The Second Report of the Congressional Oversight

Document type: Report
Date: 2020-06-18

Full text

The Second Report of the Congressional Oversight
Commission

June 18, 2020

Commission Members
U.S. Representative French Hill
Bharat Ramamurti
U.S. Representative Donna Shalala
U.S. Senator Pat Toomey

TABLE OF CONTENTS

Introduction 1

Executive Summary 3

Treasury and Federal Reserve Recent Developments 11

Discussion of Treasury and Federal Reserve’s Answers to the Commission’s Questions 22

Appendix A: Letter from Congressional Oversight Commission to Treasury
Secretary Steven Mnuchin and Federal Reserve Chair Jerome Powell, dated May 29, 2020

Appendix B: Letter from Treasury Secretary Steven Mnuchin and Federal Reserve
Chair Jerome Powell to Congressional Oversight Commission, dated June 8, 2020

INTRODUCTION

This is the second report of the Congressional Oversight Commission (the “Commission”)
created by the CARES Act. The Commission’s role is to conduct oversight of the
implementation of Division A, Title IV, Subtitle A of the CARES Act (“Subtitle A”) by the
Treasury Department (the “Treasury”) and the Board of Governors of the Federal Reserve
System (the “Federal Reserve”). Subtitle A provided $500 billion to the Treasury for lending and
other investments “to provide liquidity to eligible businesses, States, and municipalities related to
losses incurred as a result of coronavirus.”1

Of this amount, $46 billion is set aside for the Treasury itself to provide loans or loan guarantees
to certain types of companies. Up to $25 billion is available for passenger air carriers, eligible
businesses certified to perform inspection, repair, replace, or overhaul services, and ticket agents.
Up to $4 billion is available for cargo air carriers, and up to $17 billion is available for
businesses “critical to maintaining national security.”2 Any unused portions of this $46 billion,
and the remaining $454 billion, may be used to support emergency lending facilities established
by the Federal Reserve.

The CARES Act charges the Commission with submitting regular reports to Congress on:

• The use by the Federal Reserve of authority under Subtitle A, including with respect to
the use of contracting authority and administration of the provisions of Subtitle A.

• The impact of loans, loan guarantees, and investments made under Subtitle A on the
financial well-being of the people of the United States and the U.S. economy, financial
markets, and financial institutions.

• The extent to which the information made available on transactions under Subtitle A has
contributed to market transparency.

• The effectiveness of loans, loan guarantees, and investments made under Subtitle A in
minimizing long-term costs to the taxpayers and maximizing the benefits for taxpayers.3

1 CARES Act, Pub. L. No. 116-136, § 4003(a), 134 Stat. 281 (2020).
2 Id at § 4003(b). In addition, Division A, Title IV, Subtitle B of the CARES Act (“Subtitle B”) authorized the
Treasury to provide up to $32 billion in financial assistance to passenger air carriers, cargo air carriers, and certain
airline industry contractors that must be exclusively used for the continuation of payment of employee wages,
salaries, and benefits. Of this amount, up to $25 billion is available for passenger air carriers; up to $4 billion is
available for cargo air carriers; and up to $3 billion is available for certain airline industry contractors. The Treasury
has begun to provide some of this financial assistance. Subtitle B is not within the jurisdiction of the Congressional
Oversight Commission (the “Commission”).
3 CARES Act, Pub. L. No. 116-136, § 4020, 134 Stat. 281 (2020).

In its first report to Congress on May 18, 2020, the Commission stated that it is responsible for
answering two basic questions:

• What are the Treasury and the Federal Reserve doing with $500 billion of taxpayer
money?

• Who is that money helping?4

That first report posed some preliminary questions the Commission had about the initial actions
of the Treasury and the Federal Reserve in implementing Subtitle A. On May 29, the
Commission sent a letter to Treasury Secretary Steven Mnuchin and the Federal Reserve Chair
Jerome Powell asking them to provide answers to those questions.5 The letter divided the
questions into two tiers. The Commission requested that the Treasury and the Federal Reserve
provide answers to the tier 1 questions by June 8, and answers to the tier 2 questions by June 29.
On June 8, the Treasury and the Federal Reserve sent a response letter to the Commission that
provided answers to the tier 1 questions. 6

The Commission’s letter of May 29 also requested a meeting between the Commission and
Secretary Mnuchin and Chair Powell. That meeting is scheduled to take place later in June.

In this report, we describe recent key actions the Treasury and the Federal Reserve have taken
under Subtitle A and list and discuss the answers they have provided to the Commission’s tier 1
questions from our first report.

4 Congressional Oversight Commission, Questions About the CARES Act’s $500 Billion Emergency Economic
Stabilization Funds, at 5, May 18, 2020,
https://www.toomey.senate.gov/files/documents/COC%201st%20Report_05.18.2020.pdf.
5 Appendix A of this report contains a copy of the Commission’s letter of May 29, 2020.
6 Appendix B of this report contains a copy of the Treasury and the Federal Reserve’s letter of June 8, 2020.

EXECUTIVE SUMMARY

In the eleven-plus weeks since the CARES Act became law, the Treasury and the Federal
Reserve have announced how they plan to use $195 billion of the $454 billion specifically
allocated by that law to support emergency lending facilities established by the Federal Reserve.
That money has been dedicated to several lending facilities that the Federal Reserve states could
support nearly $2 trillion in loans and asset purchases. To date, the majority of those lending
facilities are not operational, and the facilities have made a total of $6.7 billion in purchases.

One of the responsibilities of the Commission is to issue reports evaluating the effect of Federal
Reserve and Treasury actions on the financial well-being of the people of the United States. The
effect of these actions on the financial well-being of the American people is difficult to fully
quantify, though it is clear that some parts of the economy are in much better shape and some
entities have benefited more than others. In some areas of the economy, such as the ability of
larger companies to issue debt to continue operations, the agencies’ actions have had a clear and
powerful impact.7 But there is less evidence that the actions of the Treasury and the Federal
Reserve have been as beneficial for small and mid-sized businesses and state and local
governments.

The Federal Reserve’s mere announcement that it was establishing these facilities has helped
improve the condition and performance of financial markets. This improvement has enabled
certain larger businesses to access credit through the capital markets at lower rates to fund their
operations during these challenging times. In addition, many direct and indirect owners of
financial assets, such as investors, retirees, and pension recipients, have seen those assets recover
or gain value due to the improvement of the financial markets.

The Commission cannot conclude whether the improved condition and performance of financial
markets has also indirectly improved access to credit for small and mid-sized companies that do
not have access to the debt market. But the agencies’ facility that is intended to directly support
credit to these companies—the Main Street Lending program—is not yet operational. The
facility is expected to launch soon, which should provide the Commission with more insight into
the condition of small and mid-sized companies.

The lending facility established to provide funding to state and local governments has extended
assistance to only one state. The facility started to operate very recently, and as such, that
number may increase. Falling yields have enabled some state and local governments to access
credit through the issuance of municipal bonds in the capital markets, but it is unclear at this
juncture to what extent, if at all, the agencies’ municipal liquidity facility has lowered the cost of
borrowing in private markets. The Commission will continue to closely monitor this facility.

7 In certain respects, it is an open question as to whether the Federal Reserve should even continue its secondary
market corporate bond-buying activities.

At this time, the facilities that the Federal Reserve and the Treasury have stated will receive
CARES Act funds are:

• The Primary Market Corporate Credit Facility (PMCCF) and Secondary Market
Corporate Credit Facility (SMCCF): The Treasury has announced it intends to make a
total equity investment of $75 billion in these facilities. The SMCCF buys previously
issued corporate bonds and exchange-traded funds (ETFs) that invest in corporate bonds.
The PMCCF will purchase newly issued corporate bonds and portions of syndicated
loans. Collectively, these facilities can support up to $750 billion in purchases.8 As of
June 10, the Treasury has invested $37.5 billion in the special purpose vehicle (SPV) it
uses for the PMCCF and SMCCF.9

• The Main Street Lending Program: The Treasury has announced it intends to make an
equity investment of $75 billion in this program, which will back loans to small and
medium-sized businesses with up to 15,000 employees. The Federal Reserve may also
expand this program to include certain nonprofit organizations. The Main Street Lending
Program can support up to $600 billion in lending.10 As of June 10, the Treasury has
invested $37.5 billion in this program.11

• The Municipal Liquidity Facility (MLF): The Treasury has announced it intends to make
an equity investment of $35 billion in this facility, which purchases short-term notes
issued by state and local governments. The MLF can provide up to $500 billion in

8 Board of Governors of the Federal Reserve System, Primary Corporate Credit Facility Term Sheet, Apr. 9, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a5.pdf.
9 Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting Reserve Balances
of the Depository Institutions and Condition Statement of Federal Reserve Banks, June 11, 2020,
https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for June 11, 2020 release). The SPV for
the PMCCF and SMCCF is Corporate Credit Facilities LLC.
10 Board of Governors of the Federal Reserve System, Main Street New Loan Facility Term Sheet, June 8, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200608a1.pdf.
11 Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting Reserve Balances
of the Depository Institutions and Condition Statement of Federal Reserve Banks, June 11, 2020,
https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for June 11, 2020 release). The SPV for
the Main Street Lending Program is MS Facilities LLC (MSFL). The H.4.1 statistical release dated June 11, 2020
indicates the MSFL did not hold any “loan participations” (i.e., loans) as of June 10, 2020. However, the release
indicates that the MSFL’s net portfolio holdings, as of June 10, 2020, were $31.875 billion. These holdings do not
consist of loans, but rather consist of nonmarketable Treasury securities. The MSFL is required to invest 85% of the
Treasury’s equity investment in the facility in such securities. The Treasury’s current equity investment is $37.5
billion and 85% of that investment equals $31.875 billion.

lending.12 As of June 10, the Treasury has invested $17.5 billion in the MLF.13

• The Term Asset-Backed Securities Loan Facility (TALF): The Treasury has announced it
intends to make an equity investment of $10 billion in this facility, which will make loans
to companies secured by consumer or business loans. The TALF can provide up to $100
billion in lending.14 As of June 10, the Treasury had not invested any funds in this
facility.15

The Federal Reserve has stated that these facilities could support up to $1.95 trillion in purchases
and loans if necessary. However, to date, only two of these facilities—the SMCCF and the
MLF—are operational and have collectively made $6.7 billion in purchases and loans:

• The SMCCF has purchased $5.5 billion worth of corporate bond ETFs as of June 10.16

12 Board of Governors of the Federal Reserve System, Municipal Liquidity Facility Term Sheet, June 3, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200603a1.pdf; Federal Reserve Bank of
New York, FAQs: Municipal Liquidity Facility, June 3, 2020, https://www.newyorkfed.org/markets/municipal-
liquidity-facility/municipal-liquidity-facility-faq.
13 Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting Reserve Balances
of the Depository Institutions and Condition Statement of Federal Reserve Banks, June 11, 2020,
https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for June 11, 2020 release). The SPV for
the Municipal Liquidity Facility is the Municipal Liquidity Facility LLC (MLFL). The H.4.1 statistical release dated
June 11, 2020 indicates the MFLF held $1.2 billion of municipal notes as of June 10, 2020. However, the release
indicates that the MFLF’s net portfolio holdings, as of June 10, 2020, were $16.07 billion. These holdings consist of
MFL’s $1.2 billion of loans and $14.875 billion of nonmarketable Treasury securities. The MFLF is required to
invest 85% of the Treasury’s equity investment in the facility in such securities. The Treasury’s current equity
investment is $17.5 billion and 85% of that investment equals $14.875 billion.
14 Board of Governors of the Federal Reserve, Term Asset-Backed Securities Loan Facility, May 12, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200512a1.pdf.
15 Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting Reserve Balances
of the Depository Institutions and Condition Statement of Federal Reserve Banks, June 11, 2020,
https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for June 11, 2020 release). The H.4.1
statistical release dated June 11, 2020 does not indicate any Treasury investment in an SPV for TALF.
16 This calculation was determined using the Federal Reserve’s statistical release H.4.1, “Factors Affecting Reserve
Balances of the Depository Institutions and Condition Statement of Federal Reserve Banks," which presents the
balance sheet of the Federal Reserve on a weekly basis. Past H.4.1 statistical releases are available on the Federal
Reserve’s website at https://www.federalreserve.gov/releases/h41/. Corporate Credit Facilities LLC (CCFL) is the
SPV for the SMCCF and PMCCF. The H.4.1 statistical release dated May 28, 2020 states that 85% of the Treasury’s
equity investment in the CCFL is invested in nonmarketable Treasury securities and reported in the net portfolio
holdings of the CCFL. The Treasury’s equity investment in the CCFL was $37.5 billion as of June 10, 2020. 85% of
$37.5 billion is $31.875 billion. According to the H.4.1 statistical release dated June 11, 2020 the net portfolio
holdings of the CCFL were $37.374 billion as of June 10, 2020. When $31.875 billion is subtracted from $37.374
billion the result is $5.5 billion. This represents the amount of value of the bond ETFs that the SMCCF has
purchased as of June 10, 2020, since the PMCCF has not made any purchases to date.

