Kevin Huchingson

Bank of the Ozarks
Little Rock, Ark.

Colliers Dickson Flake
Little Rock, Ark.

CresaPartners Memphis
Memphis, Tenn.

David Price

Whittaker Builders Inc.
John J. Miranda
St. Louis
Pinnacle Properties
of Louisville, LLC
William Mitchell
Louisville, Ky.
Memphis Area
Association of Realtors
Memphis, Tenn.

Not pictured:
Greg Kozicz

Alberici Constructors
St. Louis

E. Phillip Scherer III

Commercial Kentucky Inc.
Louisville, Ky.

36 | federal Reserve bank of st. louis

INDUSTRY COUNCIL | TR AN S PORTATION

Mark Knoy
Robert L. Lekites
UPS
Louisville, Ky.

MEMCO Barge Line
Chesterfield, Mo.

Kirk Thompson

J.B. Hunt Transport Services Inc.
Lowell, Ark.

Not pictured:
T. Michael Glenn

Joseph Tracy

Charlie W. Johnson

Phil Trenary

FedEx Corp.
Memphis, Tenn.

C.W. Johnson Xpress
Louisville, Ky.

Dot Transportation Inc.
Mt. Sterling, Ill.
Pinnacle Airlines Inc.
Memphis, Tenn.

Dennis Oakley

Bruce Oakley Inc.
North Little Rock, Ark.

2007 annual report | 37

William Poole

Dave Sapenaro

President and CEO

MANAGEMENT COMMITTEE | St. Lo uis

First Vice President
and COO

Karl Ashman
Senior Vice President

Judie Courtney

Mary Karr

Senior Vice President

Robert Rasche

Robert Schenk

Senior Vice President

Julie Stackhouse
Senior Vice President

38 | federal Reserve bank of st. louis

2007 annual report | 39

ntmessage from managementme

ow, it’s our turn. In the
previous pages, Chairman
Engelhardt shared his
thoughts on Bill Poole, as
did past chairmen and a
few of Mr. Poole’s colleagues around the Federal Reserve System. And,
of course, our past president himself offered his
reflections in the main essay. We, the Bank’s
senior management team, would also like to
express our appreciation to President Poole for his
wise guidance and counsel over the last decade.
The Bank is a much different place than it was
when we welcomed Mr. Poole in 1998. In the past
10 years, as changes have occurred both inside
and outside the Federal Reserve, we have
remained agile enough to develop new capabilities and skillful enough to emerge as a System
leader in several areas.
Mr. Poole saw the need for the Bank to, in a
sense, redefine itself. For example, our check
operations at all four offices had historically
performed very well. But that didn’t change an
environment that witnessed more and more
people switching to electronic forms of payment—a trend that the Federal Reserve has
encouraged. As we have reduced, and continue
to reduce, our check operations, we have bolstered areas of the Bank that Mr. Poole liked to
refer to as our “intellectual presence.”
By that, he meant sharing our knowledge about
the economy, monetary policy and personal
finance with traditional and nontraditional
audiences alike. We are doing this throughout
our District through programs like economic
forums, education workshops, and meetings with

40 | federal Reserve bank of st. louis

bankers and business, government and community leaders. Bill Poole was an ardent supporter
of these efforts and traveled both far and frequently to meet with the Bank’s constituents.
During the past decade, we have also greatly
enhanced the already formidable amount of
economic data on the Research portion of the
Bank’s web site. We are currently in the process
of revamping the rest of our web site and plan
to launch the new site later this year.
Chairman Engelhardt touched on the St. Louis
Fed’s relationship with the U.S. Treasury. That is
certainly true. We are extremely proud of the
partnership we have forged with the Treasury in
recent years. In 2007, the Fed’s Treasury Relations
and Support Office, based in St. Louis, continued
to provide effective monitoring and support for
the System’s Treasury-related objectives. In
addition, our District’s Treasury operations were
awarded additional Treasury responsibilities in
2007, ensuring that the District will continue to
be a leading Reserve bank in terms of serving
the U.S. Treasury.
The District’s banking supervision function last
year successfully met all safety and soundness,
consumer affairs, and applications processing
mandates, and provided effective supervision and
monitoring of District state member banks and
bank holding companies. In addition, the District
continued to expand its supervisory portfolio.
Despite all of these positive developments, we
have also been forced to make some difficult
decisions in recent years. Restructuring decisions
in departments like Check, Cash and even Treasury have lowered our employment levels in those
areas. We had to bid farewell to many dedicated,

essagefrommanagementmessagef
talented employees. Perhaps there used to be a
feeling here that the Federal Reserve was immune
to employment pressures that private companies
routinely face. That is no longer the case.
As we prepare to welcome a new president to the
St. Louis Fed, we are excited about taking on the
challenges that lie ahead. It is clear that Mr. Poole
left the Bank solidly positioned to face the continuing evolutions in the economy, the banking
sector and the Federal Reserve System.

“ I n the past 1 0 years , as
chan g es hav e occurred
both inside and outside the
F ederal R eserv e , w e hav e
remained ag ile enou g h to
de v elop ne w capabilities
and skillful enou g h to
emerg e as a System leader
in se v eral areas . ”

2007 annual report | 41

42 | federal Reserve bank of st. louis

FINANCIAL STATEMENTS | 2007

For the years ended December 31, 2007 and 2006

The firm engaged by the Board of Governors for the audits of
the individual and combined financial statements of the Reserve
Banks for 2007 was Deloitte & Touche LLP (D&T). Fees for these
services totaled $4.7 million. To ensure auditor independence,
the Board of Governors requires that D&T be independent in
all matters relating to the audit. Specifically, D&T may not

44 | federal Reserve bank of st. louis

perform services for the Reserve Banks or others that would
place it in a position of auditing its own work, making management decisions on behalf of the Reserve Banks, or in any other
way impairing its audit independence. In 2007, the Bank did
not engage D&T for any material advisory services.

Management’s Report on Internal Control Over Financial Reporting

To the Board of Directors:

March 20, 2008

The management of the Federal Reserve Bank of St. Louis (“FRBSTL”) is responsible for the preparation and fair presentation of the
Statement of Financial Condition, Statements of Income and Comprehensive Income, and Statement of Changes in Capital as of
December 31, 2007 (the “Financial Statements”). The Financial Statements have been prepared in conformity with the accounting principles, policies, and practices established by the Board of Governors of the Federal Reserve System and as set forth in the
Financial Accounting Manual for the Federal Reserve Banks (“Manual”), and as such, include amounts, some of which are based on
management judgments and estimates. To our knowledge, the Financial Statements are, in all material respects, fairly presented in
conformity with the accounting principles, policies and practices documented in the Manual and include all disclosures necessary for
such fair presentation.
The management of the FRBSTL is responsible for establishing and maintaining effective internal control over financial reporting as
it relates to the Financial Statements. Such internal control is designed to provide reasonable assurance to management and to the
Board of Directors regarding the preparation of the Financial Statements in accordance with the Manual. Internal control contains selfmonitoring mechanisms, including, but not limited to, divisions of responsibility and a code of conduct. Once identified, any material
deficiencies in internal control are reported to management and appropriate corrective measures are implemented.
Even effective internal control, no matter how well designed, has inherent limitations, including the possibility of human error, and
therefore can provide only reasonable assurance with respect to the preparation of reliable financial statements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of the FRBSTL assessed its internal control over financial reporting reflected in the Financial Statements, based upon
the criteria established in the “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, we believe that the FRBSTL maintained effective internal control over financial reporting as it relates to the Financial Statements.
Federal Reserve Bank of St. Louis

William Poole, President and Chief Executive Officer

David A. Sapenaro, First Vice President and Chief Operating Officer

Marilyn K. Corona, Vice President, Chief Financial Officer

2007 annual report | 45

Report of Independent Auditors

To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of St. Louis

We have audited the accompanying statement of condition of the Federal Reserve Bank of St. Louis (“FRB St. Louis“) as of December
31, 2007 and the related statements of income and comprehensive income and changes in capital for the year then ended, which
have been prepared in conformity with accounting principles established by the Board of Governors of the Federal Reserve System. We also have audited the internal control over financial reporting of FRB St. Louis as of December 31, 2007, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. FRB St. Louis’ management is responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial
statements and an opinion on FRB St. Louis’ internal control over financial reporting based on our audit. The financial statements of
FRB St. Louis for the year ended December 31, 2006 were audited by other auditors whose report, dated March 12, 2007, expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
FRB St. Louis’ internal control over financial reporting is a process designed by, or under the supervision of, FRB St. Louis’ principal
executive and principal financial officers, or persons performing similar functions, and effected by FRB St. Louis’ board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with the accounting principles established by the Board of Governors of the
Federal Reserve System. FRB St. Louis’ internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of FRB
St. Louis; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in

