If the Federal Reserve Board stretched the bounds of its emergency authority with the actions it took in 2008, Congress has found a way to snap things back into place.
The financial reform law put new limits on what the Fed can do under "unusual and exigent circumstances" and required that emergency measures be disclosed with a degree of transparency unheard of for the central bank.
The changes to Section 13(3) of the Federal Reserve Act are as much a warning to banks as they are a slap on the wrist for the Fed, which can no longer invoke it to take steps that would help a single company avoid bankruptcy or unload assets.
This means no more Fed backstops for companies that agree to rescue-style acquisitions, such as JPMorgan Chase & Co.'s purchase of Bear Stearns & Co., no more bailouts of reckless insurance companies a la American International Group Inc., and no more guarantees that the banks on the other side of trades with big, troubled firms will be made whole.
In theory, such measures will never be needed again thanks to another portion of the Dodd-Frank Act, which allows the government to seize and unwind distressed firms of systemic importance. In practice, the Fed's options for future crises will be narrower compared with the last one, regardless of how the resolution process pans out.
"I'm a bit worried that the Fed's hands will be unduly tied the next time an AIG-like problem arises — not that I'm an admirer of what we did with AIG," said Alan Blinder, the Princeton University economics professor and former Fed vice chairman.
