A report from the Government Accountability Office released Thursday finds that the Federal Reserve offered banks bailout loans at below-market interest rates during the crisis, and that the central bank hasn't moved to finalize the regulations it is required to implement to avoid such bailouts in the future.
The GAO report found that during the financial crisis that began in 2008, the Fed offered struggling banks “funding at rates that were often below those of potential market alternatives and at terms that reduced rollover risk for participants.” The GAO referred to some of the many programs the Fed created to prevent the financial industry from collapsing, with acronyms like the TAF, PDCF, TSLF and CPFF.
Previously, Fed Chairman Ben Bernanke has defended those programs against the charge that they offered underpriced assistance to banks. In 2011, he sent a letter to members of congress that included a Fed analysis that “most of the Federal Reserve's lending facilities were priced at a penalty over normal market rates ... and the rates that the Federal Reserve charged on its lending programs did not provide a subsidy to borrowers.”
The report also noted that the Fed Board of Governors has not finished writing rules mandated by the 2010 Dodd-Frank financial regulation reform law that limit the central bank’s ability to offer special assistance to a single failing firm, as it did in 2008 with Bear Stearns, an investment bank, and AIG, an insurance company. In September 2008, for instance, the Fed offered AIG an $85 billion line of credit.
Under Dodd-Frank, the Fed may use its 13(3) authority to lend through programs with “broad-based eligibility,” but cannot create a program to bail out a specific organization or lend to a bank that is insolvent.
The GAO notes, however, that the Fed “has not yet completed its process for drafting these policies and procedures and has not set time frames for doing so.”
Sen. David Vitter, R-La., asked Fed chair nominee and current Fed Vice Chairman Janet Yellen if she would follow the GAO’s recommendations to set a timeline for finishing the rules. Yellen responded that “we will try to get it out soon,” but acknowledged that she wasn’t “certain just what the time frame is.”
Separately, in a letter dated Oct. 17 included with the GAO report, Fed Board of Governors General Counsel Scott Alvarez defended the Fed’s bailouts as improving the stability of the financial system and economy as a whole, and said that “all of the Federal Reserve ... assistance was fully repaid with interest.” Of the GAO’s conclusion that the Fed should set a timeline for finishing the rules relating to its 13(3) authority, Alvarez wrote that “we accept this recommendation and are already working in that direction.”