• The MLF has made a single purchase of $1.2 billion in notes from the State of Illinois.17

The Treasury and the Federal Reserve have also announced that the Main Street Lending
Program is accepting lender registration applications and will begin to purchase loans soon. The
remaining two programs—the PMCCF and the TALF—are not yet operational.

The Treasury has received applications for loans under Subtitle A from the airline industry and
businesses critical to maintaining national security. At least, one airline—American Airlines—
has announced that it expects to receive a $4.75 billion loan in June. However, to date, the
Treasury has not yet made any loans using the $29 billion allocated for loans to the airline
industry and the $17 billion allocated for loans to national security businesses.

The announcement of these plans has had a significant effect on the functioning of credit markets
and the ability of businesses to access capital. In February and March, the corporate bond market
saw a widening gap between bid and ask prices for bonds.18 Meanwhile, the spread between
investment grade debt and Treasurys had increased significantly.19 In March, the yields and
spreads for municipal debt jumped, “with spreads to comparable-maturity Treasury securities
spiking to their highest level since the [2008] Global Financial Crisis.”20 However, since the
Federal Reserve’s March 23 announcement about the creation of the PMCCF and SMCCF, the
gap between bid and ask prices has narrowed sharply, improving liquidity for both the
investment grade and non-investment grade bond markets.21 And, the spread between investment
grade debt and Treasurys has dropped almost in half.22 Yields on municipal bond debt have also
improved since late March.23

As the cost of borrowing has dropped, U.S. corporate bond issuance has risen. In April and May,
U.S. corporate bond issuance, including investment grade and high-yield bonds, totaled over
$300 billion each month, far outpacing the $105 billion and $130 billion in issuances in April

17 Shruti Singh & Amanda Albright, Illinois Becomes First to Tap Fed Loans After Yields Surge, Bloomberg, June 2,
2020, https://www.bloomberg.com/news/articles/2020-06-02/illinois-becomes-first-to-tap-fed-loans-after-bond-
yields-surge; Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting
Reserve Balances of the Depository Institutions and Condition Statement of Federal Reserve Banks, June 11, 2020,
https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for June 11, 2020 release). The H.4.1
statistical release dated June 11, 2020 indicates the MFLF held $1.2 billion of municipal notes as of June 10, 2020.
18 Samuel Agini & Eric Platt, Investors adapt to ‘new normal’ on corporate bond trading, Financial Times, Apr. 21,
2020, https://www.ft.com/content/f0f9bf4d-9318-4f17-82bc-c1cd600412a9.
19 Patti Domm, Corporations raise $1 trillion in the bond market amid Fed backstop, double the pace of last year,
CNBC, May 29, 2020, https://www.cnbc.com/2020/05/29/corporations-raise-1-trillion-in-the-bond-market-after-fed-
backstop-double-the-pace-of-last-year.html.
20 Board of Governors of the Federal Reserve System, Monetary Policy Report, at 28, June 12, 2020,
https://www.federalreserve.gov/monetarypolicy/files/20200612_mprfullreport.pdf.
21 Mahyar Kargar et al., Corporate Bond Liquidity During the COVID-19 Crisis, National Bureau of Economic
Research, June 2020, https://www.nber.org/papers/w27355.pdf.
22Patti Domm, Corporations raise $1 trillion in the bond market amid Fed backstop, double the pace of last year,
CNBC, May 29, 2020, https://www.cnbc.com/2020/05/29/corporations-raise-1-trillion-in-the-bond-market-after-fed-
backstop-double-the-pace-of-last-year.html.
23 Board of Governors of the Federal Reserve System, Monetary Policy Report, at 28, June 12, 2020,
https://www.federalreserve.gov/monetarypolicy/files/20200612_mprfullreport.pdf.

2019 and May 2019, respectively.24 State and local governments seeking financing through the
capital markets also increased during that time. In April 2020 and May 2020, total U.S.
municipal bond issuances also rose to $29.4 billion and $29.2 billion, respectively, after having
fallen to $18.7 billion in March.25

Firms have taken advantage of the lower borrowing costs to make noteworthy changes to
operations. According to recent reporting, some companies that have issued debt during the
Spring are doing so to raise money to withstand further possible disruptions caused by COVID-
19. Some have proceeded to restructure and lay off workers while continuing to issue dividends
to shareholders while other corporations issuing debt have announced that they will hire
additional workers.26

The improved performance and condition of financial markets extend beyond debt and into
equity. Beginning on February 19, the S&P 500 Index began a swift and sharp decline. From
February 19 to March 23, the S&P 500 Index fell 30%, which was the fastest 30% drop in the
U.S. stock market’s history.27 Since then, the S&P 500 Index has substantially recovered.
Between March 23, when the Federal Reserve first announced its plans to establish the Main
Street Lending Program, the SMCCF, the PMCCF, and the TALF, and June 8, the S&P 500
Index fully erased this 30% decline.28 On June 9, the Nasdaq Composite, which is an index
dominated by technology company stocks, hit an all-time high when it closed above 10,000 for
the first time.29

Financial markets still face significant uncertainty. For instance, on June 11, the U.S. stock
market experienced its worst single day decline since March when the Dow Jones Industrial
Average dropped 6.9% and the S&P 500 Index fell 5.9%.30 The same day the Cboe Volatility

24 Securities Industry and Financial Markets Association, U.S. Corporate Bond Issuance, Jun. 1, 2020,
https://www.sifma.org/wp-content/uploads/2017/08/Corporate-US-Corporate-Issuance-SIFMA.xls.
25 Securities Industry and Financial Markets Association, US Municipal Issuance, June 1, 2020,
https://www.sifma.org/resources/research/us-municipal-issuance/.
26 Bob Ivry et al., Fed Vow Boosts Debt Binge as Borrowers Cut Thousands of Jobs, Bloomberg, June 5, 2020, at
https://www.bloomberg.com/news/articles/2020-06-05/fed-vow-boosts-debt-binge-while-borrowers-cut-thousands-
of-jobs.
27 Yun Li, This was the fastest 30% sell-off ever, exceeding the pace of declines during the Great Depression,
CNBC, Mar. 23, 2020, https://www.cnbc.com/2020/03/23/this-was-the-fastest-30percent-stock-market-decline-
ever.html.
28 Michael Wusthorn & Anna Isaac, S&P 500 Rebounds to Close in Positive Territory for the Year, Wall Street
Journal, June 8, 2020, https://www.wsj.com/articles/global-stock-markets-dow-update-06-08-2020-11591592116.
29 Fred Imbert & Maggie Fitzgerald, Dow and S&P 500 post back-to-back losses, but Nasdaq closes above 10,000
for the first time, CNBC, June 9, 2020, https://www.cnbc.com/2020/06/09/stock-market-futures-open-to-close-
news.html; Nasdaq Composite Closes Above 10,000 for the First Time, Nasdaq, June 10, 2020,
https://www.nasdaq.com/articles/nasdaq-composite-closes-above-10000-for-the-first-time-2020-06-10.
30 Matt Phillips, Investors, No Longer in Denial About Grim Outlook, Drive Market Down, New York Times, June
11, 2020, https://www.nytimes.com/2020/06/11/business/market-drop-coronavirus.html.

Index (the VIX Index), “known as Wall Street’s ‘fear gauge’,” closed at its highest level since
April 23.31

Other U.S. economic indicators remain troubling, though there have been some positive
developments. According to the National Bureau of Economic Research, the U.S. economy
officially entered an economic recession in February 2020, marking the end of an historic 128-
month business expansion that began in June 2009.32 The Federal Reserve’s most recent
economic projections predict that the U.S. economy, as measured by gross domestic product
(GDP), will decline 6.5% in 2020, but then grow by 5% in 2021.33 In May, retail sales increased
17.7% from April, which was the largest increase on record since 1992.34 Yet, retail sales were
down 6.1% from the same month a year earlier.35

The U.S. unemployment rate remains historically high. In April, it reached a post-World War II
high of 14.7%.36 The following month, the unemployment rate declined to 13.3% as nonfarm
payroll employment increased by 2.5 million jobs in May.37 However, the U.S. Bureau of Labor
Statistics (BLS) recently discovered that the unemployment rates for March, April, and May
2020 were likely higher than reported due to an error in the way the workers were classified by
the government. Some workers who were employed, but who were absent from work due to
COVID-19, were classified as employed when they should have been classified as “unemployed
on temporary layoff.”38 According to BLS, if these workers were classified as unemployed on
temporary layoff, “the overall unemployment rate would have been 3 percentage points higher
than reported.” Even accounting for this issue, which existed in the April employment report as
well, the unemployment rate is believed to have declined significantly from April to May.39

31 April Joyner, Wall Street’s ‘Fear Gauge’ Jumps on Fears of Coronavirus Resurgence, Reuters, June 11, 2020,
https://www.reuters.com/article/us-health-coronavirus-vix/wall-streets-fear-gauge-jumps-on-fears-of-coronavirus-
resurgence-idUSKBN23I3BJ.
32 National Bureau of Economic Research, Determination of the February 2020 Peak in the US Economic Activity,
June 8, 2020, https://www.nber.org/cycles/june2020.html.
33 Board of Governors of the Federal Reserve System and the Federal Open Market Committee, Economic
Projections of the Federal Reserve Board Members and Federal Reserve Bank Presidents, Under Their Individual
Assumptions of Projected Appropriate Monetary Policy, June 2020, June 10, 2020,
https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20200610.pdf; Jeff Cox, Fed Sees Interest Rates
Staying Near Zero Through 2022, GDP Bouncing to 5% Next Year, June 10, 2020,
https://www.cnbc.com/2020/06/10/fed-meeting-decision-interest-rates.html.
34 Harriet Torry & Sarah Nassauer, U.S. Retail Sales Rose Record 18% in May, Wall Street Journal, June 16, 2020,
https://www.wsj.com/articles/shoppers-returned-in-may-likely-spurring-increased-retail-sales-11592299802.
35 Id.
36 Josh Mitchell, U.S. Unemployment Rate Fell to 13.3% in May, Wall Street Journal, June 6, 2020,
https://www.wsj.com/articles/may-jobs-report-coronavirus-2020-11591310177.
37Id.
38 U.S. Bureau of Labor Statistics, The Employment Situation—May 2020, at 6, June 5, 2020,
https://www.bls.gov/news.release/pdf/empsit.pdf.
39 Heather Long, A ‘misclassification error’ made the May unemployment rate look better than it is. Here’s what
happened, June 6, 2020, https://www.washingtonpost.com/business/2020/06/05/may-2020-jobs-report-
misclassification-error/; U.S. Bureau of Labor Statistics, The Employment Situation—April 2020, at 5, May 8, 2020,
https://www.bls.gov/news.release/archives/empsit_05082020.pdf (noting that the unemployment rate for April 2020
would have been almost 5 percentage points higher than the reported figure of 14.7% if not for the
misclassification); U.S. Bureau of Labor Statistics, The Employment Situation—May 2020, at 6, June 5, 2020,

