Lawmakers: Fed leaves door open to ‘backdoor bailout’ in future

A broad range of lawmakers are pushing the Federal Reserve to tighten its rules on future emergency lending, saying existing efforts leave the door open to another “backdoor bailout.”

The group of 15 lawmakers chastised the central bank in a letter Monday, saying existing rules the Fed has written implementing a piece of the Dodd-Frank financial reform law are woefully insufficient.

“The Board’s proposed rule places no meaningful restrictions on [the Fed’s] emergency lending powers and, in a time of crisis, invites the same sort of backdoor bailout we witnesses five years ago,” they wrote. “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.”

{mosads}The letter was signed by several influential members from both the right and left, House and Senate. Among the big names behind the push including Sens. Elizabeth Warren (D-Mass.), Sherrod Brown (D-Ohio) and David Vitter (R-La.), as well as Reps. Scott Garrett (R-N.J.) and Keith Ellison (D-Minn.).

The broad support from lawmakers suggests there is a significant faction of members of Congress who remain concerned that, if the financial system faced trouble again, the Fed would once again decide to lend trillions of dollars at extremely low rates to huge financial institutions.

That would run counter to specific language included in Dodd-Frank that directs the Fed to set up rules to ensure it does not lend to borrowers that are insolvent, and to ensure that any lending program by the central bank is broadly available.

That language is a direct response to findings that the Fed used its emergency powers during the financial collapse to loan out as much as $17 trillion to several of the nation’s largest financial institutions in a bid to unfreeze the credit market. But lawmakers argued in their letter that that power could encourage big banks to continue risky behavior, knowing the Fed could provide assistance if times were tough.

Now, those lawmakers are calling on the Fed to write tougher, specific rules outlining exactly how the central bank would lend in tough times, and ensuring those powers are not used to keep failing institutions afloat.

For example, the lawmakers said the Fed needs to set hard deadlines for how long an institution could take advantage of emergency lending, and establish procedures for unwinding any emergency lending efforts they establish. The lawmakers also want to see the Fed set hard limits, and higher interest rates, on the loans they would provide in an emergency.