46 | federal Reserve bank of st. louis

accordance with the accounting principles established by the Board of Governors of the Federal Reserve System, and that receipts and
expenditures of FRB St. Louis are being made only in accordance with authorizations of management and directors of FRB St. Louis;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of FRB
St. Louis’ assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
As described in Note 3 to the financial statements, FRB St. Louis has prepared these financial statements in conformity with accounting principles established by the Board of Governors of the Federal Reserve System, as set forth in the Financial Accounting Manual for
Federal Reserve Banks, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United
States of America. The effects on such financial statements of the differences between the accounting principles established by the
Board of Governors of the Federal Reserve System and accounting principles generally accepted in the United States of America are also
described in Note 3.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FRB St. Louis as
of December 31, 2007, and the results of its operations for the year then ended, on the basis of accounting described in Note 3. Also,
in our opinion, FRB St. Louis maintained, in all material respects, effective internal control over financial reporting as of December 31,
2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

St. Louis, Missouri
March 20, 2008

2007 annual report | 47

48 | federal Reserve bank of st. louis

Report of Independent Auditors

To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of St. Louis

We have audited the accompanying statement of condition of the Federal Reserve Bank of St. Louis (the “Bank”) as of December 31,
2006, and the related statements of income and changes in capital for the year then ended, which have been prepared in conformity
with the accounting principles, policies, and practices established by the Board of Governors of the Federal Reserve System. These
financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards as established by the Auditing Standards Board
(United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As described in Note 3, these financial statements were prepared in conformity with the accounting principles, policies, and practices
established by the Board of Governors of the Federal Reserve System. These principles, policies, and practices, which were designed
to meet the specialized accounting and reporting needs of the Federal Reserve System, are set forth in the Financial Accounting
Manual for Federal Reserve Banks which is a comprehensive basis of accounting other than accounting principles generally accepted
in the United States of America.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as
of December 31, 2006, and the results of its operations for the year then ended, on the basis of accounting described in Note 3.

March 12, 2007

2007 annual report | 49

FEDERAL RESERVE BANK OF ST. LOUIS

statements of Condition
(in millions)

As of December 31,

2007

2006

ASSETS
Gold certificates

Special drawing rights certificates

326

328
71

Coin

Items in process of collection

196

Loans to depository institutions

1,050

Securities purchased under agreements to resell

1,486

U.S. government securities, net

23,831

24,897

Investments denominated in foreign currencies

513

223

Accrued interest receivable

205

214

Inter istrict settlement account
d

3,742

1,807

Bank premises and equipment, net

127

Other assets

Total assets

31,456

$ 27,917

LIABILITIES AND CAPITAL
Liabilities:
Federal Reserve notes outstanding, net

Securities sold under agreements to repurchase

29,212

$ 25,994

1,406

941

Deposits:
Depository institutions

289

434

Other deposits

Deferred credit items

103

Interest on Federal Reserve notes due to U.S. Treasury

Accrued benefit costs

Other liabilities
Total liabilities

31,096

$ 27,585

Capital:
Capital paid-in

180

166

and $21 million at December 31, 2007 and 2006, respectively)

180

166

Total capital

360

332

Surplus (including accumulated other comprehensive loss of $18 million

Total liabilities and capital
The accompanying notes are an integral part of these financial statements.

50 | federal Reserve bank of st. louis

31,456

$ 27,917

FEDERAL RESERVE BANK OF ST. LOUIS

statements of Income and comprehensive income
(in millions)

For the year ended December 31,

2007

2006

Interest income:
Interest on U.S. government securities

1,235

$ 1,112

Interest on securities purchased under agreements to resell

Interest on investments denominated in foreign currencies

Interest on loans to depository institutions

Total interest income

1,289 1,117

Interest expense:
Interest expense on securities sold under agreements to repurchase
Net interest income

1,235 1,075

Other operating income:
Compensation received for services provided

Reimbursable services to government agencies

115

116

Foreign currency gains, net

Other income

Total other operating income

164

153

Operating expenses:
Salaries and other benefits

104

Occupancy expense

Equipment expense

Assessments by the Board of Governors

Other expenses

108

107

Total operating expenses

252

239

Net income prior to distribution

1,147

989

Change in funded status of benefit plans

Comprehensive income prior to distribution

$1,150

989

Distribution of comprehensive income:
Dividends paid to member banks

Transferred to surplus and change in accumulated other comprehensive loss

Payments to U.S. Treasury as interest on Federal Reserve notes

1,126

936

Total distribution

1,150

$ 989

The accompanying notes are an integral part of these financial statements.

2007 annual report | 51

FEDERAL RESERVE BANK OF ST. LOUIS

STATEMENTS OF CHANGES IN CAPITAL
For the years ended December 31, 2007, and December 31, 2006
(in millions)

Surplus
Net Income Accumulated Other

Total

Capital Paid-In Retained Comprehensive Loss Surplus
Balance at January 1, 2006
(2.9 million shares)
$
144
$
144
$
–
$
144

Total Capital
$

288

Net change in capital stock
issued (0.4 million shares)

–

Transferred to surplus

–

Adjustment to initially apply
SFAS No. 158

–

(21)

166

332

Balance at December 31, 2006
(3.3 million shares)

166

187

(21)

Net change in capital stock
issued (0.3 million shares)

–

Transferred to surplus and
change in accumulated
other comprehensive loss

–

Balance at December 31, 2007
(3.6 million shares)

180

198

The accompanying notes are an integral part of these financial statements.

52 | federal Reserve bank of st. louis

(18)

180

360

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

Note 1

STRUCTURE

The Federal Reserve Bank of St. Louis (“Bank”) is part of the
Federal Reserve System (“System”) and one of the twelve Reserve
Banks (“Reserve Banks”) created by Congress under the Federal
Reserve Act of 1913 (“Federal Reserve Act”), which established
the central bank of the United States. The Reserve Banks are
chartered by the federal government and possess a unique set of
governmental, corporate, and central bank characteristics. The
Bank and its branches in Little Rock, Louisville and Memphis serve
the Eighth Federal Reserve District, which includes Arkansas, and
portions of Illinois, Indiana, Kentucky, Mississippi, Missouri and
Tennessee.
In accordance with the Federal Reserve Act, supervision and
control of the Bank is exercised by a board of directors. The
Federal Reserve Act specifies the composition of the board of
directors for each of the Reserve Banks. Each board is composed of nine members serving three-year terms: three directors,
including those designated as chairman and deputy chairman,
are appointed by the Board of Governors of the Federal Reserve
System (“Board of Governors”) to represent the public, and six
directors are elected by member banks. Banks that are members
of the System include all national banks and any state-chartered
banks that apply and are approved for membership in the System. Member banks are divided into three classes according to
size. Member banks in each class elect one director representing
member banks and one representing the public. In any election
of directors, each member bank receives one vote, regardless of
the number of shares of Reserve Bank stock it holds.
The System also consists, in part, of the Board of Governors
and the Federal Open Market Committee (“FOMC”). The Board
of Governors, an independent federal agency, is charged by the
Federal Reserve Act with a number of specific duties, including general supervision over the Reserve Banks. The FOMC is
composed of members of the Board of Governors, the president
of the Federal Reserve Bank of New York (“FRBNY”) and, on a
rotating basis, four other Reserve Bank presidents.

Note 2

OPERATIONS AND SERVICES

The Reserve Banks perform a variety of services and operations.
Functions include participation in formulating and conducting
monetary policy; participation in the payments system, including large-dollar transfers of funds, automated clearinghouse
(“ACH”) operations, and check collection; distribution of coin
and currency; performance of fiscal agency functions for the U.S.
Treasury, certain federal agencies, and other entities; serving as
the federal government’s bank; provision of short-term loans to
depository institutions; service to the consumer and the community by providing educational materials and information regarding
consumer laws; and supervision of bank holding companies, state
member banks, and U.S. offices of foreign banking organizations. Certain services are provided to foreign and international
monetary authorities, primarily by the FRBNY.