May’s employment report showed that the unemployment rate fell for many groups within the
workforce. Unemployment among women declined by 1.6%.40 Veterans experienced a 2.7%
drop in unemployment.41 Individuals with less than a high school diploma saw a 1.3% decrease
in unemployment, while high school graduates with no college degree saw a 2% decline.42 The
unemployment rate for disabled individuals fell by 1.0%.43 Unemployment among workers in the
manufacturing sector declined by 1.6%,44 which was coupled with a 0.3% increase in overtime
hours in that sector.45 But May’s employment report also reflected the continued outsized impact
of COVID-19 on Black and Hispanic people. The Black unemployment rate increased by 0.1%
and Hispanics had the highest rate of unemployment of any race—though their unemployment
rate did decline by 1.3% in May.46

Separately, the report showed that the number of people whose employment ended involuntarily
increased by 14.75%.47 The number of permanent job losses increased by roughly 250,000.48
Looking forward, the Federal Reserve projects the unemployment rate will be 9.3% at the end of
2020 and 6.5% at the end of 2021—significantly higher than its projections before the COVID-
19 crisis.49

With regard to employment, the Federal Reserve noted in its answers to the Commission’s
questions that it “designed the [emergency lending] facilities to work together to protect financial
stability and support achievement of its dual mandate of full employment and price stability.”50
There are multiple ways the Federal Reserve could use the facilities to try to promote full
employment in the U.S. economy. One way is to make sure that credit is flowing to businesses so
that they can fund their operations and continue to employ workers as they see fit. The Federal
Reserve has pursued this path through multiple actions, including the establishment of
emergency lending facilities using CARES Act funds. Based on the information we have to date,

https://www.bls.gov/news.release/pdf/empsit.pdf (noting that the unemployment rate for May 2020 would have been
about 3 percentage points higher than the reported figure of 13.3% if not for the misclassification).
40 U.S. Bureau of Labor Statistics, The Employment Situation—May 2020, at Summary table A, June 5, 2020,
https://www.bls.gov/news.release/pdf/empsit.pdf.
41 U.S. Bureau of Labor Statistics, The Employment Situation—April 2020, at Table A-5, May 8, 2020,
https://www.bls.gov/news.release/archives/empsit_05082020.htm; U.S. Bureau of Labor Statistics, The Employment
Situation—May 2020, at Table A-5, June 5, 2020, https://www.bls.gov/news.release/pdf/empsit.pdf.
42 Id. at Table A-4.
43 Id. at Table A-6.
44 Id. at Table A-14.
45 U.S. Bureau of Labor Statistics, The Employment Situation—May 2020, at Table B-2, June 5, 2020,
https://www.bls.gov/news.release/pdf/empsit.pdf.
46 Id. at Summary table A.
47 Id. at Table A-11.
48 Id.
49 Board of Governors of the Federal Reserve System and the Federal Open Market Committee, Economic
Projections of the Federal Reserve Board Members and Federal Reserve Bank Presidents, Under Their Individual
Assumptions of Projected Appropriate Monetary Policy, June 2020, June 10, 2020,
https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20200610.pdf.
50 Letter from Treasury Secretary Steven Mnuchin and Federal Reserve Chair Jerome Powell to Congressional
Oversight Commission, at 1, June 8, 2020 (letter available in Appendix B to this report).

the Federal Reserve’s actions, such as the establishment of the SMCCF and PMCCF, have
helped larger businesses obtain credit more cheaply through the capital markets.

Another way the Federal Reserve could try to promote employment is to require businesses to
maintain their payrolls or attempt to rehire workers when they obtain credit through the Federal
Reserve’s lending facilities.51

The PMCCF, SMCCF, and MLF do not impose any payroll conditions on borrowers, but the
Main Street Lending Program does require businesses to make “commercially reasonable
efforts” to maintain payroll.52 The Federal Reserve has defined such “commercially reasonable
efforts” to mean that a business should make “good-faith efforts to maintain payroll and retain
employees in light of their respective capacities, economic environment, available resources, and
business need for labor.”53 In their answers to the Commission’s questions, the agencies stated
that “[s]uch efforts may take different forms across the broad range of businesses eligible for the
program.” 54 The agencies also stated that “[b]ecause of the variety of approaches [they] expect
from borrowers, the agencies will monitor the program’s impact on the economic recovery and
employment broadly rather than on a borrower-by-borrower basis.” 55 This answer suggests that
the agencies will not monitor whether individual businesses that receive Main Street loans are
making “commercially reasonable efforts” to maintain payroll.

51 While the Federal Reserve can choose to impose payroll conditions on borrowers from its lending facilities,
Congress in the CARES Act did not require the Federal Reserve to do so. In contrast, Congress did choose to
impose payroll conditions on borrowers that receive certain other forms of financial assistance under the CARES
Act, such as the Small Business Administration’s Paycheck Protection Program loans and the Treasury’s grants to
the airline industry under Division A, Title IV, Subtitle B.
52 See, e.g., Board of Governors of the Federal Reserve System, Main Street New Loan Facility Term Sheet, June 8,
2020, https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200608a1.pdf.
53 Federal Reserve Bank of Boston, Main Street Lending Program Frequently Asked Questions, June 8, 2020,
https://www.bostonfed.org/-/media/Documents/special-lending-facilities/mslp/legal/frequently-asked-questions-
faqs.pdf (defining “commercially reasonable efforts” as “good-faith efforts to maintain payroll and retain
employees, in light of its capacities, the economic environment, its available resources, and the business need for
labor.”).
54 Letter from Treasury Secretary Steven Mnuchin and Chair Board of Governors of the Federal Reserve System to
Congressional Oversight Commission, at 10, June 8, 2020 (letter available in Appendix B to this report).
55 Id.

TREASURY AND FEDERAL RESERVE RECENT DEVELOPMENTS

In May and June, the Treasury and the Federal Reserve took a number of actions under Division
A, Title IV, Subtitle A of the CARES Act. The key recent developments are described below.

Primary Market Corporate Credit Facility (PMCCF)

The PMCCF is intended to support credit to businesses by serving as a “funding backstop” for
corporate debt.56 The Federal Reserve, through a special purpose vehicle (SPV), will be the sole
purchaser of newly issued corporate bonds or purchase portions of bonds or syndicated loans, at
issuance, from corporations rated investment grade as of March 22, 2020.57 The Treasury intends
to make a total equity investment of $75 billion in the PMCCF and the SMCCF, which can
support up to $750 billion in purchases through both facilities.58 As of June 10, the Treasury has
invested $37.5 billion in the SPV it uses for the PMCCF and SMCCF. On May 19, Chair Powell
testified before Congress that he expected the PMCCF to be operational by the end of May or the
beginning of June.59 As of June 17, the PMCCF was not yet operational and, therefore, had not
made any purchases.

Secondary Market Corporate Credit Facility (SMCCF)

The SMCCF is intended to support credit to businesses by providing liquidity to the market for
outstanding corporate bonds. The Federal Reserve, through an SPV, purchases individual
corporate bonds issued by corporations rated investment grade as of March 22, 2020 on the
secondary market, as well as U.S.-listed exchange-traded funds (ETFs) that themselves invest in
a broad range of corporate bonds. As mentioned, the Treasury intends to invest a total of $75
billion in the PMCCF and the SMCCF, which can support up to $750 billion in purchases. As of
June 10, the Treasury has invested $37.5 billion in the SPV it uses for the PMCCF and SMCCF.

On May 12, the SMCCF began to make purchases of ETFs.60 The Federal Reserve submitted a
periodic report about the SMCCF to the Senate Banking Committee and the House Financial
Services Committee on May 28 that disclosed information about the facility’s initial ETF
purchases.61 As of May 19, the SMCFF had purchased over 17 million shares in fifteen ETFs.

56 Board of Governors of the Federal Reserve System, Primary Market Corporate Credit Facility Term Sheet, Apr.
9, 2020, https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a5.pdf.
57 Id.
58 Id.
59 Senate Banking, Housing, and Urban Affairs Committee hearing on the Quarterly CARES Act Report to
Congress, 116th Cong. (May 19, 2020) (statement of Jerome Powell, Chair, the Board of Governors of the Federal
Reserve).
60 Federal Reserve Bank of New York, New York Fed Announces Start of Certain Secondary Market Purchases on
May 12, May 11, 2020, https://www.newyorkfed.org/newsevents/news/markets/2020/20200511.
61 Board of Governors of the Federal Reserve System, Periodic Report: Update on Outstanding Lending Facilities
Authorized by the Board under Section 13(3) of the Federal Reserve Act, May 28, 2020,
https://www.federalreserve.gov/files/pmccf-smccf-talf-5-29-20.pdf#page=2.

The total market value of these shares was $1.3 billion as of May 19.62 The SMCCF engaged in
158 trades with ten different sellers to make these purchases.63

The chart below lists the names of the ETFs that the SMCCF has purchased, the number of
shares purchased, and the market value of those shares as of May 19.64

Name of ETF
Shares
Purchased
Market Value as of
5/19/20 (U.S. $)
iShares iBoxx US Dollar Investment Grade Corporate Bond ETF
2,521,892
$326,282,386.96
iShares iBoxx High Yield Corporate Bond ETF
1,255,084
$100,657,736.80
SPDR Bloomberg Barclays High Yield Bond ETF
905,284
$89,532,587.60
iShares Short-Term Corporate Bond ETF
1,639,301
$88,341,930.89
SPDR Portfolio Intermediate Term Corporate Bond ETF
1,942,325
$69,030,230.50
iShares Intermediate-Term Corporate Bond ETF
997,134
$57,973,370.76
SPDR Portfolio Short Term Corporate Bond ETF
1,339,345
$41,613,449.15
VanEck Vectors Fallen Angel High Yield Bond ETF
410,585
$11,106,324.25
Xtrackers US Dollar High Yield Corporate Bond ETF
240,996
$11,006,287.32
iShares 0-5 Year Investment Grade Corporate Bond ETF
198,064
$10,208,218.56
iShares 0-5 Year High Yield Corporate Bond ETF
171,837
$7,175,913.12
iShares Broad US Dollar High Yield Corporate Bond ETF
104,979
$3,884,223.00
iShares Broad US Dollar Investment Grade Corporate Bond ETF
616,593
$35,922,708.18
Vanguard Intermediate-Term Corporate Bond ETF
2,483,885
$228,095,159.55
Vanguard Short-Term Corporate Bond ETF
2,776,786
$226,196,987.56

The Federal Reserve also provides weekly disclosures of the amount of purchases it has made
through the SPV for the SMCCF and PMCCF. Based on the most recent disclosure, we calculate
that SPV has made $5.5 billion in corporate bond ETF purchases through the SMCCF as of June
10.65

