Friends protecting friends. In theory, the new Dodd-Frank law should make this impossible in the future but the Fed seems to think they are above the law.
And nearly three years after the loans were made, the Fed still hasn’t provided a satisfying answer for why it made loans to the London-based broker-dealer subsidiaries of Merrill Lynch, Goldman Sachs, Morgan Stanley, and Citigroup, as well as the U.S. broker-dealer subsidiaries of Merrill Lynch, Goldman Sachs, and Morgan Stanley, according to the Government Accounting Office’s newly released audit of the Federal Reserve’s financial crisis activities.
In September and November of 2008, the Federal Reserve extended credit to the affiliates of these Wall Street firms under terms very similar to those it was making under the Primary Dealer Credit Facility. But because these affiliates were not actually primary dealers, loans under that facility were not officially available.
But the Fed made the loans anyway, citing its powers under Section 13(3) of the Federal Reserve Act to extend loans in “exigent circumstances.” But it never explained exactly why it decided these loans qualified under this provision.
