Treasury Dept. Won't Renew Fed Lending Programs

Chris Gaetano
Published Date:
Nov 20, 2020
Treasury Secretary Steven Mnuchin will not renew the Federal Reserve's Main Street Lending Program, as well as its corporate credit and municipal credit lending facilities,  the Wall Street Journal reported.

The lending programs were created near the pandemic's early stages to shore up an economy on the brink.

The corporate credit facilities, easily the most successful of all the Fed's pandemic programs, saw the central bank directly buying investment-grade corporate bonds from U.S. companies on both the primary and secondary market. By becoming a lender of last resort, the Fed provided the economy a backstop that gave other lenders the confidence to offer credit of their own, thus thawing a market that, at the pandemic's start, had been in danger of freezing over.

The municipal lending facility tried to do the same for state and local governments, but demand was tepid, with only a fraction of the money allocated actually being lent.

The Main Street Lending Program is meant to encourage lenders to issue more business loans by transferring most of the risk to the central bank. When an eligible lender issues a loan to an eligible borrower, the Fed purchases a 95 percent stake in the debt, freeing up bank balance sheets to extend even more credit. Similar to the municipal lending facility, though, the program saw comparatively little demand from the public. It has facilitated less than $500 million worth of loans out of $600 billion allocated to it.

Also ending, according to Bloomberg, will be the Term Asset-backed Securities Loan Facility (TALF) program, which was last used during the 2008 financial crisis, as a way to reinforce the consumer loan market. The program centers around asset-backed securities, which are a major component of funding the consumer credit market. For years, lenders have operated by selling pools of loans to a remote special-purpose vehicle, which then funds the purchase of the underlying loans by selling various classes of securities, which are in turn secured by the loans in the special purpose vehicle, thus creating an asset-backed security. The Fed's TALF program now, as it did in 2008, will allow the central bank to issue loans that use these securities as collateral.

Mnuchin, said the Journal, had sent a letter to Federal Reserve Chair Jerome Powell saying that these programs have "clearly achieved their objectives," and so they will not be renewed. Powell, on the other hand, did not believe it would be appropriate to shutter the lending programs just yet, saying the economy still needs their support to make it through the recovery. Further, while the secretary asked that the central bank return $70 billion that had been given to it to cover loan losses, plus $450 billion assigned to the programs themselves, believing this won't be needed, given the lower than expected lending volumes, the Fed  thinks could be a problem because it is not legally allowed to sustain loss on the loans that it has already made.

Transferring more than $500 billion out of the Fed also makes it more difficult for the Biden Administration to restart these programs if it so chooses, as Congress would need to reapprove the appropriations, according to MarketWatch, which has led some to believe this was done specifically to kneecap its capacity from the start, a charge Mnuchin has denied. He said it is prudence, not politics, that guides his decision. He said that it is small businesses, not corporations, that need help right now, despite the fact that the Main Street Lending Facility was created specifically for those same small businesses. He also said, according to Bloomberg, that the programs have expiration dates built into them by law, and said that the programs could be renewed if people felt they were needed, which he did not, as he himself chose not to renew them.

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