The FOMC, in the conduct of monetary policy, establishes
policy regarding domestic open market operations, oversees
these operations, and annually issues authorizations and directives to the FRBNY for its execution of transactions. The FRBNY
is authorized and directed by the FOMC to conduct operations in
domestic markets, including the direct purchase and sale of U.S.
government securities, the purchase of securities under agreements to resell, the sale of securities under agreements to repurchase, and the lending of U.S. government securities. The FRBNY
executes these open market transactions at the direction of the
FOMC and holds the resulting securities and agreements in the
portfolio known as the System Open Market Account (“SOMA”).
In addition to authorizing and directing operations in the
domestic securities market, the FOMC authorizes and directs
the FRBNY to execute operations in foreign markets for major
currencies in order to counter disorderly conditions in exchange
markets or to meet other needs specified by the FOMC in carrying out the System’s central bank responsibilities. The FRBNY is
authorized by the FOMC to hold balances of, and to execute spot
and forward foreign exchange (“FX”) and securities contracts
for, nine foreign currencies and to invest such foreign currency
holdings ensuring adequate liquidity is maintained. The FRBNY
is authorized and directed by the FOMC to maintain reciprocal
currency arrangements (“FX swaps”) with four central banks
and “warehouse” foreign currencies for the U.S. Treasury and
Exchange Stabilization Fund (“ESF”) through the Reserve Banks.
In connection with its foreign currency activities, the FRBNY
may enter into transactions that contain varying degrees of offbalance-sheet market risk that result from their future settlement
and counter-party credit risk. The FRBNY controls credit risk by
obtaining credit approvals, establishing transaction limits, and
performing daily monitoring procedures.
Although the Reserve Banks are separate legal entities, in the
interests of greater efficiency and effectiveness they collaborate
in the delivery of certain operations and services. The collaboration takes the form of centralized operations and product or
function offices that have responsibility for the delivery of certain
services on behalf of the Reserve Banks. Various operational
and management models are used and are supported by service
agreements between the Reserve Bank providing the service and
the other eleven Reserve Banks. In some cases, costs incurred
by a Reserve Bank for services provided to other Reserve Banks
are not shared; in other cases, the Reserve Banks are billed for
services provided to them by another Reserve Bank.
Major services provided on behalf of the System by the Bank,
for which the costs were not redistributed to the other Reserve
Banks, include operation of the Treasury Relations and Support
Office and the Treasury Relations and Systems Support Department, which provide services to the U.S. Treasury. These services
include: relationship management, strategic consulting, and
oversight for fiscal and payments related projects for the Federal
Reserve System; and operational support for the Treasury’s tax
collection, cash management and collateral monitoring.

2007 annual report | 53

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

Note 3

SIGNIFICANT ACCOUNTING POLICIES

Accounting principles for entities with the unique powers and
responsibilities of the nation’s central bank have not been formulated by accounting standard-setting bodies. The Board of
Governors has developed specialized accounting principles and
practices that it considers to be appropriate for the nature and
function of a central bank, which differ significantly from those
of the private sector. These accounting principles and practices
are documented in the Financial Accounting Manual for Federal Reserve Banks (“Financial Accounting Manual”), which is
issued by the Board of Governors. All of the Reserve Banks are
required to adopt and apply accounting policies and practices
that are consistent with the Financial Accounting Manual and the
financial statements have been prepared in accordance with the
Financial Accounting Manual.
Differences exist between the accounting principles and practices in the Financial Accounting Manual and generally accepted
accounting principles in the United States (“GAAP”), primarily
due to the unique nature of the Bank’s powers and responsibilities as part of the nation’s central bank. The primary difference
is the presentation of all securities holdings at amortized cost,
rather than using the fair value presentation required by GAAP.
U.S. government securities and investments denominated in foreign currencies comprising the SOMA are recorded at cost, on a
settlement-date basis, and adjusted for amortization of premiums
or accretion of discounts on a straight-line basis. Amortized cost
more appropriately reflects the Bank’s securities holdings given
the System’s unique responsibility to conduct monetary policy.
While the application of current market prices to the securities
holdings may result in values substantially above or below their
carrying values, these unrealized changes in value would have no
direct effect on the quantity of reserves available to the banking
system or on the prospects for future Bank earnings or capital.
Both the domestic and foreign components of the SOMA portfolio may involve transactions that result in gains or losses when
holdings are sold prior to maturity. Decisions regarding securities
and foreign currency transactions, including their purchase and
sale, are motivated by monetary policy objectives rather than
profit. Accordingly, market values, earnings, and any gains or
losses resulting from the sale of such securities and currencies are
incidental to the open market operations and do not motivate
decisions related to policy or open market activities.
In addition, the Bank has elected not to present a Statement of
Cash Flows because the liquidity and cash position of the Bank
are not a primary concern given the Reserve Banks’ unique powers and responsibilities. A Statement of Cash Flows, therefore,
would not provide additional meaningful information. Other
information regarding the Bank’s activities is provided in, or
may be derived from, the Statements of Condition, Income and
Comprehensive Income, and Changes in Capital. There are no
other significant differences between the policies outlined in the
Financial Accounting Manual and GAAP.
The preparation of the financial statements in conformity
with the Financial Accounting Manual requires management to
make certain estimates and assumptions that affect the reported
54 | federal Reserve bank of st. louis

amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates. Unique
accounts and significant accounting policies are explained below.
a. Gold and Special Drawing Rights Certificates

The Secretary of the U.S. Treasury is authorized to issue gold and
special drawing rights (“SDR”) certificates to the Reserve Banks.
Payment for the gold certificates by the Reserve Banks is made
by crediting equivalent amounts in dollars into the account
established for the U.S. Treasury. The gold certificates held by the
Reserve Banks are required to be backed by the gold of the U.S.
Treasury. The U.S. Treasury may reacquire the gold certificates at
any time and the Reserve Banks must deliver them to the U.S.
Treasury. At such time, the U.S. Treasury’s account is charged,
and the Reserve Banks’ gold certificate accounts are reduced.
The value of gold for purposes of backing the gold certificates is
set by law at $42 2/9 a fine troy ounce. The Board of Governors
allocates the gold certificates among Reserve Banks once a year
based on the average Federal Reserve notes outstanding in each
Reserve Bank.
SDR certificates are issued by the International Monetary Fund
(“Fund”) to its members in proportion to each member’s quota
in the Fund at the time of issuance. SDR certificates serve as a
supplement to international monetary reserves and may be transferred from one national monetary authority to another. Under
the law providing for United States participation in the SDR system, the Secretary of the U.S. Treasury is authorized to issue SDR
certificates somewhat like gold certificates to the Reserve Banks.
When SDR certificates are issued to the Reserve Banks, equivalent
amounts in dollars are credited to the account established for the
U.S. Treasury, and the Reserve Banks’ SDR certificate accounts
are increased. The Reserve Banks are required to purchase SDR
certificates, at the direction of the U.S. Treasury, for the purpose
of financing SDR acquisitions or for financing exchange stabilization operations. At the time SDR transactions occur, the Board of
Governors allocates SDR certificate transactions among Reserve
Banks based upon each Reserve Bank’s Federal Reserve notes outstanding at the end of the preceding year. There were no SDR
transactions in 2007 or 2006.
b. Loans to Depository Institutions

Depository institutions that maintain reservable transaction accounts or nonpersonal time deposits, as defined in regulations
issued by the Board of Governors, have borrowing privileges at
the discretion of the Reserve Bank. Borrowers execute certain
lending agreements and deposit sufficient collateral before credit
is extended. The Bank offers three discount window programs to
depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. Interest is accrued
using the applicable discount rate established at least every fourteen days by the board of directors of the Reserve Bank, subject
to review and determination by the Board of Governors.
In addition, depository institutions that are eligible to borrow
under the Reserve Bank’s primary credit program are also eligible
to participate in the temporary Term Auction Facility (“TAF”)

