Congress's Afterthought, Wall Street's Trillion Dollars
From Saturday’s Washington Post. One premise of the article is that this law is enough to make the Fed’s actions legal—are we sure this is the case? And the off-the-balance-sheet obligations dwarf the $1 trillion anyhow.
Fed’s Bailout Authority Sat Unused Since 1991
By Binyamin Appelbaum and Neil Irwin
Washington Post Staff Writers
Saturday, May 30, 2009
On the day before Thanksgiving in 1991, the U.S. Senate voted to vastly expand the emergency powers of the Federal Reserve.
Almost no one noticed.
The critical language was contained in a single, somewhat inscrutable sentence, and the only public explanation was offered during a final debate that began with a reminder that senators had airplanes to catch. Yet, in removing a long-standing prohibition on loans that supported financial speculation, the provision effectively allowed the Fed for the first time to lend money to Wall Street during a crisis.
That authority, which sat unused for more than 16 years, now provides the legal basis for the Fed’s unprecedented efforts to rescue the financial system.
Since March 2008, the central bank’s board of governors has invoked its emergency powers at least 19 times: to contain the wreckage of Bear Stearns and ease the fall of American International Group, to preserve Goldman Sachs and Morgan Stanley, to limit losses at Bank of America and Citigroup, to lend more than $1 trillion.
The repeated use of the once-dusty law has surprised and alarmed a wide range of people, including economists and members of Congress. It has even raised worries among presidents of the regional banks that make up the Federal Reserve system.
Many critics are concerned that an institution not accountable to voters is risking vast amounts of public money and choosing which companies get help. Others are concerned that the Fed’s new role will interfere with its basic responsibility for regulating economic growth.
There is also a question about the roots of the crisis: Did investment banks take greater risks in the past two decades because they knew the Fed could rescue them?
The 1991 legislation, authored by Sen. Christopher J. Dodd (D-Conn.), was requested by Goldman Sachs and other Wall Street firms in the wake of the 1987 market crisis, and it would save some of them a generation later.
Fed Chairman Ben S. Bernanke and other leaders of the central bank have argued that the emergency authority has allowed it to rescue the financial system and that without it, the economy would be in far worse shape. And they argue that they are using the power as Congress intended.
“This provision was designed as a last resort to make sure credit flows when times are tough and credit isn’t being extended,” said Scott Alvarez, the Fed’s general counsel. “That’s exactly what it’s being used for today.”