The Federal Reserve is on the verge of relinquishing the tools it used to rescue American International Group Inc. and Bear Stearns Cos. That probably won\u2019t appease lawmakers who\u2019ve said they\u2019re still concerned the central bank might abuse its powers as the lender of last resort.<\/p>\n
After the Fed released an initial proposal almost two years ago, a bipartisan group of lawmakers including Democratic Senator Elizabeth Warren complained that it didn\u2019t go far enough and left regulators too much wiggle room to orchestrate a backdoor bailout that violates the intent of Congress. Yellen, testifying before a House panel this month, rejected the idea that the Fed should relinquish its role as potential savior in a crisis.<\/p>\n
Warren and other lawmakers argue the expectation that the Fed will rescue failing banks, incentivizes reckless behavior on Wall Street. Lawmakers also are trying to shrink the number of banks that receive heightened supervision from the Fed and are threatening to boost Congress\u2019 authority over the Federal Reserve Bank of New York, which oversees giant U.S. lenders such as JPMorgan Chase & Co. and Citigroup Inc.<\/p>\n
Before Dodd-Frank, the central bank had the authority \u201cin unusual and exigent circumstances\u201d to lend to virtually any company or person, thanks to section 13(3) of the Federal Reserve Act. In March 2008, the Fed, then led by Ben S. Bernanke, used that power to extend credit to Bear Stearns through JPMorgan, which acquired the failing securities firm. Six months later the Fed began a bailout program to keep insurer AIG afloat.
\nNow the Fed is prohibited from rescuing individual firms, but Dodd-Frank permits the central bank to provide \u201cbroad-based\u201d liquidity to the financial system if it gets the approval of the Treasury secretary.\u00a0Though Dodd-Frank laid out the basic emergency lending restrictions, the Fed has to write the policies and procedures.<\/p>\n
The lawmakers urged the Fed to revise its proposal to establish both clear time limits for how long banks could receive emergency lending and procedures for the orderly unwinding of such programs. They asked Yellen to improve how the Fed defines terms such as insolvent and broad-based. To prevent the so-called moral hazard associated with the Fed\u2019s lending authority, the group requested that any emergency loans be made at unfavorable, or penalty, interest rates.<\/p>\n
Yellen has indicated that she might partly, but not entirely, appease the politicians. The Fed expects to release the final rule by the end of November and will address \u201cconcerns about the definition of broad-based eligibility, insolvent borrowers, and penalty rates,\u201d she told the House panel. She didn\u2019t discuss the lawmakers\u2019 other requests. \u00a0Yellen also must contend with Republican efforts led by Shelby to limit the Fed\u2019s authority. Legislation he drafted that would reduce Fed oversight of regional banks, including eliminating stress tests for many of them, was added to a spending bill that Congress must pass next month to avert a federal government shutdown.<\/p>\n
The Federal Reserve is on the verge of relinquishing the tools it used to rescue American International Group Inc. and Bear Stearns Cos. That probably won\u2019t appease lawmakers who\u2019ve said they\u2019re still concerned the central bank might abuse its powers … Continue reading ![\"Tentacles](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2015\/11\/octupus-2nd1-300x291.jpg\")
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