Nervous Treasury hampers small business loan plan | American Institute of Business


The Trump administration is hampering a Federal Reserve loan program that could help keep small and medium businesses afloat during the coronavirus recession. To correct this error, the US Treasury Department must allow the program to take more risk.

There are disturbing signs that Treasury Secretary Steven Mnuchin doesn’t see it that way. His testimony before a key Senate committee on Tuesday morning reinforced that.

The Fed’s “Main Street” loan program is intended to help businesses that were productive before the pandemic survive until the economy recovers. Businesses with up to 15,000 employees or 2019 annual revenues of less than $ 5 billion would get a loan from a bank, which would allow them to to sell part of the loan – 85% to 95% – to the Fed. This would allow the banks to make more loans.

The challenge for the Treasury is to determine the level of risk to be taken in these loans. It is the Treasury’s decision, not the Fed’s, as it is required by law to provide capital to cover losses and to approve the terms of the program.

It is certainly a difficult call. The Fed cannot grant grants and therefore must reasonably expect that the loans can be repaid. But lending always carries a risk of default. If the Main Street program is too conservative, the money will not go to the companies that need it most, jeopardizing the recovery.

There are disturbing signs that Mnuchin is being more cautious than Congress anticipated and that the economy does not need it. He recently declared, “If Congress wanted me to lose all the money, this money would have been designed as grants and subsidies as opposed to credit support.”

It is misguided. Of course, Congress had no intention of losing all the money. But there’s a long way to go between that and putting some of the money at risk. Congress clearly expected the economy to benefit if the Treasury tolerated some losses in exchange for putting the money in the hands of the types of crippled businesses that need it most.

Asked about this by Senator Mark R. Warner, a Democrat from Virginia, during a banking committee hearing on Tuesday, Mnuchin heightened concern. He said he expected the Main Street program to suffer losses, a turn in the right direction. But he gave no details on how the program would change.

The Main Street program has $ 75 billion in treasury capital designed to support $ 600 billion in Fed loans. This allows for a fault rate of around 13%. This loss rate implies that the program’s portfolio will be heavy on companies whose solvency is not in question. But economic recovery is the goal and solvency is the problem. If the Treasury and the Fed are serious about solving the problem, then losses are inevitable.

Indeed, under the terms of the program put in place by the Fed and the Treasury, it is not clear which companies would qualify for assistance that could not already access a standard business loan. By forcing banks to hold 5-15% of loans, the program encourages banks to use normal credit standards. In addition, the Main Street program requires borrowers to show that they have well-rated debt, with an internal risk rating equivalent to “pass”.

By forcing banks to use normal commercial lending standards, the Treasury can discourage borrowers and lenders from participating in the Main Street program.

A new Congressional Oversight Commission created by the March relief legislation known as the Cares Act published his first report on Monday. He revealed that virtually no money earmarked for the treasury had been loaned under any of the Fed’s pandemic response programs.

Mnuchin may be wary of taking risks in the Main Street program to avoid the public perception of corporate bailouts. If so, he over-learns the lessons of the 2008 financial crisis, when voters rebelled against bank bailouts under the Troubled Asset Relief Program, even though the government clawed back almost all of the money it did. ‘he paid. Business loans today are going to be much riskier because of the closure.

He may also under-learn a different lesson. After the 2008 crisis, the Fed suffered a political backlash, believing it had saved the financial system but had not done enough for Main Street. If today’s Main Street program does not work – so few loans are made or if program funds do not reach the businesses that need them most – the political ramifications could be more serious as the blockages put in place. in place to slow the spread of Covid-19 have created a true Main Street recession.

To reach mom and pop stores, and not just the much larger midsize businesses, other changes will need to be made. For example, the program has a minimum loan size of $ 500,000. Many small businesses that need funds are not able to take on such a large loan. And the four years given for loan repayments under the program are not enough for many low-margin businesses.

Congress allocated $ 454 billion in the Cares Act to support the Fed’s lending programs. According to Mnuchin testimony, only $ 195 billion was committed to a program, the rest being held in reserve. And only $ 75 billion of that credit, 17%, went to the Main Street program. Additional capital would allow the program to grant riskier loans. The treasury has the money and the authority to make this change immediately.

Economic recovery requires taking risks.

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