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

program. Under the TAF program, the Reserve Banks conduct
auctions for a fixed amount of funds, with the interest rate determined by the auction process, subject to a minimum bid rate. All
advances under the TAF must be fully collateralized.
Outstanding loans are evaluated for collectibility, and currently
all are considered collectible and fully collateralized. If loans were
ever deemed to be uncollectible, an appropriate reserve would
be established.
c. U.S. Government Securities and Investments
Denominated in Foreign Currencies

Interest income on U.S. government securities and investments
denominated in foreign currencies comprising the SOMA is accrued on a straight-line basis. Gains and losses resulting from
sales of securities are determined by specific issues based on
average cost. Foreign-currency-denominated assets are revalued
daily at current foreign currency market exchange rates in order
to report these assets in U.S. dollars. Realized and unrealized
gains and losses on investments denominated in foreign currencies are reported as “Foreign currency gains, net” in the Statements of Income and Comprehensive Income.
Activity related to U.S. government securities, including the
premiums, discounts, and realized and unrealized gains and
losses, is allocated to each Reserve Bank on a percentage basis
derived from an annual settlement of the inter istrict settled
ment account that occurs in April of each year. The settlement
also equalizes Reserve Bank gold certificate holdings to Federal
Reserve notes outstanding in each District. Activity related to investments denominated in foreign currencies is allocated to each
Reserve Bank based on the ratio of each Reserve Bank’s capital
and surplus to aggregate capital and surplus at the preceding
December 31.
d. Securities Purchased Under Agreements to Resell,
Securities Sold Under Agreements to Repurchase, and
Securities Lending

The FRBNY may engage in tri-party purchases of securities under
agreements to resell (“tri-party agreements”). Tri-party agreements are conducted with two commercial custodial banks that
manage the clearing and settlement of collateral. Collateral is
held in excess of the contract amount. Acceptable collateral
under tri-party agreements primarily includes U.S. government
securities, pass-through mortgage securities of the Government
National Mortgage Association, Federal Home Loan Mortgage
Corporation, and Federal National Mortgage Association, STRIP
securities of the U.S. Government, and “stripped” securities of
other government agencies. The tri-party agreements are accounted for as financing transactions, with the associated interest
income accrued over the life of the agreement.
Securities sold under agreements to repurchase are accounted
for as financing transactions and the associated interest expense
is recognized over the life of the transaction. These transactions
are reported in the Statements of Condition at their contractual
amounts and the related accrued interest payable is reported as a
component of “Other liabilities.”
U.S. government securities held in the SOMA are lent to U.S.
government securities dealers in order to facilitate the effective

functioning of the domestic securities market. Securities-lending
transactions are fully collateralized by other U.S. government
securities and the collateral taken is in excess of the market value
of the securities loaned. The FRBNY charges the dealer a fee for
borrowing securities and the fees are reported as a component of
“Other income.”
Activity related to securities sold under agreements to repurchase and securities lending is allocated to each of the Reserve
Banks on a percentage basis derived from an annual settlement
of the inter istrict settlement account. On February 15, 2007 the
d
FRBNY began allocating to the other Reserve Banks the activity
related to securities purchased under agreements to resell.
e. FX Swap Arrangements and Warehousing Agreements

FX swap arrangements are contractual agreements between
two parties, the FRBNY and an authorized foreign central bank,
whereby the parties agree to exchange their currencies up to a
prearranged maximum amount and for an agreed-upon period
of time (up to twelve months), at an agreed-upon interest rate.
These arrangements give the FOMC temporary access to the
foreign currencies it may need to support its international operations and give the authorized foreign central bank temporary
access to dollars. Drawings under the FX swap arrangements can
be initiated by either party and must be agreed to by the other
party. The FX swap arrangements are structured so that the party
initiating the transaction bears the exchange rate risk upon maturity. Foreign currencies received pursuant to these agreements
are reported as a component of “Investments denominated in
foreign currencies” in the Statements of Condition.
Warehousing is an arrangement under which the FOMC agrees
to exchange, at the request of the U.S. Treasury, U.S. dollars for
foreign currencies held by the U.S. Treasury or ESF over a limited
period of time. The purpose of the warehousing facility is to
supplement the U.S. dollar resources of the U.S. Treasury and ESF
for financing purchases of foreign currencies and related international operations.
FX swap arrangements and warehousing agreements are revalued daily at current market exchange rates. Activity related to
these agreements, with the exception of the unrealized gains and
losses resulting from the daily revaluation, is allocated to each
Reserve Bank based on the ratio of each Reserve Bank’s capital
and surplus to aggregate capital and surplus at the preceding
December 31. Unrealized gains and losses resulting from the
daily revaluation are recorded by FRBNY and not allocated to the
other Reserve Banks.

2007 annual report | 55

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

f. Bank Premises, Equipment, and Software

Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated on a straight-line basis
over the estimated useful lives of the assets, which range from two
to fifty years. Major alterations, renovations, and improvements
are capitalized at cost as additions to the asset accounts and are
depreciated over the remaining useful life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or
improvement. Maintenance, repairs, and minor replacements are
charged to operating expense in the year incurred.
Costs incurred for software during the application development stage, either developed internally or acquired for internal
use, are capitalized based on the cost of direct services and
materials associated with designing, coding, installing, or testing
software. Capitalized software costs are amortized on a straightline basis over the estimated useful lives of the software applications, which range from two to five years. Maintenance costs
related to software are charged to expense in the year incurred.
Capitalized assets including software, buildings, leasehold
improvements, furniture, and equipment are impaired when
events or changes in circumstances indicate that the carrying
amount of assets or asset groups is not recoverable and significantly exceeds their fair value.

of the Reserve Banks to be jointly pledged as collateral for the
Federal Reserve notes issued to all Reserve Banks. In the event
that this collateral is insufficient, the Federal Reserve Act provides
that Federal Reserve notes become a first and paramount lien on
all the assets of the Reserve Banks. Finally, Federal Reserve notes
are obligations of the United States government. At December
31, 2007, all Federal Reserve notes issued to the Reserve Banks
were fully collateralized.
“Federal Reserve notes outstanding, net” in the Statements of
Condition represents the Bank’s Federal Reserve notes outstanding, reduced by the Bank’s currency holdings of $3,770 million
and $3,175 million at December 31, 2007 and 2006, respectively.
i. Items in Process of Collection and Deferred
Credit Items

Items in process of collection in the Statements of Condition primarily represents amounts attributable to checks that have been
deposited for collection and that, as of the balance sheet date,
have not yet been presented to the paying bank. Deferred credit
items are the counterpart liability to items in process of collection,
and the amounts in this account arise from deferring credit for
deposited items until the amounts are collected. The balances in
both accounts can vary significantly.

g. Inter istrict Settlement Account
d

j. Capital Paid-in

At the close of business each day, each Reserve Bank assembles
the payments due to or from other Reserve Banks. These payments result from transactions between Reserve Banks and transactions that involve depository institution accounts held by other
Reserve Banks, such as Fedwire funds and securities transfers,
and check and ACH transactions. The cumulative net amount
due to or from the other Reserve Banks is reflected in the “Inter
district settlement account” in the Statements of Condition.