On June 15, the Federal Reserve announced that the SMCCF will begin purchasing individual
corporate bonds beginning on June 16.66 The SMCCF will initially purchase individual
“corporate bonds to create a corporate bond portfolio that is based on a broad, diversified index

62 Board of Governors of the Federal Reserve System, SMCCF Transaction Specific Disclosures, May 28, 2020,
https://www.federalreserve.gov/files/smccf-transition-specific-disclosures-5-29-20.xlsx.
63 Id.; These broker-dealers are: Barclays Capital Inc., BMO Capital Markets Corp., BNP Paribas Securities Corp.,
BOFA Securities, INC., Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, Jefferies LLC, Morgan Stanley
& Co. LLC, UBS Securities LLC, and Wells Fargo Securities, LLC.
64 Board of Governors of the Federal Reserve System, CCF – Monthly Report, May 19, 2020,
https://www.federalreserve.gov/publications/files/smccf-transition-specific-disclosures-5-29-20.xlsx.
65 See note 16.
66 Board of Governors of the Federal Reserve System, Federal Reserve Board announces updates to Secondary
Market Corporate Credit Facility (SMCCF), which will begin buying a broad and diversified portfolio of corporate
bonds to support market liquidity and the availability of credit for large employers, June 15, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200615a.htm.

of U.S. corporate bonds.”67 According to the announcement, this index will consist of all the
U.S. corporate bonds in the secondary market that satisfy the SMCCF’s eligibility criteria, such
as minimum credit ratings and maximum maturity. However, an issuer is not required to certify
its compliance with the SMCCF’s eligibility criteria before the SMCCF buys its individual bonds
as part of this indexing approach.68 This is a change from the Federal Reserve’s previous May 26
guidance that stated an issuer would be required to provide such a certification before the
SMCCF purchased its individual bonds.69

The Federal Reserve stated that its “indexing approach will complement the [SMCCF’s] current
purchases of [ETFs].”70 It also stated that, in the future, the SMCCF may purchase individual
corporate bonds using other methodologies.71 Although the Federal Reserve announced in March
and April that the SMCCF would purchase individual corporate bonds, June 15 was the first time
it revealed this indexing approach to buy individual bonds.

Main Street Lending Program

The Main Street Lending Program is intended to facilitate lending by banks to small and
medium-sized businesses. Businesses with up to 15,000 employees or up to $5 billion in 2019
annual revenues are eligible to receive loans under this program. The Main Street Lending
Program currently consists of three facilities: the Main Street New Lending Facility (MSNLF),
the Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility
(MSELF) (collectively, the “Main Street facilities”). However, the Federal Reserve recently
announced that it may expand the Main Street facilities to include two facilities to provide loans
to certain nonprofit organizations. The Treasury has announced it intends to make an equity
investment of $75 billion in the Main Street facilities. Collectively, they can support up to $600
billion in lending.72

On May 19, Chair Powell testified before Congress that he expected the Main Street facilities to
be operational by the end of May or the beginning of June.73 To facilitate putting these facilities

67 Id.
68 Federal Reserve Bank of New York, FAQs: Primary Market Corporate Credit Facility and Secondary Market
Corporate Credit Facility, June 15, 2020, https://www.newyorkfed.org/markets/primary-and-secondary-market-
faq/corporate-credit-facility-faq.
69 Federal Reserve Bank of New York, FAQs: Primary Market Corporate Credit Facility and Secondary Market
Corporate Credit Facility, May 26, 2020, https://www.newyorkfed.org/markets/primary-and-secondary-market-
faq/archive/corporate-credit-facility-faq-200526.
70 Board of Governors of the Federal Reserve System, Federal Reserve Board announces updates to Secondary
Market Corporate Credit Facility (SMCCF), which will begin buying a broad and diversified portfolio of corporate
bonds to support market liquidity and the availability of credit for large employers, June 15, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200615a.htm.
71 Id.
72 Board of Governors of the Federal Reserve System, Main Street New Loan Facility Term Sheet, June 8, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200608a1.pdf.
73 Senate Banking, Housing, and Urban Affairs Committee hearing on the Quarterly CARES Act Report to
Congress, 116th Cong. (May 19, 2020) (statement of Jerome Powell, Chair, the Board of Governors of the Federal
Reserve).

into operation, on May 27, the Federal Reserve Bank of Boston released registration documents
to enable lenders to participate in the facilities and form loan documentation and agreements,
such as a loan participation agreement and borrower and lender certifications and covenants.74

On June 8, the Federal Reserve announced changes to the Main Street facilities “to allow more
small and medium-sized businesses to be able to receive support.”75 These changes included:

• Lowering the minimum loan size from $500,000 to $250,000 for the MSNLF and
MSPLF.

• Raising the maximum loan size for all the facilities.

• Increasing the loan term from four years to five years for all the facilities.

• Extending the deferral of principal payments from one year to two years for all the
facilities.

• Increasing the Federal Reserve’s stake in MSPLF loans from 85% to 95%, so that the
Federal Reserve’s stake in loans in all of the facilities is now 95%.

The Federal Reserve’s announcement on June 8 stated that once lenders “have successfully
registered for the [Main Street Lending Program], lenders are encouraged to begin making Main
Street loans immediately.”76 On June 15, the Federal Reserve Bank of Boston began accepting
lender registration applications and announced that the facilities will begin buying loans soon.77
As of June 17, 2020, the Main Street facilities were not yet operational.

The chart below shows the current key terms and conditions of the Main Street facilities, as
amended by the Federal Reserve’s June 8 announcement.

74 Federal Reserve Bank of Boston, Main Street Lending Program Frequently Asked Questions, June 8, 2020,
available at: https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm; Federal Reserve Bank of
Boston, Federal Reserve Bank of Boston releases additional information for potential lenders and borrowers in the
Main Street Lending Program, May 27, 2020, https://www.bostonfed.org/news-and-events/press-
releases/2020/main-street-lending-program-additional-information-potential-lenders-borrowers.aspx; Federal
Reserve Bank of Boston, Main Street Lending Program Forms and Agreements, available at:
https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-street-lending-
program/information-for-lenders/docs.aspx.
75 Board of Governors of the Federal Reserve System, Federal Reserve Board expands its Main Street Lending
Program to allow more small and medium-sized businesses to be able to receive support, June 8, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200608a.htm.
76 Id.
77 Federal Reserve Bank of Boston, Federal Reserve’s Main Street Lending Program opens for lender registration,
June 15, 2020, https://www.bostonfed.org/news-and-events/press-releases/2020/federal-reserves-main-street-
lending-program-opens-for-lender-registration.aspx.

Main Street
Facilities
MSNLF
MSPLF
MSELF
Type of Loan
New loans to borrowers
New loans to borrowers
with greater leverage
Expanded loans to
existing borrowers
Loan Term
5 years
(Previously 4 years)
Minimum Loan
Size
$250,000
(previously $500,000)
$10 million
Maximum Loan
Size
The lesser of $35 million, or
an amount that, when added
to outstanding and undrawn
available debt, does not
exceed 4 times that
borrower’s adjusted 2019
earnings before interest,
taxes, depreciation, and
amortization (EBITDA)
(previously $25 million)
The lesser of $50
million, or an amount
that, when added to
outstanding or undrawn
available debt, does not
exceed 6 times the
borrower’s adjusted
2019 EBITDA
(previously $25
million)
The lesser of $300
million, or an amount
that, when added to
outstanding or undrawn
available debt, does not
exceed 6 times the
borrower’s adjusted
2019 EBITDA
(previously $200
million)
Loan Proceeds
Can Repay
Existing Debt
No
Yes
No
Lender’s Risk
Retention in
Loan
5%
5%
(previously 15%)
5%
Facilities Risk
Retention in
Loan
95%
95%
(previously 85%)
95%
Principal
Repayment
Schedule
Principal deferred for 2 years.

15%, 15% and 70% principal
repayment due in years 3, 4
and 5, respectively.

(Previously principal
deferred for one year and
33.33% repayment due in
years 2-4)
Principal deferred for 2 years.

15%, 15% and 70% principal repayment due in
years 3, 4 and 5, respectively.

(Previously principal deferred for one year and
15%, 15%, 70% repayment due in years 2, 3, and
4, respectively)
Deferral of
Interest
Payments
Interest payments deferred for one year
Loan Rate
London Interbank Offered Rate (LIBOR) + 3%

On June 15, the Federal Reserve announced it is seeking public feedback on a proposal to
expand the Main Street Lending Program by establishing two facilities that are intended to

facilitate lending by banks to certain small and medium-sized nonprofit organizations.78 As
currently proposed, nonprofit organizations with at least 50 employees and up to 15,000
employees or up to $5 billion in 2019 revenues would be eligible to receive loans under these
facilities.

Through the Nonprofit Organization New Loan Facility (NONLF), the Federal Reserve, through
an SPV, would purchase a 95% stake in a loan originated after June 15, 2020 if: the loan has a 5-
year maturity; payment of principal is deferred for two years; payment of interest is deferred for
one year; the loan size is between $250,000 and the lesser of $35 million or the borrower's
average 2019 quarterly revenue; and the interest rate is 300 basis points above the London
Interbank Offered Rate (LIBOR).

Through the Nonprofit Organization Expanded Loan Facility (NOELF), the Federal Reserve,
through an SPV, would purchase a 95% stake in a loan originated on or before June 15, 2020
with the same terms as through the NONLF, except that the maximum loan size is the lesser of
$300 million or the borrower's average 2019 quarterly revenue.

The proposed term sheets for the NONLF and NOELF impose certain requirements on a
borrower. These include that a borrower should make “reasonable efforts to maintain its payroll
and retain its employees” while the Main Street loan is outstanding; that it will not use the
proceeds of the loan to repay or refinance certain existing debts; and that it will follow executive
compensation, stock repurchase, and capital distribution restrictions required under the CARES
Act during the loan term and one year thereafter.

At this time, only a nonprofit organization that is a tax-exempt organization under section
501(c)(3) or 501(c)(19) of the Internal Revenue Code would be eligible for NONLF and
NOELF.79 However, at the discretion of the Federal Reserve, “other forms of organization may
be considered for inclusion as a Nonprofit Organization” under the facilities.80

The Federal Reserve announced that it is seeking public feedback on the proposed facilities until
June 22 “to help make the proposed program as efficient and effective as possible” because “the
circumstances, structure, and needs of nonprofit organizations vary widely.”81 This feedback will
be made available to the public, and comments should not include confidential information.

The chart below shows the key terms and conditions of the proposed NONLF and NOELF.

78 Board of Governors of the Federal Reserve System, Federal Reserve Board announces it will be seeking public
feedback on proposal to expand its Main Street Lending Program to provide access to credit for nonprofit
organizations, June 15, 2020, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200615b.htm.
79 Board of Governors of the Federal Reserve System, Nonprofit Organization Expanded Loan Facility Draft Term
Sheet, June 15, 2020, https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200615b1.pdf.
80 Id.
81 Board of Governors of the Federal Reserve System, Federal Reserve Board announces it will be seeking public
feedback on proposal to expand its Main Street Lending Program to provide access to credit for nonprofit
organizations, June 15, 2020, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200615b.htm.

Proposed Main Street Lending
Program Nonprofit Loan
Options
NONLF
NOELF
Type of Loan
New loans to borrowers
Expanded loans to existing
borrowers
Term
5 years
Minimum Loan Size
$250,000
$10 million
Endowment Cap
$3 billion
Years in Operation
At least 5 years
Employee Min/Max
Minimum of 50 employees and maximum of 50,000 employees
Revenue Cap and Source
Requirement
2019 revenues less than $5 billion, with less than 30% sourced from
donations
Maximum Loan Size
The lesser of $35 million, or the
borrower's average 2019
quarterly revenue
The lesser of $300 million, or
the borrower's average 2019
quarterly revenue
Lender’s Risk Retention in
Loan
5%
5%
Facilities Risk Retention in
Loan
95%
95%
Principal Repayment Schedule
Principal deferred for 2 years.

