The Congressional Oversight Commission questioned whether the Federal Reserve’s emergency lending facilities have done enough to help smaller companies and workers during the coronavirus crisis, in a report released Thursday.
The commission’s second report on the Fed and Treasury Department’s handling of the $500 billion Congress provided in March to inject liquidity into the economy applauded the help for large corporations but worried that others were being left behind.
“In some areas of the economy, such as the ability of larger companies to issue debt to continue operations, the agencies’ actions have had a clear and powerful impact,” the commission wrote. “But there is less evidence that the actions of the Treasury and the Federal Reserve have been as beneficial for small and mid-sized businesses and state and local governments.”
Congress gave the Fed and Treasury $454 billion to set up emergency lending facilities to help otherwise solvent companies, nonprofits and state and local governments weather the sharp revenue crunch caused by COVID-19 lockdowns. The commission is tasked with overseeing this money and another $46 billion earmarked for bailing out airlines and national security contractors.
To date, the Fed has said how $195 billion will be allocated among five facilities — out of 11 total it has announced since the pandemic started — that could support up to $2 trillion in loans and asset purchases. But only two of those programs are currently operational, and only $6.7 billion has been spent so far.
Still, merely announcing the programs has had a salutary effect on turbulent financial markets, where bond yields that spiked in March have fallen back to pre-crisis levels. By calming the market broadly, the Fed’s program has helped most large corporations, not just those facing downturns due to COVID-19.
The Fed’s bond-buying facilities have helped larger companies in particular. They have the means to hire underwriters and rating agencies to issue corporate bonds, and large enough credit demands to make the pricey process financially efficient. They’ve responded by loading up on debt. Corporate bond issuance totaled over $300 billion in both April and May, more than double 2019 volumes in the same months.
For their credit needs, smaller companies rely more on direct loans from banks or other financiers. But the Fed’s Main Street Lending Program for companies with under 15,000 employees and $5 billion in 2019 revenue still isn’t operational. The Fed only started taking lender applications this week, and many banks have yet to say whether they will participate.
A Brookings Institution report also published Thursday warned that the Main Street program in its current form could see limited uptake from businesses. The facility is supposed to fill the gap between large companies that can access the bond market and small businesses that rely on the Small Business Administration’s forgivable loan program.
It’s also unclear whether the stabilization at the top of the market trickled down to smaller firms seeking private loans.
"The Commission cannot conclude whether the improved condition and performance of financial markets has also indirectly improved access to credit for small and mid-sized companies that do not have access to the debt market,” the oversight panel's report noted.
Concern about workers
Concerns about workers being left behind even as corporations rebounded swiftly permeated the report. It acknowledged a point Federal Reserve Chairman Jerome Powell has made — that keeping otherwise solvent companies afloat during the coronavirus revenue drain will help many workers keep their jobs. But the commission suggested more could be done.
“Another way the Federal Reserve could try to promote employment is to require businesses to maintain their payrolls or attempt to rehire workers when they obtain credit through the Federal Reserve’s lending facilities,” it said.
Currently, the Fed only places employee retention requirements on the Main Street Lending Program, which will ask borrowers to make “commercially reasonable efforts” to keep workers. Testifying before the House Financial Services Committee Wednesday, Powell was pressed hard by Democrats, including Rep. Jim Himes of Connecticut, to impose stricter employment requirements on the bond-buying facilities.
The report also criticized Treasury and the Fed’s plans for enforcing that requirement broadly, rather than monitoring individual businesses.
While the March law included a provision for a Fed lending facility aimed at mid-sized companies with even stricter job retention and capital distribution requirements, it only said that Treasury Secretary Steve Mnuchin “shall endeavor” to create such a program, rather than require it.
The Treasury and Fed told the commission that they created the Main Street Lending Program instead because it would “meet the needs of small and medium-sized businesses as effectively and efficiently as possible,” suggesting that the congressionally described facility would not have.
The commission also pointedly noted that large companies have taken advantage of the borrowing costs lowered thanks to the Fed’s interventions without passing along those benefits to employees. “Some have proceeded to restructure and lay off workers while continuing to issue dividends to shareholders while other corporations issuing debt have announced that they will hire additional workers,” the report said.
While the Main Street Lending Program’s restrictions, which include limits on stock buybacks, dividends and executive compensation, are less stringent than the SBA’s Paycheck Protection Program, they are much more so than the Fed’s bond programs. And while the PPP was stood up in a week and the Fed facilities announcement helped out Wall Street immediately, mid-sized businesses have had to wait months for the Main Street facility.
Nearly three months since it was created, the commission is still missing its fifth member and chairman, whom Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell are supposed to jointly select. Its two Republicans are Rep. French Hill of Arkansas and Sen. Patrick J. Toomey of Pennsylvania, and the two Democrats are Rep. Donna E. Shalala of Florida and Bharat Ramamurti, a former staffer for Massachusetts Sen. Elizabeth Warren and a fellow at the Roosevelt Institute.
Despite the potential for partisan deadlock, the commission’s second report only hints at disagreement once, over the Fed’s decision to reduce the requirement on Main Street facility borrowers to keep workers from making “reasonable efforts” to “commercially reasonable efforts.”
“While the Commission does not have a consensus view on the sufficiency of this requirement, we do agree that businesses receiving Main Street loans should faithfully adhere to their loan obligations, including making commercially reasonable efforts to maintain payroll and retain employees while their Main Street loans are outstanding,” the commission wrote.
Unlike the SBA’s forgivable PPP loans, the Fed will publish the names of borrowers using its lending facilities and the terms of the credit transactions.
While the PPP program is outside of the commission’s purview, Hill told CQ Roll Call last week that he thought the program should follow the public disclosure rules of the SBA’s Section 7(a) loan guaranty program. The SBA publishes all of the details of the 7(a) loans it backs, including the borrower, lender, amount, interest rate, purpose of the loan and repayment status.
The commission’s second report was its first substantive one — the first monthly deadline came before the commission could meet with Treasury and Fed officials. The June report was nevertheless issued before the commission could sit down with Powell and Mnuchin, which is scheduled for later this month.