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The Finance 202: Senators poised to push Powell, Mnuchin on speed of economic rescue spending

The Washington Post
05/19/2020

Federal Reserve Chair Jerome H. Powell is poised this morning to push senators on spending more to backstop the pandemic-ravaged economy. And they are set to make the case right back at him.

Powell and Treasury Secretary Steven Mnuchin have allocated only a sliver of the $500 billion they were handed in the $2 trillion coronavirus stimulus bill to prop up a range of businesses, according to a new report from the Congressional Oversight Commission. And members of the Senate Banking Committee will press them on it when they testify remotely before the panel at 10 a.m. today.

“If it doesn’t get out in a timely fashion, it’s not going to achieve the goal behind its creation,” Sen. Patrick J. Toomey (R-Pa.), who serves both on the Banking Committee and the new oversight panel, tells Erica Werner.

The report, per Erica, "describes the lending facilities the Treasury Department has created to operate through the Federal Reserve, and says that only one of them has received funding. It is called the Secondary Market Corporate Credit Facility and is supposed to purchase corporate debt. It has received $37.5 billion.”

Among the items still on the Fed and Treasury to-do list, according to the report: Give aid in the form of loans and loan guarantees to the airline industry; set up a Main Street Lending Program leveraging taxpayer dollars to offer $600 billion in loans to mid-sized businesses; and get money flowing through another fund that will support up to $500 billion in loans to state and local governments.

Powell, in prepared testimony, is set to say the Fed has already taken “bold steps” to stabilize markets and the broader economy and remains “committed to using our full range of tools to support the economy in this challenging time even as we recognize that these actions are only a part of a broader public-sector response.”

Senators have ideas about how the Fed should do that.
Sen. Sherrod Brown of Ohio, the top Democrat on the banking panel, is leaning on Mnuchin and Powell to focus the Main Street Lending program on small and medium-sized businesses. He urged them in a Monday letter to avoid repeating what he called “an early and recurrent flaw” in the Paycheck Protection Program, “when some banks favored a subset of existing customers over others and over new customers.”

The program is intended to help companies too large for the PPP but too small to tap debt markets for financing. The Fed has tweaked the program’s parameters even before its launch, and companies with up to 15,000 employees or that pull in less than $5 billion in revenue will be eligible.

“Under the Fed’s middle-market program, a company would get a loan from a bank, which would then sell up to 95% of the debt to the Fed,” the Wall Street Journal’s Nick Timiraos writes. “Mr. Mnuchin agreed last month to provide $75 billion to cover losses in the Main Street Lending Program, and the Fed says that will allow the central bank to extend up to $600 billion in loans. Mr. Mnuchin has said the Treasury would put up more funds if they are needed.”

Sen. Mark Warner (D-Va.) — another Banking Committee member, who consulted with Mnuchin and Powell on the creation of the Main Street program, according to Timiraos — also wrote the pair Monday.

Along with Democratic Sens. Doug Jones (Ala.) and Kyrsten Sinema (Ariz.), Warner called on them to lower the interest rate on the program's loans to encourage businesses to take them. “Should firms fail to receive affordable financing terms under these facilities, many will be left with a choice between declaring bankruptcy, posing long-term risks to the economy, or opening up too quickly, which poses significant risk to public health and the potential for long-term negative economic consequences,” the senators wrote.

The Fed is struggling to strike a balance with the mid-market lending effort.
A key challenge, per Timiraos, “is setting the terms so the Fed doesn’t become a dumping ground for bad loans — but not so onerous that companies don’t want to participate.”

And as lawmakers lob in recommendations for how it should function, they are also anxious to see it launch. “I’m concerned about it taking weeks to get it up and functioning,” Rep. French Hill (R-Ark.), another member of the Oversight Commission, tells Erica, adding he hopes the hearing will be an opportunity for Powell and Mnuchin to “tell us what you need to do to put them into action.”

Jaret Seiberg, an analyst with Cowen Washington Research Group, writes in a note this morning the hearing will add pressure on Mnuchin and Powell to speed up the launch of the lending programs. “That would be broadly positive for the economy and the financial system," he writes.