WASHINGTON - Senate Banking Committee chairman Christopher Dodd yesterday strongly urged Federal Reserve Board chairman Ben Bernanke and Treasury officials to meet with lawmakers to work out a plan to include the municipal market in the Fed's lending programs.
The Connecticut Democrat argued that the Fed has ample legal authority to assist state and local governments.
Though Bernanke did not commit to Dodd's request, the Fed chairman told another member of the Senate panel that the Fed may not have the capacity to extend its lending programs to state and local governments.
Bernanke's remarks came in response to Sen. Michael Bennet, D-Colo., who warned during a hearing that the municipal markets remain "locked down," partly because banks that have received government bailouts under the Troubled Asset Relief Program are generally unwilling to lend to local governments.
But, Bennet asked, could the Fed try to thaw the muni market by invoking its emergency powers to allow localities to borrow from it?
"There's a couple of reasons why we haven't prioritized those markets with commercial paper, for example," Bernanke said. "One is, we do have ... a capacity constraint, which ... is the need for us to unwind our portfolio at an appropriate time. And so we cannot expand, particularly for longer-term liabilities, indefinitely."
The Fed chairman also said that "Congress obviously has been very involved in addressing state and local fiscal issues," including through the stimulus package signed into law last week. "And it seems more appropriate, given the close relationship between the federal and state governments, for that to be ... the locus of addressing those issues."
He added: "Our extraordinary authority which we've invoked to make these loans, say, in the commercial paper market, does not include state and localities. So it would be - it would take some stretch beyond, I think, congressional intent to ... include them in some of these programs."
But in the exchange with Dodd moments later, the senator politely expressed disagreement with Bernanke, and requested the meeting, citing the Fed's establishment of the Term Asset-Backed Securities Loan Facility, or TALF to help the auto and student loan sectors, which he said could be used for the muni market.
"We are doing floor plans for cars. We're doing student loans. It seems to me municipal triple-A rated bonds out of municipalities for schools and hospitals have got to be at least as creditworthy as a student loan, with all due respect to students and the floor plan for cars," Dodd said.
Perhaps, he added, the lawmakers "could spend some time with you or your staff to talk about this, because I think we did give the congressional authority to that."
"I believe the authority exists... for you to be able to do that under TALF with municipal issues," Dodd said. He noted that he and nine other Senate Banking Committee Democrats recently urged Treasury Secretary Tim Geithner in a letter to use the Treasury's TARP funds "to purchase, or offer credit or guarantees for, certain state and local bonds."
The lawmakers' exchanges with Bernanke yesterday come after Fed and Treasury officials told them last year that they did not have the authority to help the muni market, with Fed officials suggesting the governments seek assistance from Treasury, and Treasury officials urging the issuers to go to the Fed.
Though officials from the Obama administration said earlier this year that they would seek to provide some sort of federal liquidity backstop to the muni market, the White House has made no public announcements on the matter.
"They are dying there on the banking stuff," a market participant said, referring to Treasury officials. "They are in Def-con 3 crisis mode on the bank stuff and just not dealing with muni stuff now."