The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount
equal to 6 percent of the capital and surplus of the member
bank. These shares are nonvoting with a par value of $100 and
may not be transferred or hypothecated. As a member bank’s
capital and surplus changes, its holdings of Reserve Bank stock
must be adjusted. Currently, only one-half of the subscription is
paid-in and the remainder is subject to call. A member bank is liable for Reserve Bank liabilities up to twice the par value of stock
subscribed by it.
By law, each Reserve Bank is required to pay each member
bank an annual dividend of 6 percent on the paid-in capital
stock. This cumulative dividend is paid semiannually. To reflect
the Federal Reserve Act requirement that annual dividends are
deducted from net earnings, dividends are presented as a distribution of comprehensive income in the Statements of Income
and Comprehensive Income.

h. Federal Reserve Notes

Federal Reserve notes are the circulating currency of the United
States. These notes are issued through the various Federal
Reserve agents (the chairman of the board of directors of each
Reserve Bank and their designees) to the Reserve Banks upon
deposit with such agents of specified classes of collateral security,
typically U.S. government securities. These notes are identified
as issued to a specific Reserve Bank. The Federal Reserve Act
provides that the collateral security tendered by the Reserve Bank
to the Federal Reserve agent must be at least equal to the sum of
the notes applied for by such Reserve Bank.
Assets eligible to be pledged as collateral security include all of
the Bank’s assets. The collateral value is equal to the book value
of the collateral tendered, with the exception of securities, for
which the collateral value is equal to the par value of the securities tendered. The par value of securities pledged for securities
sold under agreements to repurchase is deducted.
The Board of Governors may, at any time, call upon a Reserve
Bank for additional security to adequately collateralize the Federal
Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve notes, the Reserve Banks
have entered into an agreement that provides for certain assets
56 | federal Reserve bank of st. louis

k. Surplus

The Board of Governors requires the Reserve Banks to maintain
a surplus equal to the amount of capital paid-in as of December
31 of each year. This amount is intended to provide additional
capital and reduce the possibility that the Reserve Banks would
be required to call on member banks for additional capital.
Accumulated other comprehensive income is reported as a
component of surplus in the Statements of Condition and the
Statements of Changes in Capital. The balance of accumulated
other comprehensive income is comprised of expenses, gains,
and losses related to defined benefit pension plans and other
postretirement benefit plans that, under accounting standards,
are included in other comprehensive income but excluded from

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

net income. Additional information regarding the classifications
of accumulated other comprehensive income is provided in Notes
9 and 10.
The Bank initially applied the provisions of SFAS No. 158,
Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, at December 31, 2006. This accounting
standard requires recognition of the overfunded or underfunded
status of a defined benefit postretirement plan in the Statements
of Condition, and recognition of changes in the funded status
in the years in which the changes occur through comprehensive
income. The transition rules for implementing the standard required applying the provisions as of the end of the year of initial
implementation, and the effect as of December 31, 2006
is recorded as “Adjustment to initially apply SFAS No. 158” in
the Statements of Changes in Capital.
l. Interest on Federal Reserve Notes

The Board of Governors requires the Reserve Banks to transfer
excess earnings to the U.S. Treasury as interest on Federal Reserve
notes, after providing for the costs of operations, payment of
dividends, and reservation of an amount necessary to equate
surplus with capital paid-in. This amount is reported as “Payments to U.S. Treasury as interest on Federal Reserve notes” in
the Statements of Income and Comprehensive Income and is
reported as a liability, or as an asset if overpaid during the year,
in the Statements of Condition. Weekly payments to the U.S.
Treasury may vary significantly.
In the event of losses or an increase in capital paid-in at a Reserve Bank, payments to the U.S. Treasury are suspended and earnings are retained until the surplus is equal to the capital paid-in.
In the event of a decrease in capital paid-in, the excess surplus,
after equating capital paid-in and surplus at December 31, is distributed to the U.S. Treasury in the following year.
m. Income and Costs Related to U.S. Treasury Services

The Bank is required by the Federal Reserve Act to serve as fiscal agent and depository of the United States. By statute, the
Department of the Treasury is permitted, but not required, to pay
for these services. During the years ended December 31, 2006
and 2007, the Bank was reimbursed for all services provided to
the Department of Treasury.
n. Compensation Received for Services Provided

The Federal Reserve Bank of Atlanta (“FRBA”) has overall responsibility for managing the Reserve Banks’ provision of check and
ACH services to depository institutions, and, as a result, recognizes total System revenue for these services on its Statements
of Income and Comprehensive Income. Similarly, the FRBNY
manages the Reserve Banks’ provision of Fedwire funds and
securities transfer services, and recognizes total System
revenue for these services on its Statements of Income and
Comprehensive Income. The FRBA and FRBNY compensate
the other Reserve Banks for the costs incurred to provide these
services. The Bank reports this compensation as “Compensation
received for services provided” in the Statements of Income and
Comprehensive Income.

o. Assessments by the Board of Governors

The Board of Governors assesses the Reserve Banks to fund its
operations based on each Reserve Bank’s capital and surplus
balances as of December 31 of the prior year. The Board of Governors also assesses each Reserve Bank for the expenses incurred
for the U.S. Treasury to prepare and retire Federal Reserve notes
based on each Reserve Bank’s share of the number of notes
comprising the System’s net liability for Federal Reserve notes on
December 31 of the prior year.
p. Taxes

The Reserve Banks are exempt from federal, state, and local
taxes, except for taxes on real property. The Bank’s real property
taxes were $1 million for each of the years ended December 31,
2007 and 2006, and are reported as a component of “Occupancy expense.”
q. Restructuring Charges

The Reserve Banks recognize restructuring charges for exit or
disposal costs incurred as part of the closure of business activities in a particular location, the relocation of business activities
from one location to another, or a fundamental reorganization
that affects the nature of operations. Restructuring charges may
include costs associated with employee separations, contract
terminations, and asset impairments. Expenses are recognized in
the period in which the Bank commits to a formalized restructuring plan or executes the specific actions contemplated in the plan
and all criteria for financial statement recognition have been met.
Note 11 describes the Bank’s restructuring initiatives and
provides information about the costs and liabilities associated
with employee separations and contract terminations. The costs
associated with the impairment of certain of the Bank’s assets
are discussed in Note 6. Costs and liabilities associated with
enhanced pension benefits in connection with the restructuring
activities for all of the Reserve Banks are recorded on the books
of the FRBNY.
r. Recently Issued Accounting Standards

In September, 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (“SFAS No. 157”). SFAS No. 157 establishes a
single authoritative definition of fair value, sets out a framework
for measuring fair value, and expands on required disclosures
about fair value measurement. SFAS No. 157 is generally effective for the Bank on January 1, 2008, though the effective date
of some provisions is January 1, 2009. The provisions of SFAS
No. 157 will be applied prospectively and are not expected to
have a material effect on the Bank’s financial statements.

2007 annual report | 57

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

Note 4

U.S. Government Securities, securities purchased under
agreements to resell, Securities Sold Under Agreements
to Repurchase, and Securities Lending

The FRBNY, on behalf of the Reserve Banks, holds securities
bought outright in the SOMA. The Bank’s allocated share of
SOMA balances was approximately 3.196 percent and 3.177
percent at December 31, 2007 and 2006, respectively.
The Bank’s allocated share of U.S. Government securities, net,
held in the SOMA at December 31, was as follows (in millions):

2007

2006

Par value:
U.S. government:
Bills

Notes

7,282

12,841

Bonds

3,548

8,801
12,784
3,162

Total par value

23,671

Unamortized premiums

255
(95)

(127)

Securities Securities

Purchased under Sold under

agreements
agreements

to resell
to repurchase
Allocated to the Bank:

Contract amount outstanding,

end of year

$ 1,486

$ 1,406

Weighted average amount

outstanding, during the year

1,121

1,114

Maximum month-end balance

outstanding, during the year

1,646

1,406

Securities pledged,

end of year

1,408

277

Unaccreted discounts
Total allocated to the Bank

$ 23,831

24,747

Financial information related to securities purchased under
agreements to resell and securities sold under agreements to repurchase for the years ended December 31, 2007, was as follows
(in millions):

24,897

At December 31, 2007 and 2006, the fair value of the U.S. government securities allocated to the Bank, excluding accrued interest, was $24,838 million and $25,287 million, respectively, as
determined by reference to quoted prices for identical securities.
The total of the U.S. government securities, net, held in the
SOMA was $745,629 million and $783,619 million at December
31, 2007 and 2006, respectively. At December 31, 2007 and
2006, the fair value of the U.S. government securities held in the
SOMA, excluding accrued interest, was $777,141 million and
$795,900 million, respectively, as determined by reference to
quoted prices for identical securities.
Although the fair value of security holdings can be substantially
greater or less than the recorded value at any point in time, these
unrealized gains or losses have no effect on the ability of the
Reserve Banks, as central bank, to meet their financial obligations
and responsibilities, and should not be misunderstood as representing a risk to the Reserve Banks, their shareholders, or the public. The fair value is presented solely for informational purposes.

58 | federal Reserve bank of st. louis

System total:

Contract amount outstanding,

end of year

$ 46,500

$ 43,985

Weighted average amount

outstanding, during the year 35,073 34,846

Maximum month-end balance

outstanding, during the year 51,500 43,985
Securities pledged,

end of year 44,048

At December 31, 2006, the total contract amount of securities
sold under agreements to repurchase was $29,615 million, of
which $941 million was allocated to the Bank. The total par value of SOMA securities that were pledged for securities sold under
agreements to repurchase at December 31, 2006 was $29,676
million, of which $943 million was allocated to the Bank.
The contract amounts for securities purchased under agreements to resell and securities sold under agreements to repurchase approximate fair value.

