The New Fed is the offspring of statutes dating to the early 1990s and a changing cultural shift among the central bank’s governors and staff. It has new tools, new prerogatives, and a new perspective. In the person of its chairman, Bernanke, the New Fed also has found its personality—experimental, academic, able to seem cautious while improvising wildly, and deathly afraid of deflation.
The extension of governmental credit directly to nonbanks has historically been a fiscal operation carried out by the Treasury Department, not a monetary-policy maneuver undertaken by the Fed. Restrictions on the Fed’s loaning power under section 13.3 of its charter meant that few nonbanks or business could ever qualify for an infusion of cash or easy lending. Fed governors had to vote that “unusual and exigent” circumstances existed. And the collateral offered by borrowers had to consist of “real bills” and certain Treasury obligations “of the kinds and maturities made eligible for discount for member banks under other provisions of [the Federal Reserve] Act.”
These limitations were undone in a little-noticed amendment of the Fed’s lending authority nearly 20 years ago—the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The law significantly revised the emergency liquidity provisions of the Federal Reserve Act, including Section 13. In particular, FDICIA permitted all nonbanks to borrow at the discount window for emergency purposes under the same collateral terms afforded to banks.
The key language was inserted by Sen. Christopher Dodd and written by a securities industry lawyer, Rodgin Cohen, dubbed by the New York Times the “Dean of Wall Street Lawyers.” In the 1980s Cohen was the leading mergers and acquisitions lawyer in the financial industry. He worked for Goldman Sachs and AIG, though he insists he was not acting on their behalf when he drafted the language.
