No more big-bank bailouts
Federal Reserve bans loans to prop up failing financial firms.
WASHINGTON — The Federal Reserve took the final step to ensure it can’t repeat the extraordinary measures taken to rescue American International Group and Bear Stearns in 2008, adopting formal restrictions Monday on its ability to help failing financial firms.
The Fed governors voted 5-0 at a public meeting to downsize the Fed’s emergency lending powers.
Only broad lending programs designed to revive frozen markets — not loans to individual firms — will be allowed. The Fed spent about $2 trillion on such a program to ease a credit crunch during the financial meltdown, aiming to spark lending to consumers and small businesses.
The 2010 law enacted by Congress overhauling financial regulation required the Fed to impose the restraints. Lawmakers of both parties had objected to the Fed’s emergency aid to several big Wall Street banks and insurance giant American International Group.
“Emergency lending is a critical tool that can be used in times of crisis to help mitigate extraordinary pressures in financial markets that would otherwise have severe adverse consequences for households, businesses and the U.S. economy,” Fed Chairman Janet Yellen said before the vote.
The new rule takes effect Jan. 1.
The new rule wasn’t enough to satisfy critics such as Rep. Jeb Hensarling, the Texas Republican who leads the House Financial Services Committee.
“’Too big to fail’ is unfortunately alive and well, and this rule from the Federal Reserve doesn’t change that,” Hensarling said in a statement. “Vague rules and bureaucratic discretion are not the answer — they are the problem.”
For any emergency lending that the Fed does make, interest rates must be set high enough to encourage repayment as fast as possible, and the Fed will be required to review every six months whether a loan program should be ended. Under the final rule, emergency credit can initially be made and renewed for a maximum of one year.
The Fed adopted some of the restrictions proposed in legislation by a bipartisan group of lawmakers led by Sens. Elizabeth Warren, DMass., and David Vitter, R-La.
Vitter called the Fed’s action “the first real acknowledgement from the Fed that it needed to do more to curtail
its own bailout authority.”
“American taxpayers should never be on the hook to bail out financial institutions that make unwise and risky bets,” Vitter said in a statement.
The issue of limits on the government’s power in responding to financial catastrophe came to the fore in an unusual legal case over the Fed’s $85 billion bailout in September 2008 of then-teetering AIG. Former AIG Chairman and Chief Executive Officer Maurice Greenberg sued the government, asserting that the terms of the federal rescue loan were unfairly punitive.
The bailout violated the Constitution’s Fifth Amendment by taking control of AIG with 80 percent of the stock without “just compensation,” Greenberg’s suit alleged. He demanded some $40 billion in damages for himself and other AIG shareholders from the government.
The government insisted that its actions in the AIG bailout were legal, proper and effective, and that the terms were as tough as needed to protect taxpayers from the risk of AIG failing to repay the loan.
Following an eight-week trial in fall 2014 in the U.S. Court of Federal Claims, the judge handed Greenberg a partial victory. He ruled in June that Greenberg’s allegation of excessively strict terms was valid, but rejected the former AIG CEO’s demand for damages.