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

The maturity distribution of U.S. government securities bought
outright, securities purchased under agreements to resell, and securities sold under agreements to repurchase that were allocated
to the Bank at December 31, 2007, was as follows (in millions):
Securities
Purchased
Under
Agreements
to Resell
(Contract
amount)

U.S.
Government
Securities
(Par value)

Within 15 days

872

16 days to 90 days

Securities
Sold Under
Agreements to
Repurchase
(Contract
amount)

$ 1,486

1,406

4,785

91 days to 1 year 4,867
Over 1 year to 5 years

7,689

Over 5 years to 10 years

2,619

Over 10 years 2,839
Total allocated
to the Bank

$ 23,671

$ 1,486

1,406

At December 31, 2007 and 2006, U.S. government securities
with par values of $16,649 million and $6,855 million, respectively, were loaned from the SOMA, of which $532 million and
$218 million, respectively, were allocated to the Bank.

At December 31, 2007, the total amount of foreign currency
deposits held under FX contracts was $24,381 million, of which
$264 million was allocated to the Bank. At December 31, 2006,
there were no open foreign exchange contracts.
At December 31, 2007 and 2006, the fair value of investments
denominated in foreign currencies, including accrued interest, allocated to the Bank was $513 million and $222 million,
respectively. The fair value of government debt instruments was
determined by reference to quoted prices for identical securities.
The cost basis of foreign currency deposits and securities purchased under agreements to resell, adjusted for accrued interest,
approximates fair value. Similar to the U.S. government securities
discussed in Note 4, unrealized gains or losses have no effect on
the ability of a Reserve Bank, as central bank, to meet its financial
obligations and responsibilities.
Total System investments denominated in foreign currencies
were $47,295 million and $20,482 million at December 31, 2007
and 2006, respectively. At December 31, 2007 and 2006, the
fair value of the total System investments denominated in foreign
currencies, including accrued interest, was $47,274 million and
$20,434 million, respectively.
The maturity distribution of investments denominated in foreign currencies that were allocated to the Bank at December 31,
2007, was as follows (in millions):

Note 5

European Japanese Swiss
Euro Yen Franc

Investments Denominated in Foreign Currencies

Within 15 days

The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks and with the Bank for
International Settlements and invests in foreign government debt
instruments. Foreign government debt instruments held include
both securities bought outright and securities purchased under
agreements to resell. These investments are guaranteed as to
principal and interest by the issuing foreign governments.
The Bank’s allocated share of investments denominated in
foreign currencies was approximately 1.085 percent and 1.089
percent at December 31, 2007 and 2006, respectively.
The Bank’s allocated share of investments denominated in
foreign currencies, including accrued interest, valued at foreign
currency market exchange rates at December 31, was as follows
(in millions):

16 days to 90 days 251

2007

$ 54

$ 32

–

Total

$ 86

4 44 299

91 days to 1 year

30 22

–

Over 1 year to 5 years

42 34

–

Total allocated
to the Bank

$ 377

$ 92

$ 44

$ 513

At December 31, 2007 and 2006, the authorized warehousing
facility was $5,000 million with no balance outstanding.

2006

Euro:
Foreign currency deposits

298

Securities purchased under
agreements to resell

Government debt instruments

Foreign currency deposits

Government debt instruments

Japanese Yen:

Swiss franc:
Foreign currency deposits
Total allocated to the Bank

44
–
513

223
2007 annual report | 59

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

Note 6

Bank Premises, Equipment, and Software

Bank premises and equipment at December 31 was as
follows (in millions):

2007

2006

Bank premises and equipment:
Land

$ 11

Buildings 74

Building machinery
and equipment 20

Construction in progress 50

Furniture and equipment 40

Subtotal 195 159
Accumulated depreciation (68) (63)
Bank premises and equipment, net

$ 127

Depreciation expense, for the
year ended December 31

$ 8

96
8

The Bank leases space to outside tenants with lease terms of
less than one year. Rental income from such leases was immaterial for the years ended December 31, 2007, and 2006. Future
minimum payments under agreements in existence at December
31, 2007, were immaterial.
The Bank has capitalized software assets, net of amortization,
of $6 million and $8 million at December 31, 2007 and 2006,
respectively. Amortization expense was $3 million for each of the
years ended December 31, 2007 and 2006. Capitalized software
assets are reported as a component of “Other assets” and the
related amortization is reported as a component of “Other expenses.” Software assets of $3 million were written off in 2006.
The majority of the write-offs were reimbursed by the Department of the Treasury.
Assets impaired as a result of the Bank’s restructuring plan, as
discussed in Note 11, include check processing equipment. Asset
impairment losses of $2 million and $1 million for the periods
ending December 31, 2007 and 2006, respectively, were determined using fair values based on quoted market values or other
valuation techniques and are reported as a component of “Other
expenses.” The impairment loss for the period ending December
31, 2006, represents a further write down of the Little Rock facility, which was available for sale and reported as a component of
“Other assets.”

Note 7

Commitments and Contingencies

At December 31, 2007, the Bank was obligated under noncancelable leases for premises and equipment with remaining terms
ranging from one to approximately three years. These leases
provide for increased rental payments based upon increases in
real estate taxes, operating costs, or selected price indices.
60 | federal Reserve bank of st. louis

Rental expense under operating leases for certain operating
facilities, warehouses, and data processing and office equipment
(including taxes, insurance and maintenance when included in
rent), net of sublease rentals, was $2 million for each of the years
ended December 31, 2007 and 2006. Certain of the Bank’s
leases have options to renew.
Future minimum rental payments under noncancelable
operating leases, net of sublease rentals, with remaining terms
of one year or more, at December 31, 2007 are as follows
(in thousands):
Operating
2008

628

2009

535

2010

Future minimum rental payments

$ 1,238

At December 31, 2007, there were no material unrecorded
unconditional purchase commitments or long-term obligations in
excess of one year.
At December 31, 2007, the Bank had commitments of approximately $15 million for the construction and acquisition of
additional building space at the St. Louis facility. Expected payments related to these commitments are $15 million for the year
ending December 31, 2008.
Under the Insurance Agreement of the Federal Reserve Banks,
each of the Reserve Banks has agreed to bear, on a per incident
basis, a pro rata share of losses in excess of one percent of the
capital paid-in of the claiming Reserve Bank, up to 50 percent of
the total capital paid-in of all Reserve Banks. Losses are borne
in the ratio of a Reserve Bank’s capital paid-in to the total capital
paid-in of all Reserve Banks at the beginning of the calendar year
in which the loss is shared. No claims were outstanding under
the agreement at December 31, 2007 or 2006.
The Bank is involved in certain legal actions and claims arising
in the ordinary course of business. Although it is difficult to
predict the ultimate outcome of these actions, in management’s
opinion, based on discussions with counsel, the aforementioned
litigation and claims will be resolved without material adverse effect on the financial position or results of operations of the Bank.

Note 8

Retirement and Thrift Plans
Retirement Plans

The Bank currently offers three defined benefit retirement plans to
its employees, based on length of service and level of compensation.
Substantially all of the Bank’s employees participate in the Retirement Plan for Employees of the Federal Reserve System (“System
Plan”). Employees at certain compensation levels participate in the
Benefit Equalization Retirement Plan (“BEP”) and certain Reserve
Bank officers participate in the Supplemental Employee Retirement
Plan (“SERP”).
The System Plan provides retirement benefits to employees of the
Federal Reserve Banks, the Board of Governors, and the Office of

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

Employee Benefits of the Federal Reserve Employee Benefits System.
The FRBNY, on behalf of the System, recognizes the net asset and
costs associated with the System Plan in its financial statements.
Costs associated with the System Plan are not redistributed to other
participating employers.
The Bank’s projected benefit obligation, funded status, and
net pension expenses for the BEP and the SERP at December 31,
2007 and 2006, and for the years then ended, were not material.
Thrift Plan

Employees of the Bank may also participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System
(“Thrift Plan”). The Bank’s Thrift Plan contributions totaled $4
million and $3 million for the years ended December 31, 2007
and 2006, respectively, and are reported as a component of
“Salaries and other benefits” in the Statements of Income and
Comprehensive Income. The Bank matches employee contributions based on a specified formula. For the years ended December 31, 2007 and 2006, the Bank matched 80 percent on the
first 6 percent of employee contributions for employees with less
than five years of service and 100 percent on the first 6 percent
of employee contributions for employees with five or more years
of service.

