Legislators See Crash Coming, Warn the Fed's Yellen Against New Bailouts
August 20, 2014 • 10:14AM

Aware, to some degree, that the Trans-Atlantic system is headed for a crash, a bipartisan group of 15 Senators and Congressmen have preemptively warned Federal Reserve Chief Janet Yellen not to contemplate another bailout of the Too Big To Fail banks like that implemented in 2009-2009.

Senator Elizabeth Warren (D-MA), David Vitter (R-LA), Rep. Scott Garrett (R-NJ), Michael Capuano (D-MA), and eleven others wrote Yellen on Aug. 18 warning that the proposed rule under Section 1101 of Dodd-Frank, which is supposed to restrict the Fed's emergency lending authority—the one that showered "a handful of massive financial institutions" with $13 trillion in low-cost loans in 2008—in reality "places no meaningful restrictions" on those emergency lending powers. "In a time of crisis," the legislators admonish, failure to impose such restrictions "invites the same sort of backdoor bailout we witnessed five years ago. We urge the Board to strengthen these restrictions in its final rule."

In her WallStreetonParade column Tuesday, Glass-Steagall proponent Pam Martens prominently highlights the letter.

The bipartisan group points to the "staggering" scope of the Federal Reserve Board's emergency lending authority, which bailed out large domestic and foreign financial institutions. Citigroup, Merrill Lynch, and Morgan Stanley were the largest beneficiaries, with access to the Board's credit facilities for an average of 22 months. Interest rates were usually under 1%, thus propping up the TBTF banks, for nearly two years!

The legislators warn that the Fed Board's proposed rule fails to carry out Congress's mandate to set rules "to prohibit borrowing from programs and facilities by borrowers that are insolvent."

Among the recommendations proposed by the legislators are the call for establishing a clear time limit for a financial institution's reliance on the Board's emergency lending; establishing procedures for the orderly unwinding of any emergency lending programs or faciities, ensuring that they "are truly temporary;" adopting a broader definition of "insolvent," that would "examine the relative value of an institution's assets and liabilities, so that the Board could not use its emergency lending program to save an institution that is on the brink of bankruptcy;" and establishing limitations and a penalty rate on lending terms.

The letter concludes with a warning that 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."

Other signators of the letter include: Sen. Sherrod Brown (D-Ohio), Sen. Mark Begich (D-alaska), Sen. Mazie Hirono (D-Hawaii), and Sen. Edward Markey (D-MA); Rep. Walter Jones (R-NC), Stephen Lynch (D-MA), Michael McCaul (R-TX), Gwen Moore (D-Wis), Keith Ellison (D-Minn), Leonard Lance (R-NJ), and Tom Cotton (R-Ark).