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 During the crisis, the Fed invoked its emergency lending powers to
pump cash into Citigroup, Morgan Stanley and other banks to prevent
the global panic from worsening.
The 2010 Dodd-Frank law, enacted by Congress to crack down on Wall
Street excesses, curtailed those powers. It instructed the Fed to
provide emergency loans as a broad program, not to individual banks,
and blocked it from lending to insolvent businesses.
Fifteen lawmakers from both political parties and both houses of
Congress said on Monday that the Fed has not done enough on its own
to adequately limit its crisis lending powers.
"If the board's emergency lending authority is left unchecked, it
can once again be used to provide massive bailouts to large
financial institutions without any congressional action," they said
in a letter to Fed Chair Janet Yellen.
In a sign of the breadth of the backlash against bailouts, the group
included lawmakers who are rarely found on the same side of
financial regulatory issues, including both supporters and fierce
critics of the Dodd-Frank law.
Senators Elizabeth Warren, a Massachusetts Democrat, and David
Vitter, a Republican from Louisiana, and representatives Scott
Garrett, a New Jersey Republican, and Michael Capuano, a
Massachusetts Democrat, were the main authors.
Congress approved billions of dollars in 2008 to stabilize banks. In
addition, the Fed launched its own programs, such as an overnight
loan facility for primary dealers.
In all, the Fed provided more than $13 trillion to banks that relied
on emergency lending programs for an average of 22 months, the
letter said. "These loans were another bailout in all but name," the
lawmakers said.
Specifically, the group criticized rules the Fed proposed in
December 2013 to implement the Dodd-Frank requirement that emergency
programs provide liquidity to the entire financial system, not
failing banks.
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The lawmakers said the Fed failed to set a time limit for banks to
receive crisis cash. They also said the Fed limited its definition
of "insolvent" firms that cannot receive Fed funds to those already
in bankruptcy. The Fed could still lend to a bank teetering on the
edge of bankruptcy, they said.
"The purpose of ... Dodd-Frank was to ensure that banks that would
be insolvent absent emergency lending assistance from the board
would be put into bankruptcy," they said.
The lawmakers also directed the Fed to set out a process for ending
emergency programs and to set penalty rates so that banks cannot
borrow from the Fed at cheaper rates than they could get in the
financial markets.
The Fed is still finalizing its rules for crisis lending. A Fed
spokesperson said the agency would consider all of the comments on
its initial proposal before writing final rules.
The group also included senators Sherrod Brown, Mark Begich, Mazie
Hirono and Edward Markey and representatives Stephen Lynch, Gwen
Moore, Keith Ellison, Walter Jones, Michael McCaul, Leonard Lance
and Tom Cotton.
(Reporting by Emily Stephenson; Editing by Karey Van Hall and Dan
Grebler)
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