As Chairman Bernanke will be the first to admit, the Fed’s role has changed more than a little of late.  Still, we were shocked to see the Board base a walloping exemption from critical safety-and-soundness rules for GMAC’s bank on Treasury’s decision to bail out GM and Chrysler.  As a result, GMAC’s bank, Ally, can lend to buyers and dealers on terms no one else can match.  The Board did this just as the FDIC decided to give GMAC access to the TLGP, which then went out and raised billions in debt at far lower rates than Ford could do in what’s left of the private market.  The unavoidable conclusion from both of these developments:  bank regulatory policy now favors the failing and the failed if they have friends in high places. 

What did the Fed in fact do?  In its crop of complex interpretive letters released late last month is one to GMAC’s counsel.  The Board decided to waive the inter-affiliate transaction restrictions applicable under Sections 23A and 23B of the Federal Reserve Act.  The reason?  The Board says that Treasury has found it to be in the public interest to bail out the auto-manufacturing sector.  Although the opinion does impose some restrictions, the bank may now proceed to act as a captive finance company.  This is, of course, precisely what Sections 23A and 23B were put in law to prevent

To be sure, GMAC isn’t the only one getting a pass.  In the same crop of interpretive letters, the Board let it be known that the rules are also bent big-time for Goldman Sachs and Morgan Stanley.  But there’s a difference between what the Fed did for the investment banks and GMAC, and this is if anything even more startling than the waivers to the inter-affiliate transactions.  When the Board granted these to Goldman and Morgan Stanley, it required collateralized guarantees from the parents to protect the FDIC from risks in the insured depositories.  Although GMAC must take problem loans off the bank’s hands, the Fed didn’t mandate a collateralized guarantee.  Why not?

The answer lies in the billions committed by Treasury to support GMAC.  The FRB expressly cites this in its reasoning, presumably finding that Treasury is now the effective guarantor of GMAC and, by inference, the subsidiary bank.  Thus, for the first time we see Treasury in a new role: an FDIC on steroids for selected bank holding companies in targeted asset classes.  In short, the FRB first decided to grant an exemption to critical rules because Treasury likes cars and then to limit any resulting cost to GMAC because Treasury has put billions behind the troubled auto-finance firm. 

The Board’s action is even more disturbing put into the broader context of all the credit-allocation decisions – another long-time historic no-no – made in the TALF.  There, as several presidents of regional Federal Reserve Banks have acidly noted, the Board is deciding which asset classes – autos, student loans, credit cards, etc. – to favor over others – muni bonds, for example – that are left to their own devices in the devilish market in which they find themselves. 

The Fed is now selecting winners and losers based on grounds far, far afield from monetary policy or prudential considerations.  If it wants to hold on to its independence, it must again act independently.   Of late, the Fed isn’t a lender of last resort or even an investor of last resort – it’s become a partner of first resort for companies on Treasury’s chosen list.