JOURNAL OF BUSINESS ENTREPRENEURSHIP & THE LAW
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Discretion to Act: How the Federal Reserve’s Decisions Whether to Provide Emergency Loans During the Financial Crisis Were Discretionary and Why Dodd-Frank Falls Short of Preventing Future Bailouts

Discretion to Act: How the Federal Reserve’s Decisions Whether to Provide Emergency Loans During the Financial Crisis Were Discretionary and Why Dodd-Frank Falls Short of Preventing Future Bailouts

The housing market crash of 2007–2008 threatened to cause the collapse of the United States and global economies. By early 2008, Bear Stearns, Lehman Brothers, and American International Group all faced the strong possibility of bankruptcy absent government intervention. The Federal Reserve Board of Governors activated its emergency lending powers pursuant to Section 13(3) of the Federal Reserve Act to “bail out” Bear Stearns and American International Group, but elected to let Lehman Brothers fail. Lehman’s bankruptcy led to a run on money market mutual funds, made it impossible for corporations to raise capital, led to widespread layoffs across economic sectors, and undermined faith in the financial system. This note analyzes the degree of discretion awarded to the Federal Reserve to issue emergency loans, both during the financial crisis and post Dodd–Frank. This note concludes that Dodd–Frank’s broad-based eligibility requirement for issuing emergency loans, while making the issuance of emergency loans less discretionary, does not protect the American taxpayers from future bailouts because debt is even more concentrated among fewer financial institutions after the financial crisis than before it. Unfortunately, given the current climate in Congress and recent election of presidential election, reform is unlikely.

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