Fed to clarify emergency loan power to key senator

By Mark Felsenthal

WASHINGTON (Reuters) - The Federal Reserve is expected to send a letter to a key lawmaker on Friday explaining that it must obtain sufficient collateral under law to make any emergency loans, a source familiar with the letter said on Thursday.

The letter is a response to a request from Democrat Christopher Dodd, chairman of the Senate Banking Committee, who sought clarification of the Fed's powers under a clause of the Federal Reserve Act that the U.S. central bank has repeatedly invoked this year to provide emergency funding to a range of financial institutions buffeted by the financial crisis.

The possibility of Fed loans to U.S. carmakers arose during a committee hearing earlier on Thursday about Detroit's request for $34 billion in federal aid.

Lawmakers at the hearing asked why the Fed could not loan money to help General Motors and Chrysler , which have said they urgently need a cash infusion. Ford Motor is asking for a line of credit from the federal government.

The Fed has provided hundreds of billions of dollars to banks and other financial institutions against a wide range of collateral including U.S. Treasury securities and debt securities issued by mortgage finance enterprises.

Unlike those financial institutions, it appears unlikely that U.S. automakers would be able to post enough collateral.