15%, 15% and 70% principal repayment due in years 3, 4 and 5,
respectively.
Deferral of Interest Payments
Interest payments deferred for one year
Loan Rate
London Interbank Offered Rate (LIBOR) + 3%

Municipal Liquidity Facility (MLF)

The MLF is intended to help state and local governments manage cash flow problems relating to
the COVID-19 crisis. The Federal Reserve, through an SPV, will purchase notes from U.S.
states, including the District of Columbia, U.S. counties with a population of at least 500,000
residents, U.S. cities with a population of at least 250,000, and certain multistate entities. States
may use the proceeds for the sales of these notes to support counties and cities. The Treasury has
announced it intends to make an equity investment of $35 billion in this facility. The MLF can
provide up to $500 billion in lending.82

82 Board of Governors of the Federal Reserve, Municipal Liquidity Facility Term Sheet, June 3, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200603a1.pdf; Federal Reserve Bank of
New York, FAQs: Municipal Liquidity Facility Term Sheet, June 3, 2020,
https://www.newyorkfed.org/markets/municipal-liquidity-facility/municipal-liquidity-facility-faq.

On May 19, Chair Powell testified before Congress that he expected the MLF to be operational
by the end of May or the beginning of June.83 The MLF became operational on May 26.84

On June 2, Illinois announced that it intended to borrow $1.2 billion from the MLF through the
sale of one-year notes on June 5, making it the facility’s inaugural participant.85 Illinois will pay
an interest rate of 3.82% on these notes. That is more than a full percentage point less than the
4.875% interest rate it paid on comparable short-term notes during a bond market sale in mid-
May.86

On June 3, the Federal Reserve announced changes to the MLF to expand the “number and types
of entities eligible to directly use the [MLF].87 These changes included:

• Allowing all U.S. states to have at least two cities or counties directly issue notes to the
MLF regardless of population.

• Authorizing governors of each state to designate two issuers in their states whose
revenues “are generally derived from operating government activities (such as public
transit, airports, toll facilities, and utilities) to be eligible to directly use the facility.”88

As of June 10, Illinois is the only state or local government to borrow from the MLF.89

Term Asset-Backed Securities Loan Facility (TALF)

The TALF is intended to facilitate the provision of credit to consumers and businesses by
enabling the issuance of asset-backed securities (ABS) “backed by private student loans, auto
loans and leases, consumer and corporate credit card receivables, certain loans guaranteed by the
Small Business Administration (SBA), and certain other assets.”90 The Federal Reserve, through

83 Senate Banking, Housing, and Urban Affairs Committee hearing on the Quarterly CARES Act Report to
Congress, 116th Cong. (May 19, 2020) (statement of Jerome Powell, Chair, the Board of Governors of the Federal
Reserve).
84 Federal Reserve Bank of New York, FAQs: Municipal Liquidity Facility, June 3, 2020,
https://www.newyorkfed.org/markets/municipal-liquidity-facility/municipal-liquidity-facility-faq.
85 Shruti Singh & Amanda Albright, Illinois Becomes First to Tap Fed Loans After Yields Surge, Bloomberg, June 2,
2020, https://www.bloomberg.com/news/articles/2020-06-02/illinois-becomes-first-to-tap-fed-loans-after-bond-
yields-surge.
86Id.; State of Illinois, General Obligation of Bonds, Series of May 2020, May 2020,
https://www2.illinois.gov/sites/capitalmarkets/Documents/Official%20Statements/2020/State%20of%20Illinois-
General%20Obligation%20Bonds%20Series%20of%20May%202020-Official%20Statement.pdf.
87 Board of Governors of the Federal Reserve System, Federal Reserve Board announces an expansion in the
number and type of entities eligible to directly use its Municipal Liquidity Facility, June 3, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200603a.htm.
88 Id.
89 See note 17.
90 Board of Governors of the Federal Reserve System, Periodic Report Update on Outstanding Lending Facilities
Authorized by the Board under Section 13(3) of the Federal Reserve Act, May 28, 2020,
https://www.federalreserve.gov/files/pmccf-smccf-talf-5-29-20.pdf#page=3.

an SPV, will “make loans to U.S. companies secured by certain AAA-rated [ABS] backed by
recently originated consumer and business loans.”91 The Treasury has announced it intends to
make an equity investment of $10 billion in this facility. The TALF can provide up to $100
billion in lending.92

On fixed days each month, known as subscription dates, borrowers will be able to request one or
more three-year TALF loans. On May 20, the Federal Reserve Bank of New York announced
that the first subscription date for TALF loans will be June 17 and the first loan closing date will
be June 25.93 As of June 17, the TALF was not yet operational.

Treasury Loans for the Airline Industry and National Security Businesses

The Treasury has not disbursed any of the $46 billion it can use to provide loans and loan
guarantees to the airline industry and businesses critical to maintaining national security. While
the Treasury has received applications for these loans and is in the process of reviewing them, it
has not made any loans.

The Treasury has defined a “business critical to maintaining national security” as a business that
is at the time of its application performing under a defense contract of the highest national
priority or operating under a top secret facility security clearance.94

The Treasury has also stated that a business that does not satisfy either of these two criteria may
be considered for loans if the Treasury Secretary determines that the business is critical to
maintaining national security, based on a recommendation and certification by the Secretary of
Defense or the Director of National Intelligence that it is.95

91 Id.
92 Board of Governors of the Federal Reserve System, Term Asset-Backed Securities Loan Facility, May 12, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200512a1.pdf.
93 Federal Reserve Bank of New York, New York Fed Announces the First Subscription Date of June 17 for the
Term Asset-Backed Securities Loan Facility and Releases Additional Information, May 20, 2020,
https://www.newyorkfed.org/newsevents/news/markets/2020/20200520.
94 U.S. Department of the Treasury, Q&A: Loans to Air Carriers and Eligible Businesses and National Security
Businesses, Apr. 10, 2020, https://home.treasury.gov/system/files/136/CARES-Airline-Loan-Support-Q-and-A-
national-security.pdf; Defense Contract Management Agency, Defense Priorities & Allocations System (DPAS),
May 7, 2019, https://www.dcma.mil/DPAS/ (“A DX rating is assigned to those programs of the highest national
priority”).
95 U.S. Department of the Treasury, Q&A: Loans to Air Carriers and Eligible Businesses and National Security
Businesses, Apr. 10, 2020, https://home.treasury.gov/system/files/136/CARES-Airline-Loan-Support-Q-and-A-
national-security.pdf.

On April 30, Undersecretary of Defense Ellen Lord stated that “a little less than 20 companies”
had applied for the loans for businesses critical to maintaining national security as of that date,
which was a day before the May 1 loan application deadline.96

On June 11, Treasury Secretary Steven Mnuchin told reporters the Treasury may modify the
definition of a business considered critical to maintaining national security in order to widen
access to loans.97 He also stated the Treasury is “first processing the existing requests” for these
loans and that a “large number of applications” were being reviewed, but he did not give a
specific number or identify any specific businesses that had applied.98

Secretary Mnuchin noted that the Treasury anticipated Boeing Co. and General Electric Co.
might apply for these loans, but neither business decided to apply for the loans.99 On April 30,
Boeing was able to raise $25 billion through a bond sale in the debt market.100 Secretary
Mnuchin went on to state that “[i]f for whatever reason we don’t have enough demand, we may
go back to Congress and reauthorize that for other areas.”101

During the same June 11 press conference, Secretary Mnuchin also discussed the Subtitle A loan
program for the airline industry. He said that some airlines have chosen to utilize the grant
program in Division A, Title IV, Subtitle B of the CARES Act rather than the loans available
through Subtitle A.102 He stated the Treasury has told the airline industry they can access the
loan program under Subtitle A “between now and the end of September.”103 He also stated that

96 Undersecretary of Defense for Acquisition and Sustainment Ellen M. Lord, Undersecretary of Defense (A&S)
Ellen Lord Holds a Press Briefing on COVID-19 Response Efforts, U.S. Department of Defense, Apr. 30, 2020,
https://www.defense.gov/Newsroom/Transcripts/Transcript/Article/2172171/undersecretary-of-defense-as-ellen-
lord-holds-a-press-briefing-on-covid-19-resp/; Saleha Mohsin, Mnuchin May Ease Rules for $17 Billion Security
Funds, Bloomberg, June 11, 2020, https://www.bloomberg.com/news/articles/2020-06-11/mnuchin-says-he-may-
ease-rules-for-17-billion-security-stimulus.
97 Saleha Mohsin, Mnuchin May Ease Rules for $17 Billion Security Funds, Bloomberg, June 11, 2020,
https://www.bloomberg.com/news/articles/2020-06-11/mnuchin-says-he-may-ease-rules-for-17-billion-security-
stimulus; David Lawder & David Shepardson, U.S. Treasury’s Mnuchin considering changes to aid for national
security firms, Reuters, June 11, 2020, https://www.reuters.com/article/health-coronavirus-defense/update-1-u-s-
treasurys-mnuchin-considering-changes-to-aid-for-national-security-firms-idUSL1N2DO1SP.
98 David Lawder & David Shepardson, U.S. Treasury’s Mnuchin considering changes to aid for national security
firms, Reuters, June 11, 2020, https://www.reuters.com/article/health-coronavirus-defense/update-1-u-s-treasurys-
mnuchin-considering-changes-to-aid-for-national-security-firms-idUSL1N2DO1SP.
99 Saleha Mohsin, Mnuchin May Ease Rules for $17 Billion Security Funds, Bloomberg, June 11, 2020,
https://www.bloomberg.com/news/articles/2020-06-11/mnuchin-says-he-may-ease-rules-for-17-billion-security-
stimulus; David Lawder & David Shepardson, Update 1-U.S. Treasury’s Mnuchin Considering changes to aid for
national security firms, Reuters, June 11, 2020, https://www.reuters.com/article/health-coronavirus-defense/update-
1-u-s-treasurys-mnuchin-considering-changes-to-aid-for-national-security-firms-idUSL1N2DO1SP.
100 Joshua Franklin & David Shepardson, Boeing raises $25 billion in blowout debt sale, eschews government aid,
Apr. 30, 2020, https://www.reuters.com/article/us-boeing-debt/boeing-raises-25-billion-in-blowout-debt-sale-
eschews-government-aid-idUSKBN22C3SJ.
101 David Lawder & David Shepardson, U.S. Treasury’s Mnuchin considering changes to aid for national security
firms, Reuters, June 11, 2020, https://www.reuters.com/article/health-coronavirus-defense/update-1-u-s-treasurys-
mnuchin-considering-changes-to-aid-for-national-security-firms-idUSL1N2DO1SP.
102 Id.
103 Id.

there “are detailed negotiations going on” with airline industry applicants concerning these
loans.104

On June 12, American Airlines announced that it has applied for, and expects to obtain from the
Treasury in June, an approximately $4.75 billion loan through Subtitle A’s airline industry loan
program.105 The company noted, however, that it has not yet finalized the loan with the Treasury.
American Airlines expects the loan to be “a five-year, senior secured obligation at a variable
interest rate of LIBOR plus 3.50% and prepayable at any time without premium.”106 The
company’s current intention is to pledge its domestic loyalty program assets as security for this
loan.107 According to American Airlines, the “most recent third-party appraisal has estimated the
value of [its loyalty program] to be between $19.5 billion and $31.5 billion.”108

