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Financial Reform and the Fed's Bailout Capability

June 17, 2010 - by Hilary Worden

Included among the financial reforms that may soon become law is an attempt to restrict the Fed’s ability to bail out failing companies by changing a small but important paragraph in the Federal Reserve Act: section 13.3. 13.3 gives the Federal Reserve significant latitude in making emergency loans and is, for instance, what made possible the $29 billion loan to JPMorgan Chase in 2008. The financial reform bills passed by the House and Senate both include a number of additions and modifications to the paragraph, and whatever bill is eventually signed would likely significantly reduce the freedom of the Board to make such loans.

Currently, the Federal Reserve Act allows these emergency loans provided three conditions are met:

  • There are “unusual and exigent circumstances”
  • The borrower is not able to secure enough credit from other sources
  • There has been an affirmative vote of at least five members of the Board of Governors

The financial reform bills would add many new conditions and restrictions. Significantly, both bills prohibit assistance for a single, specific entity. The Senate bill states that loans must be made “for the purpose of providing liquidity to the financial system, and not to aid a failing financial company,” and changes the language of the section so that assistance must come through a “program or facility with broad-based eligibility” (rather than going directly to a specific company). Similarly, the House bill states that the Federal Reserve can authorize loans “only as part of a broadly available credit or other facility and may not authorize [loans] for only a single and specific individual, partnership, or corporation.” Apart from this commonality, however, the House and Senate bills are quite different in their handling of 13.3.

The House bill goes a long way in distributing power away from the Board of Governors. Instead of allowing unilateral action by the Board, the House bill requires that:

  • At least six of the nine members of the new Financial Stability Oversight Council agree that “a liquidity event exists that could destabilize the financial system;”
  • The Secretary of the Treasury has consented;
  • The President has certified that an emergency exists; and
  • Congress has not adopted a joint resolution of disapproval.

The Senate bill lacks such an extensive set of new restrictions, but does require the Secretary of the Treasury’s approval for the creation of any new program or facility for emergency lending.

Additionally, though both bills have a couple provisions to protect taxpayers from losses, they have none in common. The House bill limits the funds available to $4 trillion, requires there to be at least a 99% chance that a loan will be repaid, and prohibits low quality assets from being used as security. The Senate bill, on the other hand, requires sufficient collateral for emergency loans to protect taxpayers, and prohibits insolvent borrowers.

On the crucial issue of keeping the public informed, the bills again vary. Under the Senate bill, within a week of a loan being made, the Board would have to make a report including (among other things): a justification for the loan; the identity of the recipient; how much the loan was; requirements imposed (such as rules for employee compensation); and the expected cost to taxpayers. An update would have to be made every 30 days. However, at the request of the Chairman of the Board, the information could be kept confidential. The Senate bill also allows the Comptroller General to review any lending programs, but requires that identifying details be kept confidential until the Board of Governors releases the information or until a year after the program ends.

The House version requires that the Financial Stability Oversight Council notify the House and Senate if it determines that there are liquidity events that threaten the stability of the financial system. It also requires that, within two years, the Comptroller General conduct an audit of the Board’s use of the power granted under 13.3 in dealing with the current financial situation. A report would be submitted to Congress and made available to the public within 90 days of the audit’s completion. The Senate bill also requires the retroactive audit of loans made under 13.3 from December 1, 2007 to the date of the passage of the final bill.

The Congressional negotiators clearly have their work cut out for them on the matter of 13.3, but any product of the current House and Senate bills will almost surely radically reduce the Fed’s ability to make emergency loans at will.

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  • Chris51 06/30/2010 10:57pm

    The Senate needs to be held accountable for their incompetence and lack of integrity. Shame on them for not coming up with a 100% solution for all Americans who are forced to survive on their UI.

    President Obama can’t sign a bill, if Congress doesn’t get it to him. President Obama’s discussed the economy, and the need to help the displaced unemployed with UI Extentions on Monday and Tuesday. CSPAN.ORG

    As of today, we have 9.7% unemployed, 55% of the workforce have taken reduced work hours, pay-cuts, unpaid leave, forced to switch to part-time, and BP Oil Corporation’s IRRESPONSIBLENESS is adding to LOST JOBS and LOST LIVES.
    1.2 million who will lose their Unemployment Insurance if Republicans get their way.

