CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 1003
demonstrated, it is extremely difficult for outsiders (including
members of Congress) to second-guess a regulator’s determination of
solvency during the midst of a systemic crisis. Moreover, regulators
are strongly inclined during a crisis to make generous assessments of
solvency in order to justify their decision to provide emergency
assistance to troubled LCFIs. 215 Thus, during a financial crisis, the
FRB could potentially assert its authority under amended section
13(3) to provide emergency loans to a targeted group of LCFIs that it
claimed to be “solvent,” such as the primary dealers, with the goal of
helping one or more troubled members of that group.
Moreover, Dodd-Frank does not limit the ability of banks owned
by LCFIs to receive liquidity support from the FRB’s discount
window or from Federal Home Loan Banks (FHLBs). The FRB’s
discount window (often referred to as the FRB’s “lender of last
resort” facility) provides short-term loans to depository institutions
secured by qualifying collateral. 216 Similarly, FHLBs—described in
one study as “lender[s] of next-to-last resort” 217 —make collateralized
FRB’s list of primary dealers included all of the “big eighteen” LCFIs except for AIG,
Société Générale, and Wachovia. See Tobias Adrian et al., The Federal Reserve’s
Primary Dealer Credit Facility, 15 CURRENT ISSUES ECON. &FIN. No. 4, Aug. 2009;
Adam Ashcraft et al., The Federal Home Loan Bank System: The Lender of Next-to-Last
Resort?, 42 J. MONEY, CREDIT &BANKING 551, 574–75 (2010); Primary Dealers List,
FED. RESERVE BANK OF N.Y. (Nov. 30, 2007), http://www.newyorkfed.org/newsevents
/news/markets/2007/an071130.html.
215 For example, on October 14, 2008, the Treasury Department announced that it
would provide $125 billion of capital to Bank of America, Citigroup, and seven other
major banks pursuant to the Troubled Asset Relief Program. In its announcement, the
Treasury Department declared that all nine banks were “healthy.” Several weeks later,
following public disclosures of serious problems at Bank of America and Citigroup, the
Treasury Department made $40 billion of additional capital infusions into Bank of
America and Citigroup, and federal regulators provided asset guarantees covering more
than $400 billion of Bank of America’s and Citigroup’s assets. The extraordinary
assistance provided to Bank of America and Citigroup raised serious questions about the
validity (and even the sincerity) of the Treasury Department’s declaration that both
institutions were “healthy” in October 2008. See CONG. OVERSIGHT PANEL, NOVEMBER
OVERSIGHT REPORT: GUARANTEES AND CONTINGENT PAYMENTS IN TARP AND
RELATED PROGRAMS 13–27 (2009), available at http://cop.senate.gov/documents/cop-110
609-report.pdf; SIGTARP BANK OF AMERICA REPORT, supra note 14, at 14–31;
SIGTARP CITIGROUP REPORT, supra note 14, at 4–32, 41–44.
216 See 12 U.S.C. § 347b; Ashcraft et al., supra note 214, at 552–53, 568–69 (describing
the FRB’s discount window); Stephen G. Cecchetti, Crisis and Responses: The Federal
Reserve in the Early Stages of the Financial Crisis, 23 J. ECON. PERSPECTIVES No. 1, at
51, 56–57, 64–66 (2009) (same).
217 Ashcraft et al., supra note 214, at 554.