In connection with this loan, American Airlines would issue to the Treasury warrants to purchase
approximately 38 million shares of the company’s common stock at an exercise price of $12.51
per share. On June 17, the company’s closing share price was $16.98. The warrants issued in
connection with American Airlines’ Subtitle A loan would be issued in addition to, and have the
same terms, conditions, and exercise price as, the approximately 13.7 million warrants it expects
to issue to the Treasury in connection with the $5.8 billion in funding it is receiving from the
Treasury under the Payroll Support Program created by Division A, Title IV, Subtitle B of the
CARES Act.109

In addition to American Airlines, multiple other airlines have publicly disclosed they intended to,
or did apply for, the Treasury’s Subtitle A loan program, including, among others, United
Airlines, Southwest Airlines, and Jet Blue Airways.110

104 Id.
105 American Airlines Group Inc., Current Report (Form 8-K), June 12, 2020, https://americanairlines.gcs-
web.com/static-files/10598693-10e7-455b-9310-0072dd86c913.
106 Id.
107 Id.
108 Id.
109 American Airlines Group Inc., Current Report (Form 8-K), Apr. 14, 2020, https://americanairlines.gcs-
web.com/static-files/18c94436-54b1-4593-aa1a-984734904a5f.
110 United Airlines Holdings, Inc., Current Report (Form 8-K), Apr. 20, 2020, https://ir.united.com/static-
files/440c2464-a618-4c55-afa0-4eaff0210d3e; Southwest Airlines Co.; Quarterly Report (Form 10-Q), April 28,
2020, http://otp.investis.com/clients/us/southwest/SEC/sec-
show.aspx?FilingId=14098646&Cik=0000092380&Type=PDF&hasPdf=1; Jetblue Airways Corp., Quarterly
Report (Form 10-Q), May 8, 2020, http://otp.investis.com/clients/us/jetblue_airways/SEC/sec-
show.aspx?FilingId=14134706&Cik=0001158463&Type=PDF&hasPdf=1.

DISCUSSION OF TREASURY AND FEDERAL RESERVE’S ANSWERS TO THE
COMMISSION’S QUESTIONS

This section of the report lists the tier 1 questions the Commission asked the Treasury and the
Federal Reserve (the “agencies”) to answer by June 8, followed by the agencies’ answers and the
Commission’s discussion of those answers.

I. General Questions

1. How will Treasury and the Fed (“the agencies”) assess the success or failure
of this program?

The Board of Governors of the Federal Reserve System (the “Board”; together with the Federal
Reserve Banks, the “Federal Reserve”) with the support and approval of the Department of the
Treasury (“Treasury”; together with the Federal Reserve, the “agencies”) has established a set
of lending facilities pursuant to the Coronavirus Aid, Relief, and Economic Security Act
(“CARES Act”) and under section 13(3) of the Federal Reserve Act (the “13(3) facilities”).
The agencies created the 13(3) facilities in response to the unprecedented financial and
economic strains imposed by the COVID-19 pandemic and by the public health measures
employed in response. The agencies monitor a broad range of economic and financial
indicators to judge economic activity, credit flows, and market functioning as a whole. The
Federal Reserve designed the facilities to work together to protect financial stability and
support achievement of its dual mandate of full employment and price stability.

Broadly speaking, the 13(3) facilities established with the support and approval of Treasury
using funds made available by the CARES Act—the corporate credit facilities (the Primary
Market Corporate Credit Facility (“PMCCF”) and Secondary Market Corporate Credit Facility
(“SMCCF”)), the Main Street Lending Program (the Main Street New Loan Facility
(“MSNLF”); the Main Street Priority Loan Facility (“MSPLF”); and the Main Street
Expanded Loan Facility (“MSELF”)); the Term Asset-Backed Securities Loan Facility
(“TALF”); and the Municipal Liquidity Facility (“MLF”)—have as their immediate goal the
promotion of the flow of credit to businesses, households and state and local governments. The
effectiveness of all these facilities is generally best measured by the degree to which the
targeted market or area of the economy recovers by having the program present.

As noted, the agencies monitor a variety of indicators to assess the performance of the 13(3)
facilities. With respect to short-term funding markets, among other indicators, we monitor
issuance, maturity, outstandings and spreads for a range of money market instruments,
including repurchase agreements, commercial paper, certificates of deposit, and variable-rate
demand notes. We also measure pressures on key institutions and intermediaries in these
markets, which include, but are not limited to, money market funds, commercial banks and
dealers. Finally, we monitor the volume and key features of assets pledged to, or purchased by,
these facilities as well as the counterparties to these transactions.

When judging the flow of credit to households, businesses, and state and local governments, we
use similar metrics. Among these, we monitor the issuance, maturity, outstandings, and spreads
for a wide range of debt instruments, including auto, credit card, and other consumer loans;
loans to small businesses; syndicated loans; corporate bonds; municipal notes and bonds; and
asset-backed securities. We also monitor measures of market functioning, such as bid-ask
spreads, trading costs, order book depth, trading volumes, and price volatility. Moreover, the
agencies monitor the health of key institutions and intermediaries in these credit markets, which
include, but are not limited to, open-end mutual funds, commercial banks, and dealers. Finally,
as these facilities come to operational readiness, we monitor the volume and key characteristics
of loans made (or assets purchased) by these facilities, as well as the set of businesses and
governmental entities (e.g., states and municipalities) using the facilities.

Commission Discussion:

The agencies have provided a helpful response on how they will measure the success of these
emergency programs. Notably, the agencies state that the Federal Reserve designed the
programs in a way that “protect[s] financial stability and support[s] achievement of [the
Federal Reserve’s] dual mandate of full employment and price stability.” The agencies state
that the “effectiveness of all these facilities” should not be measured by their effect on
employment and price stability, but instead is “generally best measured by the degree to
which the targeted market or area of the economy recovers by having the program present.”
We recommend that the agencies further clarify how they will evaluate the success of the
emergency lending programs and facilities under Division A, Title IV, Subtitle A of the
CARES Act (“Subtitle A”).111

First, the agencies should consider expanding their evaluation framework to help guide decision-
making and identify when to adjust course. To help in this regard, the agencies could clarify the
following statement in their response:

• The agencies state that the “effectiveness of all these facilities is generally best measured
by the degree to which the targeted market or area of the economy recovers by having the
program present.” First, the agencies should define what they mean by “recovers.” Does
it mean revert to its condition before the COVID-19 crisis or something else? What
metrics will they evaluate to assess “recovery”? Second, the agencies should clarify how
they plan to determine if an economic recovery is due to these programs. For example,
are the agencies identifying a baseline economic recovery without the programs and
comparing it to an economic recovery with the programs? If so, additional insight on the
methodology behind such measurement would be valuable to the Commission. Third, we
are interested to know the extent to which the timing and scope of economic recovery
would be attributable to these programs. Fourth, the agencies should clarify both how the

111 The Commission recognizes the agencies forthcoming answers to its tier 2 questions may address these matters.

presence of the emergency programs will impact economic recovery, even absent a high
rate of participation in the programs.

Second, the agencies should consider distinguishing between leading indicators and long-term
goals, which are achieved only through intermediary steps and do not provide timely feedback.
For example, certain pieces of data may serve as leading indicators that speak to the health of the
internal operations of a program. A lack of demand for a program could indicate a problem with
program design or it could indicate that recovery is underway and the program is less necessary.
Such information would be useful for the Commission and the public in understanding the
effectiveness of the various programs and facilities.

In implementing the 13(3) facilities using the authority provided by the CARES Act, and
under the Federal Reserve Act, the agencies are committed to addressing the severe economic
dislocations that have occurred as a result of the impact of COVID-19. We have designed the
13(3) facilities to provide liquidity to solvent borrowers—businesses and states and
municipalities—to better enable these organizations to either rehire their workers when the
economy reopens or keep them on board. Consistent with the CARES Act, these facilities also
are designed and implemented in compliance with section 13(3) of the Federal Reserve Act,
which provides that the Federal Reserve is restricted to making loans that are secured to the
satisfaction of the lending Reserve Bank and that carry sufficient credit protections to protect
taxpayers from losses. Equity investments provided by Treasury, including equity investments
made by Treasury using funds appropriated by Congress under the CARES Act, are designed
to cover losses on loans made by the facility, including in downside economic scenarios—and
thus inherently may take loss. Treasury accepts the possibility that losses may occur with
respect to the funds it has committed, and believes that the terms and conditions of the 13(3)
programs to which it has committed funds appropriately balance the interests of taxpayer
protection and program efficacy.

We have focused to date on the most pressing needs for liquidity support in the U.S. economy.
We are willing to adapt and extend these programs—or adopt additional programs—if
appropriate to address the economy’s evolving needs or our evolving understanding of its
needs. The Federal Reserve expects that its loans made to fund the 13(3) facilities will be fully
repaid under a very broad range of economic outcomes. The performance of Treasury equity
investment in the 13(3) facilities will depend on program features and future economic
conditions.

Commission Discussion:

The Commission appreciates that the agencies are “willing to adapt and extend” the emergency
lending facilities, or create new ones, “if appropriate to address the economy’s evolving needs.”
We also appreciate the agencies’ clear commitment to comply with the restrictions on emergency
lending in Section 13(3) of the Federal Reserve Act. However, we encourage the agencies to
provide additional information on three matters.

First, we recommend that the agencies further clarify how they are determining whether to adapt
facilities or create new ones to “address the economy’s evolving needs.” We are interested to
know whether and how the agencies are working to identify if there are business sectors with
creditworthy companies in need of lending that are not eligible for any of the emergency lending
programs and facilities. We are also interested to know whether and how the agencies are
working to identify if there are state and local governments in need of lending that may not be
able to take advantage of the MLF. If there are business sectors or municipal governments that
fall into such a gap, the Commission is interested to know whether and how the agencies will
consider modifying the design of existing facilities, or creating new facilities, to address this gap,
such as by modifying the amount of the Treasury’s equity investment in a facility or by revising
the terms of the facility.

Second, the Commission recommends that the agencies further clarify how they are deciding to
invest economic stabilization funds provided under Subtitle A in the Federal Reserve’s various
lending facilities. Of particular importance is clarifying how much of the funds they are willing
to allocate and lose, under what conditions, and whether and how they will decide to allocate the
Treasury’s remaining funds provided by Subtitle A.

• To that end, the agencies should elaborate on the meaning of the statutory restrictions on
emergency lending under Section 13(3) of the Federal Reserve Act. The agencies state
that 13(3) emergency loans must be “secured to the satisfaction of the lending Reserve
Bank.” The agencies should elaborate on the characteristics of a satisfactorily secured
loan. For example, are all loans made from a facility in which the Treasury has made an
investment sufficiently secured? If not, what types of features should be present in a loan
beyond the requirement that the Treasury’s investment in a facility cover all losses?

The agencies stated that 13(3) loans must “carry sufficient credit protections to protect
taxpayers from losses.” However, the agencies should clarify what credit protections
could be sufficient. As with the previous restriction, they should also clarify how the
Treasury’s investments in the Federal Reserve’s lending facilities interact with this
requirement.

Third, the Commission recommends that the agencies provide additional information about how
they assess the risk of loss in the emergency lending facilities.

• The agencies should provide further details on the economic scenarios that they use to
assess risk. For example, do these include economic scenarios for both a COVID-19
second wave and a faster-paced economic reopening? If the agencies have conducted
projections of different economic scenarios to arrive at their decisions about the
appropriate level of Treasury investment, the Commission requests that the agencies
provide information about those projections.

