Fed Invokes Depression-Era Law for Bear Loan

[Ichingcarpenter]

The Fed can normally only lend through its discount window to banks. Under Section 13-3 of the Federal Reserve Act, added in 1932, it can lend to “individuals, partnerships, or corporations” with the approval of not less than five governors, provided “such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions.”

However, under Section 11(r)(3)(ii)(I), approval can be granted with fewer than five governors in office if the “available members unanimously determine that … unusual and exigent circumstances exist and the borrower is unable to secure adequate credit accommodations from other sources” and “despite the use of all means available (including all available telephonic, telegraphic, and other electronic means), the other members of the Board have not been able to be contacted on the matter.”

Officials said the Fed used its authority to lend to nonbanks several times during the Depression. It was invoked at times during the 1960s but it wasn’t clear if money was ultimately lent in those latter instances.

http://blogs.wsj.com/economics/2008/03/14/fed-invokes-depression-era-law-for-bear-loan/?mod=fpa_blogs