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Stimulus bill gives Fed direct loan funds with few strings

The Fed is trying to keep banks and businesses solvent as the economy slows

Under Chairman Jerome Powell, the Fed has established six credit facilities to address the pandemic.
Under Chairman Jerome Powell, the Fed has established six credit facilities to address the pandemic. (Bill Clark/CQ Roll Call)

The Senate’s stimulus package set to go to the floor Wednesday would allow corporations of all types — not just banks — to turn to the Federal Reserve for direct lending with few restrictions on how those funds are used.

The package would give the Treasury secretary $454 billion to support credit facilities established by the Federal Reserve in response to the coronavirus crisis. The funds would also go toward the creation of Fed facilities to provide financing to state and municipalities. The package would also temporarily lift a number of banking regulations while the national COVID-19 emergency persists.

The Fed has created six credit facilities in the last two weeks — in addition to slashing interest rates to almost zero and starting to buy unlimited amounts of U.S. Treasurys and mortgage-backed securities from banks — and has plans to open more in an effort to keep U.S. banks and businesses solvent while much of the economy shuts down to slow the pandemic’s spread.

While the Fed works regularly with banks and other nonbank financial firms, its actions to provide direct credit to other corporations is a step the central bank didn’t take even during the 2008 financial crisis.

The $454 billion would fund those credit facilities.

Senate Banking Chairman Michael D. Crapo, R-Idaho., said in a statement that the funds would support $4 trillion in Fed lending.

On a press call Wednesday with reporters, Sen. Patrick J. Toomey, R-Pa., offered a smaller amount, saying the Fed could leverage those funds into $2 trillion to $3 trillion in loans.

When making loans and loan guarantees out of the $454 billion fund, the Treasury would need to restrict borrowers from buying back stocks or paying out dividends until a year after the loan is repaid. The borrowers would also have to agree to executive compensation limits for the life of the loans. But the bill would allow Treasury Secretary Steven Mnuchin to waive those restrictions “upon a determination that such a waiver is necessary to protect the interests of the Federal Government.”

The waiver provisions have drawn criticism from the left over fears it will ultimately allow relatively healthy, larger corporations and banks to use the Fed’s financing without any restrictions.

On Twitter, David Sirota, an adviser to Bernie Sanders’ presidential campaign, called it “a lesson in bait-and-switch corruption.”

“We are giving Mnuchin unchecked power to waive the rules for any reason or even no reason at all,” he said.

House Financial Services ranking member Patrick T. McHenry, R-N.C., who has pushed for such a provision in the next stimulus bill, said the focus was on providing the Treasury and the Fed enough flexibility to respond to rapidly moving economic conditions.

“We don’t know what the needs will be next week, much less two months from now,” he said. “So, we want to make sure the Treasury has sufficient capacity to deal with issues that arise.”

“My main goal is to ensure we don’t have a complete economic collapse,” he added. “That is my sole and complete focus right now. People can have ambitions for the future — and that’s fine well and good — but we need to meet the crisis right now, and that is my number one priority.”

The bill would direct the Treasury secretary to “endeavor to seek the implementation of a program or facility” that would make direct loans to businesses and nonprofit organizations with between 500 and 10,0000 employees. The interest rates on those loans would be set at a 2 percent annual rate and borrowers would not need to pay principal or interest for the first six months.

That provision appears to provide a facility for firms too large for the bill’s $349 billion forgivable loan program for small businesses, which is restricted to covering payroll and other fixed costs. But the language of the text falls short of requiring the Treasury to establish such a credit facility with the Fed and doesn’t say how large it must be.

If the Treasury and the Fed establish such a lending facility, borrowers applying for loans through it would need to make a “good-faith certification” that:

  • The funds will be used to retain at least 90 percent of a recipient’s workforce, at full compensation and benefits, until Sept. 30, 2020.
  • The recipient intends to restore at least 90 percent of workforce that existed on Feb. 1, 2020, and restore all compensation and benefits to workers within 4 months of the end of Health and Human Services Administration’s public health emergency declared Jan. 31.
  • The borrower won’t buy back stocks or pay dividends while the loans are outstanding.
  • The borrower won’t outsource jobs until at least two years after the loan is repaid. 
  • The borrower won’t end collective bargaining agreements for at least two years after the loan is repaid.
  • The borrower won’t try to block union organizing while the loan is outstanding.

The legislation doesn’t appear to allow a waiver on these restrictions, meaning medium-sized firms may be held to stricter standards than larger firms receiving Fed loans backed by the Treasury under the terms of the bill.

The credit facility provision says this medium-sized business lending program would be separate from a “Main Street Lending Program” that the Fed has said it intends to create for smaller businesses.

It also appears to be separate from the primary market corporate credit facility the Fed created on Monday to directly lend to nonbank companies. The Fed used $10 billion from the Treasury’s Exchange Stabilization Fund to create that facility.  That Fed corporate credit facility is limited to investment-grade firms — meaning mostly large, publicly traded corporations — seeking bridge financing for up to four years. They can issue bonds, which the facility would purchase, at a low interest rate. Issuers also must pay a 1 percent commitment fee. The facility’s terms allow firms to roll over payments for 6 months. While a borrower isn’t paying back, it cannot pay dividends or make stock buybacks.

The bill would also make the following regulatory changes for the duration of the national emergency:

  • Allow the Office of the Comptroller of the Currency to waive lending limits on unsecured credit to nonbank financial companies. Currently, the OCC can only waive these limits for banks.
  • Lower the Community Bank Leverage Ratio to 8 percent from 9 percent.
  • Allow financial institutions to suspend troubled debt restructuring.
  • Allow financial institutions to delay implementation of the Financial Accounting Standards Board’s new Current Expected Credit Losses rule.
  • Suspend restrictions on the Treasury’s Exchange Stabilization Fund that prevent it being used to support money market mutual fund credit facilities. The Fed established such a facility on March 18; this would provide the Fed legal cover for that action.
  • Expand the number of  credit unions that can go to the National Credit Union Central Liquidity Facility to increase their lending to any credit union approved by the National Credit Union Administration Board. The facility is currently available to credit unions primarily lending to individuals. The legislation also would remove a prerequisite that credit unions seek other sources of liquidity before accessing the liquidity facility.
  • Allow the Federal Deposit Insurance Corporation to guarantee debt of banks upon a determination of the FDIC’s board.

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