II. Program and Facility-Specific Questions

A. Primary Market Corporate Credit Facility (PMCCF)

1. How did the agencies determine the eligible assets for purchase by this facility?

Under the PMCCF term sheet, there are two groups of eligible assets. First, the PMCCF may
purchase eligible corporate bonds as the sole investor in a bond issuance. Second, the PMCCF
may purchase portions of syndicated loans or bond issuances of eligible issuers at issuance; the
PMCCF may purchase no more than 25 percent of any such loan syndication or bond issuance.

The agencies established the PMCCF to ensure that creditworthy companies that rely on
capital markets to fund their operations have access to credit during the current unusual and
exigent circumstances in which financial markets are experiencing extraordinary disruptions,
volatility, and illiquidity. Corporate bonds support the operations of companies with more than
17 million employees based in the United States, and these bonds are key investment assets
for retirees and pension funds. If companies are unable to issue corporate bonds, they may be
unable to invest in inventory and equipment, meet current liabilities, or pay employees. The
PMCCF seeks to ensure that creditworthy companies with maturing capital markets
instruments (namely, syndicated loans and corporate bonds) retain the ability to refinance debt
as well as access additional credit to ensure liquidity through this unprecedented period of
COVID-19- related disruption.

Since the PMCCF’s goal is to provide general support to creditworthy companies, and not to
select among different industries and companies, the PMCCF utilizes a broad, transparent and
simple ratings-based eligibility standard. In addition, since depository institutions and
depository institution holding companies have access to other sources of support, their debt
instruments are excluded from eligibility, as are companies that received specific lending
support from Treasury under the CARES Act. Finally, because the equity provided to the
PMCCF by the Treasury includes funds appropriated under the CARES Act, companies that
participate in the PMCCF must comply with the U.S. business, conflict company, and other
applicable CARES Act requirements.

Commission Discussion:

The agencies have provided a helpful response as to how they determined the eligible assets for
purchase by the PMCCF. The Federal Reserve’s March 23 announcement of the PMCCF,
SMCCF, and several other lending facilities helped to stabilize the corporate bond market.112
Even though the PMCCF is still not operational, since the late March announcement of these
facilities, U.S. corporate bond issuance has been robust, which has enabled some businesses,
particularly investment grade ones, to access credit to fund their operations. In both April and
May, more than $300 billion of new U.S. corporate bonds were issued by investment grade and
non-investment grade issuers, far outpacing the $105 billion and $130 billion in issuances in
April and May 2019, respectively. Given these developments, we recommend the agencies
continue to monitor conditions in the corporate bond market to evaluate the extent to which
they will need to utilize the PMCCF. We are also interested to know why the agencies decided
the PMCCF would purchase no more than 25% percent of a loan syndication or bond issuance
when it purchases a portion of a syndicated loan or bond issuance.

2. Why did the agencies require an issuer to be rated investment grade by the credit
rating agencies as of March 22, 2020, to be an eligible issuer for this facility? What
would be the implications of broadening eligibility to this facility to issuers rated non-
investment grade?

The PMCCF seeks to support creditworthy companies that rely on capital markets to fund their
operations during unusual and exigent circumstances. Section 13(3) of the Federal Reserve Act
and the Board’s Regulation A require that a lending Reserve Bank secure itself to its satisfaction
and ensure protection of the taxpayer. A historical investment-grade rating reflects positively on
the creditworthiness of a firm prior to the unprecedented period of COVID-19-related disruption.
Issuers that are rated investment grade have historically realized default rates that are
significantly lower than issuers rated non-investment grade. Therefore, acquiring capital markets
instruments of investment-grade issuers provides greater security than acquiring capital markets
instruments of non-investment-grade issuers.

If the eligibility criteria of the PMCCF were broadened to include issuers that were not rated
investment grade as of March 22, 2020, the number of companies eligible to obtain credit from
the PMCCF would increase. Such an expansion, however, would increase the credit risk to the
PMCCF at a rate greater than the proportionate increase in potential borrowers, due to the
higher leverage and default risk of high-yield borrowers.

112 Molly Smith, U.S. Corporate Bond Sales Smash Record, Soaring Over $1 Trillion, Bloomberg, May 28, 2020,
https://www.bloomberg.com/news/articles/2020-05-28/fed-fueled-borrowing-binge-hits-1-trillion-mark-at-record-
rate; Patti Domm, The Fed thawed debt market and big companies built a $500 billion war chest to fight the virus,
CNBC, May 11, 2020, https://www.cnbc.com/2020/05/11/the-fed-thawed-debt-market-and-big-companies-built-a-
500-billion-war-chest-to-fight-the-virus.html.

Commission Discussion:

The agencies have provided a helpful response as to how they determined the credit rating
eligibility criteria for issuers for the PMCCF. As discussed above, since the Federal Reserve
announced the PMCCF, SMCCF, and other lending facilities on March 23, U.S. corporate bond
issuance has been robust. In April and May, almost 90% of the U.S. corporate bond issuances
were from investment grade companies, while the rest were from non-investment grade
companies. Because some investment grade issuers have been able to access credit through the
corporate bond market, the number of potential investment grade borrowers from the PMCCF
has likely declined.

Given this, the agencies should elaborate on the extent to which the Federal Reserve’s legal
requirements on adequate security and taxpayer protection prohibit the agencies from broadening
the PMCCF’s credit rating eligibility criteria to support more non-investment grade companies.
As part of that explanation, the agencies should discuss both the CARES Act authorization for
the Treasury to make loans, loan guarantees, and other investments meant to provide liquidity to
businesses experiencing losses incurred as a result of the COVID-19 crisis, and the implications
for future market behavior that could come from assisting non-investment grade issuers. Within
this context, the agencies should further clarify whether a larger Treasury equity investment in
the PMCCF would enable the Federal Reserve to broaden access to the facility to additional non-
investment grade companies while still adhering to its aforementioned legal requirements. The
Commission expects that the agencies will receive requests to expand the PMCCF, and
answering these questions will help the agencies respond fairly to those requests.

3.
Why did the agencies choose March 22, 2020, as the cutoff date for an issuer to be
rated investment grade to be an eligible issuer for this facility? How will this date selection
impact the ability of issuers that have been downgraded from investment grade to non-
investment grade to access capital through this facility?

The two corporate credit facilities were initially authorized by the Board and approved by
the Secretary of the Treasury on March 22, 2020. That cut-off date was chosen for the
ratings criteria in order to extend the reach of the facilities to include all companies eligible
at the announcement date, regardless of how long it would take to operationalize the
facilities.

Issuers that were investment grade prior to March 22, 2020, but were subsequently
downgraded, may still be eligible to access the PMCCF. They must be rated at least BB-/Ba3
as of the date on which the PMCCF makes a purchase. If rated by multiple major NRSROs,
such issuers must be rated at least BB-/Ba3 by two or more NRSROs at the time the PMCCF
makes a purchase.

Commission Discussion:

We appreciate the agencies’ response as to how they determined the March 22 cutoff date and
why they allowed some issuers downgraded to non-investment grade after March 22 the
opportunity to access the PMCCF. As the agencies noted, an issuer that was rated investment
grade as of March 22 but is subsequently downgraded to non-investment grade may still be
eligible for the PMCCF if it is rated at least BB-/Ba3.

The Commission would like to know if the agencies have considered the costs and benefits of
broadening the PMCCF to non-investment grade issuers prior to March 22 or changing the
eligibility thresholds for downgraded issuers. As the agencies noted in their answer to question
II.B.2 below, discontinuities between investment grade and non-investment grade markets “can
lead to extreme outcomes where companies downgraded a single notch—from low investment-
grade to the upper end of high-yield—find themselves facing sharply higher funding costs and
thus are under increased pressure to cut costs, including by reducing their workforces.” We want
to ensure the relative risks borne by the agencies and the risks of changing the credit rating
eligibility standards are balanced against the CARES Act goal of economic stabilization.

4. Why did the agencies limit eligible issuers to those rated by a major nationally
recognized statistical rating organization (NRSRO) as opposed to issuers rated by other
credit rating organizations?

The PMCCF uses ratings to evaluate the credit quality of companies in order to determine
whether they may access the facility. To enable a quick launch, the PMCCF originally relied on
the three NRSROs that the largest number of investors rely on. After conducting additional
analysis, the facility recently added another three rating agencies to the list of eligible
NRSROs. In assessing which rating agencies to deem eligible, the agencies analyzed a wide
range of factors, including the extent to which an individual rating agency is relied upon by
private-sector investors with respect to the relevant asset classes.

Commission Discussion:

The agencies have provided a helpful response as to how they determined the initial list of
eligible NRSROs and the subsequent additions to that list. We are interested in whether the
agencies have identified any business sectors with creditworthy companies that are ineligible for
the PMCCF because they have ratings from credit rating organizations not on this list and
whether it would be appropriate to further modify the list to address this issue.

B. Secondary Market Corporate Credit Facility (SMCCF)

1. Is there a concern that changes in secondary market bond prices will reduce the flow of
credit to households and businesses or create risk to the financial system? If so, how and what
is the strategy for using this facility to address that concern?

Since the onset of the COVID-19 pandemic, the corporate bond market has experienced
significant dislocations. By facilitating market functioning, the SMCCF is intended to reduce
the risk that secondary market prices for corporate bonds become subject to fire sales or price
dislocations. These price dislocations are important because they affect the primary markets for
American companies to access capital. Potential buyers may purchase bonds sold at distressed
prices in the secondary market rather than buying newly issued bonds directly from companies,
reducing the availability of new credit to fund companies. By providing support to the
secondary market, the SMCCF reduces the cost of credit and increases the availability of credit
to borrowers who might otherwise not be able to access the market with new corporate bond
issuances at reasonable rates. In addition, there is a direct relationship between the secondary
market and the primary market, as most new corporate bond prices are set based on secondary
market spreads.

Commission Discussion:

We acknowledge the agencies’ response about the important link between a functioning
secondary market for corporate bonds and the ability of companies to access credit through the
primary market for bonds. However, if the goal of the SMCCF is to ensure that creditworthy
companies can access capital on the primary market at reasonable rates, it is unclear why the
PMCCF alone does not serve that function. The agencies should elaborate as to why they need a
SMCCF in addition to the PMCCF, and the rationale for the SMCCF’s indexing approach to
individual corporate bond purchases (when bond ETFs already exist), as announced on June 15.
This explanation is particularly important given that the SMCCF has reduced spreads and, as
discussed in the Commission’s analysis of question II.A.1, the corporate bond market is
functioning smoothly.

With liquidity restored and robust issuance of new corporate debt in April and May at low yields,
the agencies should explain why they believe there is a continued need for SMCCF purchases.
As the agencies operate the SMCCF, we recommend that they consider how to best distinguish
between a functioning market and a non-functioning market. Their views on this matter will help
determine how much and how long they will need to use the SMCCF to facilitate market
functioning. The agencies should bear in mind that the Federal Reserve’s emergency lending
powers are statutorily limited to “unusual and exigent circumstances.”113 The COVID-19 crisis
clearly created such circumstances. However, it is important that the Federal Reserve’s use of
these emergency powers not extend for a longer period of time than is necessary.

113 12 U.S.C. § 343(3) (Section 13(3) of the Federal Reserve Act).

2. On May 4, the Federal Reserve Bank of New York announced that it plans to use this
facility to purchase exchange-traded funds (ETFs) that may own bonds rated below investment
grade. How did the Fed reach this decision and how does it measure the trade-offs of
purchasing such ETFs?

