Lending facilities set up by the Federal Reserve and Treasury Department to avoid a coronavirus-related credit crunch have distributed about $14 billion out of $500 billion Congress approved in a March aid bill.
The light activity of the 11 emergency lending facilities was the main topic of a monthly report released Monday by the Congressional Oversight Commission, which was created under the $2 trillion pandemic relief package to oversee the law’s lending programs to distressed businesses, states and municipalities.
The biggest chunk of lending thus far has been the Fed’s purchase of $11.4 billion worth of corporate bonds and exchange-traded funds that invest in baskets of corporate bonds. Another $1.2 billion was spent on short-term debt issued by the state of Illinois, and $937 million has gone to loans to companies secured by assets such as consumer and business loans.
The report also announced the commission’s intention to “explore the decision” by the Treasury Department to make a $700 million loan to YRC Worldwide Inc., which was announced July 1. So far that’s the only Treasury loan inked out of $46 billion set aside for airlines and businesses considered “critical to maintaining national security,” though several airline loans are in the pipeline.
The commission was critical of the YRC loan, noting that risk of losing this money “appears high” and it is “questionable” that the loan meets the standards set by the March law.
YRC provides most of the Defense Department’s “less than truckload” transportation and hauling services. A Treasury Department release said that in exchange for the loan, the federal government will take a 29.6 percent ownership stake in YRC.
In its criticism of the YRC loan, the commission noted that the company’s bonds have been rated non-investment grade, or “junk,” for more than a decade and that the company was struggling financially before the pandemic.
The March law requires that loans “like this one” be secured and made at an interest rate reflecting the risk. “It is questionable whether the loan to YRC meets these standards,” the commission wrote, noting that the government loan to YRC is at an interest rate 4 percentage points lower than the company’s most recent debt financing.
“But given the company’s long-term non-investment grade rating and previous close calls with bankruptcy over the years, it is not clear that an equity stake in YRC will provide much, if any, compensation or protection to taxpayer,” the commission wrote.
Not mentioned in the oversight commission’s 75-page monthly report, the third since four members of the panel were named, is that the commission is still without a chairperson. Last week, Speaker Nancy Pelosi confirmed the withdrawal of Gen. Joseph F. Dunford Jr., the former chairman of the Joint Chiefs of Staff, from consideration.
Pelosi and Senate Majority Leader Mitch McConnell are supposed to name the commission chief, while the other four members were named by the individual “big four” congressional leaders.
The other four members of the commission — Sen. Patrick J. Toomey, R-Pa.; Reps. Donna E. Shalala, D-Fla., and French Hill, R-Ark.; and Bharat R. Ramamurti, who is a former aide to Sen. Elizabeth Warren, D-Mass. — were all named to the panel within a month of the March 27 signing of the relief package.
While waiting now nearly four months for a chairperson, not to mention a budget and a staff, the four members of the commission have been producing monthly reports and have met and corresponded with Federal Reserve Board Chairman Jerome Powell and Treasury Secretary Steven Mnuchin.
While the Congressional Budget Office has estimated that the $500 billion program would have a negligible fiscal impact as income earned on federal investments would roughly offset expected defaults, that may also be true since the programs have seen little use so far.
Part of the reason is a slow start for the Main Street lending facility, which started taking loan applications late last month and could make as much as $600 billion in direct loans to businesses. So far, the facility has purchased just one $12 million loan made to an eligible business, the oversight report noted.
The commission announced in its report that “in the coming weeks” it would hold a hearing about the Main Street program and its charge to provide loans to small- and medium-sized businesses. The facility was designed for businesses not quite small enough to benefit from the Paycheck Protection Program’s forgivable loans, but not big enough to access lending through the other tools employed by the Fed and Treasury.
Between the Federal Reserve’s June 18 weekly report and its July 15 report, the lending facilities made a total of $6.9 billion in loans or asset purchases, according to the report. Overall, the Fed and Treasury have committed $195 billion of the $500 billion for eventual use, but the actual implementation of the programs has been slow going.
To a degree, the lack of activity was expected, since the Fed learned during the Great Recession that simply providing a backstop for corporate bonds and other forms of credit could be enough to prevent a freeze in these markets.
But the dormant funds have drawn the attention of others who would draw on them to pay for their own programs. Last week, Senate Democrats proposed using $200 billion of the leftover funds to pay for school repairs, broadband infrastructure, tax credits and more to help make “immediate and long-term investments in communities of color.”