2007
Fair value of plan assets
at January 1
$
–

2006
$

–

Contributions by employer

3.5

2.8

Contributions by plan participants

0.6

0.5

Benefits paid, net of Medicare
Part D subsidies

(4.1)

(3.3)

Postretirement Benefits other than Pensions

In addition to the Bank’s retirement plans, employees who have
met certain age and length-of-service requirements are eligible
for both medical benefits and life insurance coverage during
retirement.
The Bank funds benefits payable under the medical and life
insurance plans as due and, accordingly, has no plan assets.
Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions):

2007 2006

$ 73.0

$ 66.2

Service cost-benefits earned during the period

2.6

1.7

Interest cost on accumulated benefit obligation

4.3

3.3

Net actuarial (gain) loss

(1.7) 19.9

Curtailment gain

(1.0)

–

Contributions by plan participants

0.6

0.5

Benefits paid

(4.4)

(3.6)

Medicare Part D subsidies

0.3

Plan amendments

– (15.3)

$ 73.7

Fair value of plan assets
at December 31

$ 73.7

$ 73.0

$ 10.4

$ 15.1

–

Amounts included in accumulated
other comprehensive loss
are shown below:

Postretirement Benefits Other Than Pensions and
Postemployment Benefits

Accumulated postretirement
benefit obligation at December 31

Following is a reconciliation of the beginning and ending balance of the plan assets, the unfunded postretirement benefit obligation, and the accrued postretirement benefit costs (in millions):

Unfunded obligation and accrued
postretirement benefit cost

Note 9

Accumulated postretirement
benefit obligation at January 1

At December 31, 2007 and 2006, the weighted-average
discount rate assumptions used in developing the postretirement benefit obligation were 6.25 percent and 5.75 percent,
respectively.
Discount rates reflect yields available on high-quality corporate
bonds that would generate the cash flows necessary to pay the
plan’s benefits when due.

Prior service cost

Net actuarial loss (29.2) (36.3)
Deferred curtailment gain
Total accumulated other
comprehensive loss

1.1

$ (17.7)

–

$ (21.2)

Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Statements of Condition.
For measurement purposes, the assumed health care cost trend
rates at December 31 are as follows:

2007

Health care cost trend
rate assumed for next year

8.00%

9.00%

Rate to which the cost trend
rate is assumed to decline
(the ultimate trend rate)

5.00%

Year that the rate reaches
the ultimate trend rate

2013

2006

2012

$ 73.0

2007 annual report | 61

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

Assumed health care cost trend rates have a significant effect
on the amounts reported for health care plans. A one percentage point change in assumed health care cost trend rates would
have the following effects for the year ended December 31, 2007
(in millions):
One Percentage One Percentage

Point Increase
Point Decrease
Effect on aggregate of
service and interest cost
components of net periodic
postretirement benefit costs

$ 0.7

Effect on accumulated
postretirement
benefit obligation

$ (0.7)

5.6

(5.9)

The following is a summary of the components of net periodic
postretirement benefit expense for the years ended December 31
(in millions):

Service cost-benefits earned
during the period

2007
$ 2.6

2006
$ 1.7

Interest cost on accumulated
benefit obligation 4.3 3.3

terminated employment during 2007. A deferred curtailment
gain was recorded in 2007 as a component of accumulated other
comprehensive loss; the gain will be recognized in net income in
future years when the related employees terminate employment.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug benefit under
Medicare (“Medicare Part D”) and a federal subsidy to sponsors
of retiree health care benefit plans that provide benefits that are
at least actuarially equivalent to Medicare Part D. The benefits
provided under the Bank’s plan to certain participants are at least
actuarially equivalent to the Medicare Part D prescription drug
benefit. The estimated effects of the subsidy, retroactive to January 1, 2004, are reflected in actuarial gain in the accumulated
postretirement benefit obligation and net periodic postretirement
benefit expense.
There were no receipts of federal Medicare Part D subsidies in
the year ended December 31, 2006. Receipts in the year ending
December 31, 2007, related to benefits paid in the years ended
December 31, 2006 and 2007, were $0.3 million and $0.2 million, respectively. Expected receipts in 2008, related to benefits
paid in the year ended December 31, 2007, are $0.1 million.
Following is a summary of expected postretirement benefit
payments (in millions):

Without Subsidy

2008

4.3

With Subsidy
$ 3.9

Amortization of prior service cost (3.4) (3.4)

2009

4.7

4.3

Amortization of net actuarial loss 4.2 2.3

2010

5.1

4.6

Total periodic expense 7.7 3.9

2011

5.5

5.1

Curtailment gain (0.1)

2012

5.9

5.4

Net periodic postretirement
benefit expense

–

2013-2017
$ 7.6

$ 3.9

Estimated amounts that will be
amortized from accumulated
other comprehensive loss into
net periodic postretirement
benefit expense in 2008
are shown below:
Prior service cost

33.8 30.2

$ 59.3

$ 53.5

Postemployment Benefits

$ (3.1)

Net actuarial loss 2.8
Total

Total

$ (0.3)

Net postretirement benefit costs are actuarially determined
using a January 1 measurement date. At January 1, 2007 and
2006, the weighted-average discount rate assumptions used to
determine net periodic postretirement benefit costs were 5.75
percent and 5.50 percent, respectively.
Net periodic postretirement benefit expense is reported as a
component of “Salaries and other benefits” in the Statements of
Income and Comprehensive Income.
A net curtailment gain was recognized in net income in the
year ended December 31, 2007 related to employees who
62 | federal Reserve bank of st. louis

The Bank offers benefits to former or inactive employees.
Postemployment benefit costs are actuarially determined using a
December 31 measurement date and include the cost of medical
and dental insurance, survivor income, and disability benefits.
The accrued postemployment benefit costs recognized by the
Bank at December 31, 2007 and 2006 were $5 million for each
year. This cost is included as a component of “Accrued benefit
costs” in the Statements of Condition. Net periodic postemployment benefit expense included in 2007 and 2006 operating
expenses were $1 million and $213 thousand, respectively, and
are recorded as a component of “Salaries and other benefits” in
the Statements of Income and Comprehensive Income.

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

Note 10

accumulated other comprehensive income and other
comprehensive income

Following is a reconciliation of beginning and ending balances of
accumulated other comprehensive loss (in millions):

Balance at January 1, 2006

Amount Related
to Postretirement
Benefits other
than Pensions
$

Adjustment to initially apply
SFAS No. 158
Balance at December 31, 2006

–
(21)

$ (21)

Change in funded status of benefit plans:
Prior service costs arising during the year

(1)

Net actuarial gain arising during the year

Deferred curtailment gain

Amortization of prior service cost

(3)

Amortization of net actuarial loss

Change in funded status of benefit plans other comprehensive income

Balance at December 31, 2007

$ (18)

Additional detail regarding the classification of accumulated
other comprehensive loss is included in Note 9.

