At the Conglomerate blog, Wharton professor David Zaring reports on the debate:
My soon to be colleague Peter Conti-Brown and Brookings author (and future Glom guest) Philip Wallach are debating whether the Fed had the power to bail out Lehman Brothers in the middle of the financial crisis. The Fed's lawyers said, after the fact, that no, they didn't have the legal power to bail out Lehman. Peter says yes they did, Philip says no, and I'm with Peter on this one - the discretion that the Fed had to open up its discount window to anyone was massive. In fact, I'm not even sure that Dodd-Frank, which added some language to the section, really reduced Fed discretion much at all. It's a pretty interesting debate, though, and goes to how much you believe the law constrains financial regulators.