Oversight Member Blasts the Fed’s Efforts to Rescue Main Street
Oversight Member Blasts the Fed’s Efforts to Rescue Main Street
WASHINGTON — The Federal Reserve’s first-ever attempt to lend money to midsize businesses was destined to be a challenge. The push has proved to be an outright flop, according to a member of the oversight commission charged with monitoring it.
Mr. Ramamurti and his colleagues, who oversee the taxpayer-backed pandemic emergency lending efforts run by the Fed and the Treasury Department, used the event to critique the so-called Main Street program.
One of many emergency lending programs the central bank has rolled out since the pandemic crisis began, Main Street is among the most divisive and difficult. It is supposed to funnel loans to businesses that are too small to raise money by issuing bonds and stocks but too big to benefit from the government’s small-business loans. The Fed announced the initiative on March 23, but it took months to get it started, to lawmakers’ frustration.
Since it came fully online about a month ago, the program has hardly been used, supporting less than $200 million in loans. While more are in the pipeline, the program’s lending remains a tiny fraction of its $600 billion capacity.
The difficulty Main Street has faced in gaining traction is a prime example of the challenges the Fed faces in the rescue efforts it has set up during the economic crisis caused by the pandemic. The central bank is well suited to support banks and big companies in times of trouble. But this year it has ventured into markets that its powers, conservative instincts and legal limitations sometimes make it ill equipped to help.
Given current market conditions, the Main Street program works only for a narrow set of companies. Many healthy companies can borrow unassisted. And hard-hit businesses may need grants rather than more debt, but the Fed can offer only loans.
Still, a key Fed official suggested that the program would help in the months ahead, explaining that it could support healthy companies that were likely to make it through the crisis but would need to borrow money to do so.
“This program is designed for a business that had a disruption in short-term credit, that was in good shape prior to the crisis and who, after the pandemic subsides, would be able to be a viable business,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said at Friday’s hearing.
Mr. Rosengren’s central bank branch is running the initiative. He said that while about $100 million in loans had been settled as of Tuesday, the number had increased to $189 million by Thursday night and that more than $600 million in total were somewhere in the process.
“We actually have seen significant pickup recently,” Mr. Rosengren said.
The program ran into problems from the start. Both Republican and Democrat lawmakers have repeatedly raised concerns about how Main Street was designed, worrying that it would not get money into the hands of companies that need it.
Loans must be for at least $250,000 and cannot go to highly indebted companies. The Fed doesn’t make the loans itself — banks do. The problem is that banks have been reluctant to participate.
The way Main Street works, the Fed agrees to buy 95 percent of any loan that banks originate through the program. That means the banks keep some exposure to loans that might go bad, yet get only a small piece of loans that might prove more profitable, plus fees. That approach has led to questions from many lawmakers, not just those on the oversight commission.
“Many banks seem disinterested in the program because they either wish to retain more than 5 percent of a profitable loan or they have no interest in retaining any stake at all in an unprofitable loan,” a group of four Republican senators, led by Kelly Loeffler of Georgia, wrote in a letter on Tuesday to the Fed chair, Jerome H. Powell, and Treasury Secretary Steven Mnuchin.
The senators recommended reducing the minimum loan size and increasing the debt-to-earnings ratio allowed for borrowers. They also want the Fed and the Treasury to eliminate the loan stake that banks must retain, or promise that taxpayers will take the earliest losses on bad loans rather than sharing those losses evenly with banks.
While the Fed is not supposed to lose money on its emergency lending programs, Congress gave the Treasury Department funds to cover the costs in case loans go bad. Still, Mr. Mnuchin has resisted taking on too much risk with the program, saying initially that he did not expect to lose money on it if the economy played out as anticipated.
Mr. Rosengren has repeatedly made the case that the program could help a broader swath of companies if a second wave of the virus erupts and credit conditions worsen, a point he reiterated at the Friday oversight hearing.
Congress established the commission to oversee how the Treasury and Fed’s economic relief programs were carried out. Mr. Ramamurti, a former aide to Senator Elizabeth Warren, Democrat of Massachusetts, is one of four current members of what is supposed to be a five-person panel. It is still missing a chairperson.
Commission members vetted many aspects of the Main Street program on Friday, making it clear that the Fed and the Treasury are walking a political tightrope as they shape it. For instance, Mr. Ramamurti both questioned the program’s basic utility and voiced concern that the oil and gas industry might stand to benefit.
He pointed out that the Fed had revised program terms to make the maximum loan size larger, and argued that the oil and gas lobby had pushed for the change. He urged the commission to investigate the issue and request any related documents on any communications between the Fed and Treasury and the energy industry.
Senator Patrick J. Toomey, a Republican from Pennsylvania and a commission member, urged Mr. Rosengren to consider an asset-based lending program, one that might help real estate companies.
And Mr. Toomey noted that when Congress had earmarked money for the Fed’s lending programs, he and his colleagues had meant to help businesses survive a brief but severe downturn.
“At some point we need to have a discussion about how we’re in a different place than we were when we first designed these programs back in March,” Mr. Toomey said. “Now we have the prospects of possibly excess capacity in a number of industries that could persist for some time.”
“That is a new and different challenge,” he added.
Alan Rappeport contributed reporting.