2007 annual report | 63

Note 11

Business Restructuring Charges

In 2007, the Reserve Banks announced a restructuring initiative to align the check processing infrastructure and operations with declining check processing volumes. The new infrastructure will involve consolidation of operations into four regional Reserve Bank processing sites in Philadelphia, Cleveland, Atlanta, and Dallas. Additional announcements in 2007 included restructuring plans associated
with the U.S. Treasury’s Collections and Cash Management Modernization initiative.
In 2006, the Bank announced restructuring plans related to additional consolidation and restructuring initiatives in the check adjustment operations.
Following is a summary of financial information related to the restructuring plans (in millions):

2006
2007
Restructuring Restructuring

Plans
Plans

Total

Information related to restructuring plans
as of December 31, 2007:
Total expected costs related to restructuring activity

0.3

4.6

Estimated future costs related to restructuring activity

–

1.1

Expected completion date

2007

4.9
1.1

2011

Reconciliation of liability balances:
Balance at January 1, 2006

–

Employee separation costs

0.4

–

0.4

Balance at December 31, 2006

0.4

–

0.4

Employee separation costs

–

3.5

Adjustments

(0.1)

–

(0.1)

Payments

(0.3)

(0.1)

(0.4)

3.4

Balance at December 31, 2007

–

Employee separation costs are primarily severance costs for identified staff reductions associated with the announced restructuring
plans. Separation costs that are provided under terms of ongoing benefit arrangements are recorded based on the accumulated benefit
earned by the employee. Separation costs that are provided under the terms of one-time benefit arrangements are generally measured
based on the expected benefit as of the termination date and recorded ratably over the period to termination. Restructuring costs
related to employee separations are reported as a component of “Salaries and other benefits” in the Statements of Income.
Adjustments to the accrued liability are primarily due to changes in the estimated restructuring costs and are shown as a component
of the appropriate expense category in the Statements of Income.
Restructuring costs associated with the impairment of certain Bank assets, including software, buildings, leasehold improvements,
furniture, and equipment, are discussed in Note 6.
Costs associated with enhanced pension benefits for all Reserve Banks are recorded on the books of the FRBNY as discussed in Note 8.

64 | federal Reserve bank of st. louis

note 12

SUBSEQUENT EVENTS

In March 2008, the Board of Governors announced several
initiatives to address liquidity pressures in funding markets and
promote financial stability, including increasing the Term Auction
Facility (see Note 3b) to $100 billion and initiating a series of term
repurchase transactions (see Notes 3d and 4) that may cumulate
to $100 billion. In addition, the Reserve Banks’ securities lending
program (see Notes 3d and 4) was expanded to lend up to $200
billion of Treasury securities to primary dealers for a term of 28
days, secured by federal agency debt, federal agency residential
mortgage-backed securities, agency collateralized mortgage
obligations, non-agency AAA/Aaa-rated private-label residential
mortgage-backed securities, and AAA/Aaa-rated commercial
mortgage-backed securities. The FOMC also authorized increases
in its existing temporary reciprocal currency arrangements (see
Notes 3e and 5) with specific foreign central banks. These
initiatives will affect 2008 activity related to loans to depository
institutions, securities purchased under agreements to resell, U.S.
government securities, net, and investments denominated in
foreign currencies, as well as income and expenses. The effects
of the initiatives do not require adjustment to the amounts
recorded as of December 31, 2007.
The facility in Little Rock, including associated furnishings, was
sold for $4 million on March 11, 2008.

2007 annual report | 65

66 | federal Reserve bank of st. louis

Federal Advisory
Council Member

Susan F. Gerker

Elizabeth A. Hayes

Matthew W. Torbett

Vice President

Assistant Vice President

Lewis F. Mallory Jr.

Roy A. Hendin

Paul M. Helmich

Yi Wen

Vice President, Deputy General
Counsel and Assistant Secretary

Assistant Vice President

Edward A. Hopkins

David C. Wheelock

Assistant Vice President

James L. Huang

Glenda Joyce Wilson

Assistant Vice President

Debra E. Johnson

Subhayu Bandyopadhyay

Assistant Vice President

Research Officer

Visweswara R. Kaza

Jane Anne Batjer

Assistant Vice President

Assistant Counsel

Carrie E. Keen

Diane B. Camerlo

Assistant Vice President

Assistant Counsel

William D. Little

Joseph C. Elstner

Assistant Vice President

Public Affairs Officer

Raymond McIntyre

William R. Emmons

Assistant Vice President

Supervisory Officer

John W. Mitchell

Anna M. Helmering Hart

Assistant Vice President

Information Technology Officer

Christopher J. Neely

Cathryn L. Hohl

Assistant Vice President

Assistant Counsel

Edward M. Nelson

Joel H. James

Assistant Vice President

Bank Relations Officer

Arthur A. North

Michael T. Owyang

Assistant Vice President

Research Officer

Glen M. Owens

Michael R. Pakko

Assistant Vice President

Research Officer

Kathy A. Schildknecht

Christopher H. Wheeler

Assistant Vice President

Research Officer

Chairman and CEO
Cadence Financial Corp.
Starkville, Miss.

Bank Officers
St. Louis Office

Vicki L. Kosydor
Vice President

Jean M. Lovati
Vice President

William Poole
President and CEO

David A. Sapenaro
First Vice President and COO

Karl W. Ashman
Senior Vice President

Judith A. Courtney
Senior Vice President

Mary H. Karr
Senior Vice President, General
Counsel and Secretary

Robert H. Rasche
Senior Vice President and Director
of Research

Michael D. Renfro
Senior Vice President

Robert J. Schenk
Senior Vice President

Julie L. Stackhouse
Senior Vice President

Richard G. Anderson
Vice President

John P. Baumgartner
Vice President

Timothy A. Bosch
Vice President

Timothy C. Brown
Vice President

James B. Bullard
Vice President

Ronald L. Byrne
Vice President

Marilyn K. Corona
Vice President

Cletus C. Coughlin
Vice President

William T. Gavin
Vice President

Michael J. Mueller
Vice President

Kim D. Nelson
Vice President

Kathleen O’Neill Paese
Vice President

Todd J. Purdy
Vice President

Steven N. Silvey
Vice President

Randall C. Sumner
Vice President

Daniel L. Thornton
Vice President

Howard J. Wall
Vice President

Jonathan C. Basden
Assistant Vice President

Dennis W. Blase
Assistant Vice President

Daniel P. Brennan
Assistant Vice President

Winchell S. Carroll

Philip G. Schlueter
Assistant Vice President

Little Rock Branch

Assistant Vice President

Susan K. Curry

Harriet Siering
Assistant Vice President

Assistant Vice President

Hillary B. Debenport

Diane A. Smith
Assistant Vice President

Robert A. Hopkins
Senior Branch Executive

Louisville Branch

Assistant Vice President

William M. Francis Jr.

Scott B. Smith
Assistant Vice President

Assistant Vice President

Kathy A. Freeman

Leisa J. Spalding
Assistant Vice President

Maria G. Hampton
Senior Branch Executive

Memphis Branch

Assistant Vice President

Thomas A. Garrett

James E. Stephens

Martha L. Perine Beard

Assistant Vice President

Senior Branch Executive

Kristina L.C. Stierholz

James A. Price

Assistant Vice President

Massimo Guidolin
Assistant Vice President

2007 annual report | 67

Editor: Stephen Greene
Contributor: David C. Wheelock
Designer: Kathie Lauher
Web Design: Becca Marshall
Production: Barb Passiglia
Photography: Steve Smith Studios
Mark Gilliland Photography

For additional print copies, contact:
Public Affairs
Federal Reserve Bank of St. Louis
Post Office Box 442
St. Louis, Missouri 63166,
or send an e-mail to pubtracking@stls.frb.org

This report is also available on the
Federal Reserve Bank of St. Louis web site:
www.stlouisfed.org

The Federal Reserve Bank of St. Louis is one of 12
regional Reserve banks which, together with the
Board of Governors, make up the nation’s central
bank. The Fed carries out U.S. monetary policy,
regulates certain depository institutions, provides
wholesale-priced services to banks and acts as fiscal
agent for the U.S. Treasury. The St. Louis Fed serves
the Eighth Federal Reserve District, which includes
all of Arkansas, eastern Missouri, southern Indiana,
southern Illinois, western Kentucky, western
Tennessee and northern Mississippi. Branch offices
are located in Little Rock, Louisville and Memphis.

FEDERAL RESERVE BANK OF ST. LOUIS
One Federal Reserve Bank Plaza
Broadway and Locust Street
St. Louis, Missouri 63102
314-444-8444
LITTLE ROCK BRANCH
Stephens Building
111 Center Street, Suite 1000
Little Rock, Arkansas 72201
501-324-8300
LOUISVILLE BRANCH
National City Tower
101 South Fifth Street, Suite 1920
Louisville, Kentucky 40202
502-568-9200
MEMPHIS BRANCH
200 North Main Street
Memphis, Tennessee 38103
901-523-7171

68 | federal Reserve bank of st. louis

Full text of Annual Report of the Federal Reserve Bank of St. Louis : Annual Report 2007 : Looking Back: A Retrospective Conversation with William Poole

FRASER