$260bn+ in CARES Unused

Update 472: $260bn+ in CARES Unused; 
A Fiscal Fix for Fed Facility Failures?

$454 billion was provided in the CARES Act enacted in March, the biggest corporate assistance package since TARP. Today, $259 billion remains uncommitted. All the while, fiscal relief has run out and the American people are suffering.

While the $259 billion sits idle, support spanning the spectrum, including a clear majority of the presidents of the regional Fed banks across the nation, has emerged for Congress to pass more fiscal relief. These forsaken funds could support the forgotten in need of relief and the macroeconomy in need of stimulus, which Congress seems also to have forgotten.

Below, we analyze the four CARES-backstopped Fed lending programs and what resources therein lie fallow and can be put to use. 

Good weekends, all… 

Best,

Dana

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Nearly six months after the CARES Act’s passage, Treasury’s $454 billion fund to backstop the Federal Reserve 13(3) facilities remains largely untapped. Treasury has committed $195 billion of the fund to backstop four lending programs. But these programs have only lent $18.2 billion out of a possible $1.95 trillion.

Main Street Lending Program

• Lending Capacity: $600 billion
• Lending to Date: $1.4 billion
• Treasury Backstop Commitment: $75 billion
• Treasury Backstop Investment to Date: $37.5 billion

After three months of implementation delays and two months of operation, the Fed’s Main Street Lending Program (MSLP) for small and mid-sized businesses has only lent $1.4 billion, or 0.2 percent, of its overall capacity. As we noted last week, Treasury Secretary Mnuchin’s high-end lending estimate for the MSLP is $50 billion. The commensurate backstop to support $50 billion in lending would only amount to $6.25 billion. 

All sides recognize that the MSLP is not performing as intended. Many target firms have been unwilling to use the program to avoid taking on further debt. On Wednesday, Senate Banking Committee Chair Crapo held a hearing on the MSLP that focused on changes to increase program demand. Witnesses argued the Fed could lower interest rates, extend the loan maturity period, and reduce the minimum loan size. These changes would likely increase uptake in the MSLP marginally at best. Senator Brown, skeptical of the Fed programs, said during Wednesday’s hearing, “We are going about this backwards. Every dollar we give to working families goes directly to supporting the real economy.”

As members of Congress debate further relief, they must consider the opportunity costs of committing $75 billion to the MSLP, $69 billion of which might be unnecessary. That $69 billion could fund nearly a month of $600 weekly unemployment benefits or 683,000 new Paycheck Protection loans. Also, because the MSLP is not providing liquidity to a well-established debt market, removing backstop funds would be unlikely to cause undue stress in the financial system.

Corporate Credit Facilities

• Lending Capacity: $750 billion
• Lending to Date: $12.8 billion
• Treasury Backstop Commitment: $75 billion
• Treasury Backstop Investment to Date: $37.5 billion

The Fed’s Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF) buy corporate bond and loan issuances. The Fed has the capacity to buy up to $750 billion in corporate debt but has spent only $12.8 billion to date. The SMCFF has purchased approximately $3.6 billion of investment-grade corporate bonds and $8.7 billion of exchange-traded funds focused on investment-grade and high-yield (junk) bonds. The PMCFF has not made any purchases. 

Despite deploying less than 1.7 percent of the two facilities’ resources, the corporate credit facilities played a notable role in lifting prices and narrowing spreads – perhaps working too well. The SMCCF has been a boon for private equity firms, spurring one of the highest-ever levels of junk bond issuances by private-equity-backed companies during Q2 and after. Yields for junk bonds consequently fell from a high of 11.4 percent to 5.5 percent. Through August, the facilities slowed their purchases in response to market conditions and crowd-out concerns. 

These facilities, propped up the corporate debt market and the corporate credit facilities, should continue to exist in case of another serious downturn. But the Fed can now take a step back given the markets’ overwhelming recovery. Congress should reconsider if Treasury’s entire $75 billion backstop commitment is necessary and well-targeted. Withdrawing a significant portion of this backstop may, however, raise fears of liquidity in the lower grade corporate bond market. 

Municipal Liquidity Facility

• Lending Capacity: $500 billion
• Lending to Date: $1.7 billion
• Treasury Backstop Commitment: $35 billion
• Treasury Backstop Investment to Date: $17.5 billion

The Municipal Liquidity Facility (MLF) was designed to purchase newly-issued municipal debt with up to three years of maturity from states, cities, counties, and Revenue Bond issuers — excluding U.S. territories. So far, only Illinois and the New York Metropolitan Transportation Authority have tapped the facility, accounting for only $1.7 billion in lending.

Although states are facing severe budget shortfalls, many are unable to access the MLF due to restrictive eligibility criteria and punitive interest rates. The Fed has taken steps to increase the number of eligible borrowers and decrease rates, but MLF rates remain too high and eligibility too narrow. A whopping 97 percent of cities and counties are still unable to access this badly-needed aid. 

The House-passed HEROES Act lowers the MLF’s interest rates to match the Fed Funds Rate, allowing states and cities to avoid the Dodd-Frank imposed “penalty rate.” The Uplifting our Local Communities Act, introduced by Reps. Tlaib and Neguse would expand access to the MLF by including U.S. territories and further reducing the population threshold for municipalities.

As Democrats and Republicans fail to find common ground on fiscal relief for states and localities, loosening the terms of the MLF may be these governments’ last hope for relief from an estimated $900 billion budget shortfall. Unlike the MSLP and the corporate credit facilities, the MLF’s $35 billion backstop should remain intact, as these funds would hardly fill the fiscal hole if redirected. Further, any changes could cause municipal bond prices to increase as state and local governments struggle, which could offset the benefits of fund redirection. If Congress fails to act, the Fed should use its own powers to expand the MLF.

Term Asset-Backed Securities Loan Facility

• Lending Capacity: $100 billion
• Lending to Date: $2.6 billion
• Treasury Backstop Commitment: $10 billion
• Treasury Backstop Investment to Date: $10 billion

The Fed first deployed the Term Asset-Backed Securities Loan Facility (TALF) during the Global Financial Crisis. TALF is the smallest of the CARES-backstopped facilities and has garnered little attention. The facility aims to support the availability of credit to households and businesses by lending to businesses with AAA-rated asset-backed securities (ABS) in areas such as auto loans, student loans, SBA loans, and credit card debt. 

While the facility has issued relatively few loans (totaling just $2.6 billion), it has served to shore up confidence in the ABS market. Yields on student and auto loan ABS spiked at the onset of the crisis in March but stabilized after TALF’s announcement later that month. A premature removal of TALF’s backstop could disrupt these markets and seize up lending in the underlying products. 

The Fed’s Fiscal Limitations

The Fed’s programs have worked well for markets, but the Fed alone can’t save the real economy. More direct fiscal relief is needed from Congress to pull the economy out of this crisis. While Republicans and Democrats debate the next fiscal package, Democrats should consider tapping the Treasury’s uncommitted $259 billion and certain backstops such as the MSLP’s to deliver the needed fiscal response.