    The GOP have no vested interest in hearing or helping jobless people. The only communication Republicans hear is $$$$$. That’s why they listen to and only support Oil Companies, Insurance Companies, Banks, Big Corporations, and Wall Street

  • Comm_reply
    Chris51 07/08/2010 7:28pm

    Senator’s excuse for not passing is a false statement.
    Read all about it:
    The funding argument is even harder to swallow. I’d be more sympathetic with these new converts to fiscal responsibility if they were as enthusiastic about paying for extending $32 billion worth of special interest tax breaks as they are about funding the unemployment extension. If I understand correctly, these lawmakers insist that Congress fund every dime of added jobless aid, which nearly all analysts agree will help boost the economy. But they feel no need to pay for continuing these special interest tax breaks, which will not.
    Full Story:

  • Chris51 07/01/2010 9:48am

    Corporations have increased their cash reserves to $1.84 TRILLION, THE HIGHEST FIGURE IN HISTORY! Big business and the banks, after an unprecedented bailout by the public treasury, are hoarding the funds (Americans pay this back on their IRS tax bill). BIG CORPORATIONS EXECUTIVES ARE MAKING BIG BONUSES AND GETTING SALARY INCREASES FOR SHOWING HUGE PROFITS. The cash reserves of major corporations have jumped 26 percent in one year, the largest percentage increase in nearly 60 years. The cash reserves of working people, and particularly the unemployed, have not been so fortunate.

    REPUBLICANS bloc, the SENATE vote and defeat sevaral proposed extension of unemployment benefits for unemployed workers. Many of these same Senators rushed through a $700 BILLION bailout of Wall Street in 2008 in a matter of days, cannot bring itself to support even the most meager subsistence for the unemployed workers who are the victims, not the perpetrators, of the economic crisis.

  • Comm_reply
    Chris51 07/08/2010 7:28pm

    GOP are determined to bloc everything the President is trying to do for the USA right now. He has a vested interest, and seems to take pride in doing the best job he can while in office.
    We are in trouble as long as Republican politicians continue favoring their special interest.
    How can any CEO or Owner of business get anything done if half of his managers or executives stand in his way just to be defiant.

    President Obama speech on CSPAN today, while in Kansas City, MO to support a future candidate. Was right on.
    If you are an unemployed American, and are thinking no one understands the difficulties of being jobless. Obama speech articulated the financial and emotional struggles well. Hat’s off to the President for saying what needed to be said.

  • Chris51 07/03/2010 10:11pm

    Why don’t our Senators get that there is a great need?

    The job market is broken.
    The corporate executives are not going to give up their year-end profit bonus by adding jobs/payroll to their companies.

    Here are a few stories on our jobless nation:

    Job recovery hits a wall

    Job gloom at all time high

    7.9 million jobs lost- many forever

    Jobless claims spike

    Thousands at risk for losing unemployment benefits

  • Chris51 07/10/2010 7:17am

    Republicans filibustered UI Ext bill! They’re asking for UI Ext be paid, while at the same time they’re fighting to give their Special Interest groups special tax stimulus. Rep are trying to look like they care about the deficit, but for 10 yrs (Bush Admin) they never spoke of concerns for the huge deficit they were digging us into as they approved large spending for Special Interest. The Rep debate on these UI Ext bills are like “broken record”. They want USA to use the stimulus money that is already committed to the agreed upon projects, programs, etc. Republicans want USA to “rob Peter to pay Paul”, so they can try to prolong the problem past November election. This is how they have operated for YEARS, and we’re in worse shape now because of their IRRESPONSIBLENESS. People should not be in Leadership positions if they cant make decision for the problems at hand.
    Dont take my word for it. Please read links Donny Shaw and others have provided with accurate research and reporting.

  • new2020 05/14/2013 11:28pm

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