Pedestrians walk on Main Street, which is largely empty as many shops and restaurants are closed due to the coronavirus COVID-19 pandemic, in Annapolis, Maryland, April 20.
Photo: michael reynolds/ShutterstockThe Federal Reserve on Thursday rolled out revised terms for its Main Street Lending Program, and we wonder why it bothered. The details suggest the Fed and Treasury would rather not have anyone use the facility.
The Fed said it received some 2,200 comments on its original terms, but it didn’t do much to make the program more attractive to needy small and medium-sized borrowers across America. The Fed reduced the minimum loan size to $500,000 from $1 million, and it expanded the pool of eligible borrowers to include companies with annual revenue up to $5 billion in 2019 (from $2.5 billion) and up to 15,000 employees (from 10,000). This will make more (especially larger) companies eligible, but it is mainly window dressing.
The Fed did nothing to address the obstacles in the original term sheet that these columns and our contributors Hal Scott and Glenn Hubbard identified last month. They include double-barreled loan covenants from the Fed and the lending bank. Mr. Scott notes that the loan must have a “pass” rating from financial regulators, which is the highest rating.
Banks must keep 5% or 15% of the loan on their books, depending on the type of loan, which means they’ll apply their normal covenants. But if banks are going to treat these loans as routine, their incentive is to lend only to the best customers without the Fed and keep 100% on the books.
Then there are the limits on dividends, stock repurchases and compensation that apply for 12 months past the time that the loan has been repaid. The loans have to be repaid in four years, so many borrowers will have to live with these terms for five years.
All of which means the take-up rate on Main Street loans is likely to be lower than it should be. This means less liquidity for thousands of solvent firms that are the bedrock of the U.S. economy. We mean the entrepreneur who owns a few car dealerships in Illinois; the local grocery chain with six stores in Milwaukee; the light manufacturer in Ohio that supplies parts for auto makers; the owner of boutique hotels in California.
The Main Street facility should be set up to provide immediate and ample liquidity to all comers on relatively simple terms against good collateral. Instead the Fed is offering scarce and delayed cash under terms that will let banks and the Fed pick winners and losers.
One explanation for this penurious treatment is that the Treasury, which backstops the Fed loans, simply doesn’t want to take losses. Treasury Secretary Steven Mnuchin hinted at this when he told the Journal this week: “If Congress wanted me to lose all the money, that money would have been designed as subsidies and grants as opposed to credit support.” No, Congress wanted to provide liquidity to prevent bankruptcies from becoming a solvency and banking panic, which means taking some loan risk.
Mr. Mnuchin would be more credible if he also objected to the risks on the loans the Fed is supplying to weak Wall Street credits packed into collateralized-loan obligations. Note, too, that the Fed this week widened its new state and local government facility to include more counties and cities. Main Street companies don’t have the same political clout in Washington, which may be the simplest explanation.
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May 01, 2020 at 06:29AM
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