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Lawmakers slam Fed's crisis lending proposal

WASHINGTON (Reuters) - A bipartisan group of lawmakers on Monday urged the Federal Reserve to restrict its crisis lending programs for big banks, which were criticized as bailouts during the 2007-2009 meltdown.

During the crisis, the Fed invoked its emergency lending powers to pump cash into Citigroup, Morgan Stanley and other banks to prevent the global panic from worsening.

The 2010 Dodd-Frank law, enacted by Congress to crack down on Wall Street excesses, curtailed those powers. It instructed the Fed to provide emergency loans as a broad program, not to individual banks, and blocked it from lending to insolvent businesses.

Fifteen lawmakers from both political parties and both houses of Congress said on Monday that the Fed has not done enough on its own to adequately limit its crisis lending powers.

"If the board's emergency lending authority is left unchecked, it can once again be used to provide massive bailouts to large financial institutions without any congressional action," they said in a letter to Fed Chair Janet Yellen.

In a sign of the breadth of the backlash against bailouts, the group included lawmakers who are rarely found on the same side of financial regulatory issues, including both supporters and fierce critics of the Dodd-Frank law.

Senators Elizabeth Warren, a Massachusetts Democrat, and David Vitter, a Republican from Louisiana, and representatives Scott Garrett, a New Jersey Republican, and Michael Capuano, a Massachusetts Democrat, were the main authors.

Congress approved billions of dollars in 2008 to stabilize banks. In addition, the Fed launched its own programs, such as an overnight loan facility for primary dealers.

In all, the Fed provided more than $13 trillion to banks that relied on emergency lending programs for an average of 22 months, the letter said. "These loans were another bailout in all but name," the lawmakers said.

Specifically, the group criticized rules the Fed proposed in December 2013 to implement the Dodd-Frank requirement that emergency programs provide liquidity to the entire financial system, not failing banks.

The lawmakers said the Fed failed to set a time limit for banks to receive crisis cash. They also said the Fed limited its definition of "insolvent" firms that cannot receive Fed funds to those already in bankruptcy. The Fed could still lend to a bank teetering on the edge of bankruptcy, they said.

"The purpose of ... Dodd-Frank was to ensure that banks that would be insolvent absent emergency lending assistance from the board would be put into bankruptcy," they said.

The lawmakers also directed the Fed to set out a process for ending emergency programs and to set penalty rates so that banks cannot borrow from the Fed at cheaper rates than they could get in the financial markets.

The Fed is still finalizing its rules for crisis lending. A Fed spokesperson said the agency would consider all of the comments on its initial proposal before writing final rules.

The group also included senators Sherrod Brown, Mark Begich, Mazie Hirono and Edward Markey and representatives Stephen Lynch, Gwen Moore, Keith Ellison, Walter Jones, Michael McCaul, Leonard Lance and Tom Cotton.

(Reporting by Emily Stephenson; Editing by Karey Van Hall and Dan Grebler)

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