August 27, 2014 View entire issue of ANO         Close 

Congress Challenges Fed Bailout Procedures
Lawmakers sent a letter to Federal Reserve Chair Janet Yellen in which they requested she reconsider the Fed’s proposed rule on bailing out banks considered “too big to fail,” HousingWire reported Aug. 18.

The letter was signed by a bi-partisan group of lawmakers, including Sens. Elizabeth Warren, D-Mass.; David Vitter, R-La.; and Mark Begich, D-Alaska, who want the Fed to rethink changes to its emergency lending authority that were proposed last December.

The letter criticizes the amount of bank bailouts in which the federal government was involved following the financial crisis. At the height of the crisis, the government authorized billions of dollars in programs, including more than $400 billion for the Troubled Asset Relief Program and the full bailout of Fannie Mae and Freddie Mac.

“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,” the letter reads, HousingWire reported. “The Board’s proposed rule fails to strike the appropriate balance between promoting financial stability and mitigating moral hazard among the largest financial institutions.” 

The Fed’s rule on bank bailouts is mandated by Section 1101 of the Dodd-Frank Act, but the lawmakers’ letter noted that Dodd-Frank intended to restrict the Fed’s lending authority in order to prevent another $13 trillion bailout like what happened during the years following the housing crash.

The letter stated, “Section 1101 was established to stop these kinds of bailouts from happening again. Congress directed the Board to establish firm limitations on its emergency lending authority so that any emergency lending program or facility is for the purpose of providing liquidity to the financial system, not to aid a failing financial company,” HousingWire reported.

The lawmakers went on to write that “the Fed’s proposed rule places no meaningful restrictions on its emergency lending powers … and invites the same sort of backdoor bailout we witnessed five years ago,” HousingWire reported.

The lawmakers suggested a number of changes to the Fed’s proposed rule, including the creation of a clear time limit for how long financial institutions can rely on emergency funding, the development of procedures for organized unwinding of any emergency lending program and the adoption of a broader definition of “insolvent” that would consider the relative value of a firm’s assets and liabilities to avoid bailout of an institution on the verge of bankruptcy. 

Additionally, the letter noted the need for a broader definition of “broad-based” to allow for the injection of liquidity back into the nation’s financial system without restricting aid to a handful of institutions, and they requested limitations and penalty rates on lending terms. 

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