Scarce traffic is seen on Main Street in a mostly deserted downtown Kansas City, Mo., April 14.
Photo: Charlie Riedel/Associated PressAnother 5.2 million Americans filed jobless claims last week, for a depressing total of 22 million in a month. The worst is far from over, which makes it all the more puzzling that the Federal Reserve and Treasury have been so stingy with their Main Street Expanded Loan Facility that is supposed to offer liquidity support for mid-sized companies.
The Fed last week unveiled its Main Street program as part of a $2.3 trillion lending effort that is heavily tilted toward relief for Wall Street. But the stipulations and strings spelled out by the Fed will make the program much less attractive to borrowers, as we described in “The Fed’s ‘Main Street’ Mistake.”
Glenn Hubbard and Hal Scott elaborate on the problems nearby, and the Fed and Treasury ought to listen if they don’t want to be held politically accountable for favoring the well connected in finance over middle American companies that are the heart of the U.S. economy.
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The Fed’s interventions have helped to shore up financial markets by putting a guarantee on seemingly every credit in circulation. That’s only a slight exaggeration, as it has offered to buy high-yield corporate debt, commercial real-estate securities holding strip malls, and perhaps even the bonds of some of the most mismanaged states and cities (here’s looking at you, Illinois).
This has been good for Wall Street and asset holders, and the Fed did have to take action to prevent cascading defaults and protect the financial system. But the Fed’s facilities (other than Main Street) are in many ways price supports for weak credits whose owners are able to navigate the Fed process. The relative stability in the stock and credit markets the last two weeks may have encouraged the Fed and Treasury to believe that this is enough.
We wouldn’t count on it. The U.S. will defeat Covid-19, but no one knows how or when or what the cost will be. Job losses in the unemployment report for April could be as high as 20 million. Mortgage and debt payments due on May 1 could trigger loan defaults and corporate bankruptcies. If the lockdowns extend into June, look out below. If the recovery is slow or halting, liquidity concerns could become solvency problems that lead to even more uncreative destruction.
All of which makes it passing strange that the Fed is so grudging with the terms for its Main Street facility. The program targets businesses from zero to 10,000 employees with up to $2.5 billion in 2019 revenue. Many of these don’t qualify for the Paycheck Protection Program that stops at 500 employees and has run out of money in any case. (See nearby.)
Most of these mid-sized companies were in solid condition before the virus hit and had strong balance sheets—in contrast to some of the dogs in packaged Wall Street securities. They are exactly the companies that the Fed and Treasury should want to assist to have any hope of a strong recovery.
WSJ Opinion: The Coronavirus, America’s Response and the 2020 Election
The Covid-19 pandemic will cost thousands of lives and cause a sharp economic recession. WSJ Opinion’s Paul Gigot and Kimberley Strassel, with guests Marie Harf and columnist Karl Rove, joined “Opinion Live” on April 14th to discuss how America is mobilizing against this challenge, the social and economic lockdown, the response from business and governments, and the impact on the election.Click here to watch the Q&A Video replay.
Yet the Fed’s Main Street facility term sheet last week imposes restrictions for borrowers on dividends, stock buybacks and compensation and says they must “make reasonable efforts to maintain” payroll. As we read the Cares Act, these stipulations aren’t required for loans made in the normal course of business through the Fed’s 13(3) authority. Our legal sources agree.
The Fed also requires that companies borrowing from the Main Street facility use banks that must retain 5% of any loan on their books. This means banks will insist on their own covenants and approval process that will slow everything down even if banks take the risk of lending. Banks will turn down many willing borrowers, or companies may think all of this is too burdensome to borrow.
Messrs. Hubbard and Scott attribute these obstacles to the Fed’s desire not to take on risk that could lead to losses, which is plausible. But the losses will be the Treasury’s, not the Fed’s, and Treasury has backstopped Main Street with $75 billion. Treasury also has far more under the Cares Act that it can allocate for the Fed. Any Fed losses will pale next to the losses to the economy and society if much of American business is ruined by the coronavirus lockdowns.
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The political risks for the Fed are also greater from such business destruction than they would be from loan losses. The only way for the Fed to maintain its independence is with support from the middle class across the country. Wall Street and the Beltway media won’t be enough to hold off populist anger if much of the American economy crumbles. And wait until Donald Trump is heard from.
The Fed invited comment on its Main Street facility through Thursday, so there is still time to adjust its terms. Treasury and the Fed should rewrite those terms to provide immediate and ample liquidity to all comers that were solvent before the pandemic. Otherwise some of us will wonder if Main Street is merely a political sop that the Fed doesn’t want to succeed.
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