Market functioning in the corporate credit market has been impaired based on metrics such as
prices, bid ask spreads, trading volumes, and price volatility as well as limited primary market
issuance from high-yield issuers. By purchasing ETFs that have exposure to high-yield issuers,
the SMCCF seeks to provide support to the more dislocated segments of the corporate bond
market and to limit discontinuities between the different segments of the market. Such
discontinuities can lead to extreme outcomes where companies downgraded a single notch—
from low investment-grade to the upper end of high-yield—find themselves facing sharply
higher funding costs and thus are under increased pressure to cut costs, including by reducing
their workforces. The increased risk associated with acquiring instruments issued by high-yield
companies is managed by investing through instruments that allow for the creation of a
diversified portfolio and by the increased amount of Treasury’s equity allocated to support
these purchases. The agencies also limit the amount of risk to the SMCCF from purchases of
high- yield ETFs by ensuring that the large majority of ETF purchases target the investment-
grade corporate bond market.

Commission Discussion:

The agencies have provided a helpful response explaining their rationale for using the SMCCF to
purchase ETFs that may own bonds from non-investment grade companies. By purchasing ETFs
that own bonds from non-investment grade companies, the agencies are tangentially altering the
investment grade standard they have set for the PMCCF. The agencies should explain how they
evaluate the implications of that decision—including whether they have analyzed which types of
investors hold this debt—and how they weigh the potential costs of that approach against the
benefits.

As the agencies note in their answer, discontinuities between the investment grade and non-
investment grade bond markets “can lead to extreme outcomes where companies downgraded a
single notch—from low investment-grade to the upper end of high-yield—find themselves facing
sharply higher funding costs and thus are under increased pressure to cut costs, including by
reducing their workforces.” The agencies should clarify whether the rationale for using the
SCMMF to purchase ETFs with bonds from non-investment grade companies also applies to the
PMCCF.

The agencies stated that they manage the increased risk associated with purchasing ETFs
containing non-investment grade bonds by creating a diversified portfolio, allocating more of the
Treasury’s equity investment in the SMCCF to support these purchases, and ensuring that the
large majority of the SMCCF’s purchases target investment grade bonds. We ask that they

explain the costs and benefits of using a similar risk management approach with the PMCCF if
they allow additional non-investment grade companies to access that facility.

3. The Fed has hired the firm BlackRock to serve as an investment manager for this facility.
How is the Fed ensuring BlackRock is acting in the best interest of the Fed and the public?

On May 11, 2020, Corporate Credit Facilities LLC (“CCF”), a special purpose vehicle created
to facilitate the operations of SMCCF, entered into an Investment Management Agreement
(“IMA”) with BlackRock Financial Management, Inc. (“BlackRock”). The Federal Reserve
Bank of New York (“FRBNY”) is the sole managing member of the CCF.

Pursuant to the IMA, BlackRock acts as a fiduciary to the CCF in performing investment
management services. In order to best advance the CCF’s objectives as a fiduciary,
BlackRock is required to follow FRBNY’s specific and detailed investment guidelines and to
buy and sell corporate bonds, corporate loans, and corporate bond ETFs on a best execution
basis. BlackRock is required to communicate with the CCF on a daily basis regarding its
planned purchase activity for the day and respond to requests for updates from the CCF on
market functioning and asset purchases.

The IMA imposes stringent requirements on BlackRock to protect confidential information
and to mitigate conflicts of interest. Confidential information gained by BlackRock or its
affiliates or their respective directors, officers, or employees in the course of this engagement
may not be leveraged for matters unrelated to the CCF. BlackRock’s compliance with the
rigorous information barrier and conflict of interest mitigation provisions the Federal Reserve
has imposed under the IMA is subject to audit and review by FRBNY, the Board, and other
governmental authorities with oversight responsibilities under applicable law.

These are select examples of provisions relating to the Federal Reserve’s efforts to ensure that
Blackrock is acting in the best interest of the public. The IMA, including the investment
guidelines, is available in full on the FRBNY website. See
https://www.newyorkfed.org/medialibrary/media/markets/SMCCF Investment Management
A greement.pdf.

Commission Discussion:

The Commission appreciates that the agencies highlighted in this response certain provisions in
BlackRock’s Investment Management Agreement (IMA) that relate to the Federal Reserve’s
efforts to ensure that Blackrock is acting in the best interest of the public. We strongly encourage
the Federal Reserve to act diligently to promote BlackRock’s compliance with these provisions
and all related provisions in the IMA. The Commission also recognizes that the hiring of
BlackRock to provide investment advice also could confer certain benefits on BlackRock that are

not addressed in the IMA.114 We ask the Federal Reserve to elaborate on why it chose
BlackRock through a non-competitive process to provide investment advice.

4. Does Blackrock have a duty of best execution to the Fed?

Yes. The Operating Guidelines set out in the IMA provide that “[a]ll transactions in Eligible
ETFs will be effected through Eligible Sellers at market prices on a best execution basis in
accordance with [the IMA], whether in the secondary market or via primary creations and
redemptions.”

Commission Discussion:

The Commission appreciates the response. We strongly encourage the Federal Reserve to act
diligently to promote BlackRock’s compliance with this provision.

5. BlackRock has entered into a contract with the New York Federal Reserve Bank to
provide management and advisory services to the facility. In that role, BlackRock employees
will have access to material non-public information. Per the contract, certain BlackRock
executives with access to that information will have the ability to provide “investment
management, trading, and/or advisory services to other clients with respect to securities
other than corporate bonds, ETFs, equity securities, or derivatives the value of which are
tied to such instruments, including providing general market views and market views related
to securities other than corporate bonds, ETFs, equity securities, or derivatives the value of
which are tied to such instruments.” They are also permitted to provide "investment
management, trading or advisory services" in any asset class and to purchase investments
for themselves in any asset class after a two-week cooling-off period.

a. Why is two weeks an appropriate cooling-off period?

b. How will any breaches of the non-public information be reported? What will
be the discipline for such breaches?

The IMA provides stringent requirements to protect confidential information and to mitigate
conflicts of interest. Confidential information gained by BlackRock or its affiliates or their
respective directors, officers, or employees in the course of this engagement may not be
leveraged for matters unrelated to the CCF. This restriction prohibits, without limitation, use of
any confidential information for the benefit of BlackRock, for the benefit of any other
BlackRock client, or to inform any financial transaction, render any advice or recommendation,
or attempt to influence any market or transaction for the benefit of any individual or entity
other than the CCF. This obligation survives the termination or expiration of the IMA.

114 Chris Flood, BlackRock trounces ETF rivals after Fed appointment, Financial Times, May 20, 2020,
https://www.ft.com/content/7091a2a5-7eef-4c78-8331-9fd986925f8a.

The “two-week cooling off period” relates to the information wall between BlackRock
employees who are involved in providing investment management, trading, and/or advisory
services to the CCF or FRBNY and other BlackRock employees. BlackRock employees
providing such services to the CCF or FRBNY—for the duration of when they have access to
material nonpublic information plus a two week cooling off period—are prohibited from
providing investment management, trading, or advisory services to anyone other than the CCF
in any of the asset classes held by BlackRock and must also refrain from purchasing for
him/herself investments in any of the asset classes held by BlackRock, unless authorized by the
Chief Compliance Officer of FRBNY. The two-week period is intended to ensure that material
nonpublic information loses its value in the market. To be clear, even after the two-week
cooling off period, material nonpublic information may not be leveraged for matters unrelated
to the CCF. Additional information is available in Exhibit G to the IMA, which sets forth the
Information Barrier and Conflicts of Interest Mitigation Procedures. See
https://www.newyorkfed.org/medialibrary/media/markets/SMCCF_Investment_Management_
A greement.pdf.

The IMA requires that breaches of confidential information be reported promptly. Should a
breach occur, FRBNY will respond with diligence and promptness. Consequences for any breach
will be determined by the Federal Reserve.

Commission Discussion:

The Commission appreciates that the agencies highlighted in this response provisions of the
IMA that seek to protect confidential information and mitigate conflicts of interest. We
strongly encourage the Federal Reserve to act diligently to promote BlackRock’s compliance
with these provisions and to respond appropriately if they are breached.

C. Main Street Lending Program

1. Why did the agencies choose the 85% and 95% purchase rates for the SPVs in this
program?

The Main Street SPV will purchase participations in MSNLF loans, MSPLF loans, and MSELF
upsized tranches. The agencies considered several factors in sizing participations in Main Street
eligible loans and upsized tranches. The agencies created Main Street facilities that purchase
sizable (but less than 100 percent) participations in loans in order to maintain a level of risk
sharing that limits downside risk and creates balance sheet capacity for eligible lenders, while
at the same time ensuring eligible lenders have a strong incentive to apply prudent underwriting
and risk management standards. Upon full consideration of the relevant factors, the agencies
believe that a 95 percent participation provides an appropriate balance of these considerations
for all three Main Street facilities. Accordingly, on June 8 the Board issued revised term sheets
that, among other changes, specify a 95% participation percentage for MSPLF loans (up from
85%), while maintaining the 95% participation percentage for MSNLF and MSELF loans.

Commission Discussion:

The Commission appreciates that the agencies are striving to find an “appropriate balance”
between limiting “downside risk” for lenders and encouraging “prudent underwriting and risk
management standards.” In their response, the agencies highlight the reduction of the lender risk
retention in loans under the MSPLF from 15% to 5%. The agencies should consider whether to
modify loan terms or the standard for determining maximum loan size in exchange for higher
risk retention by lenders. This approach appears to be consistent with the original rationale for
the MSPLF, which required lenders to retain 15% of a loan but allowed for potentially riskier
loans. The original 15% risk retention ensured that lenders would share more in any losses and
thus provided greater protection for taxpayer funds. It also encouraged lenders to apply prudent
underwriting and risk management practices for these potentially riskier loans. The Commission
is also interested in learning if the agencies have considered other changes to the loan terms
(origination fees, servicing fees, etc.) that would better incentivize banks to make loans and
reach as many businesses as possible that need additional credit.

2. Why did the agencies choose the employee-size and annual revenue criteria that
determine which businesses are eligible for this program?

Employee size and annual revenue criteria are used for the Small Business Administration’s
(SBA) 7(a) program and Payroll Protection Program (“PPP”) and are commonly used to
measure the footprint of a business. The adoption of such metrics was considered prudent,
because the program is designed to support small and medium-sized businesses that are unable
to receive sufficient assistance through other programs, such as the SBA’s PPP, and that lack
access to the Federal Reserve’s Primary and Secondary Market Corporate Credit Facilities. The
agencies set the employee and revenue criteria for the Main Street Lending Program to provide
broad access to companies that lack access to or sufficient support from other existing programs
and were otherwise in sound financial condition prior to the crisis.

The agencies have not set a lower bound “floor” for borrower size under the program, thereby
providing access to small businesses that met other program criteria. The upper bounds for the
employee-size and annual revenue criteria were raised from 10,000 employees or $2.5 billion
in revenues to 15,000 employees or $5 billion in revenues in response to public feedback that
the lower levels initially proposed would have scoped out businesses that could benefit from
Main Street loans. The changes were also intended to provide a better congruence with the
PMCCF and SMCCF by capturing a wider swath of companies that may not have reached the
scale needed to issue the kinds of capital market instruments that would be purchased under the
PMCCF and SMCCF.

Commission Discussion:

The agencies have provided a helpful response explaining their rationale for the employee-size
and annual revenue criteria that determine which businesses are eligible for the Main Street

Lending Program. As the Main Street Lending Program and PMCCF become operational, we
recommend the agencies monitor whether there are businesses in need of credit who are too big
to access the Main Street Lending Program but too small to access the PMCCF. If the agencies
discover that there are, they should consider modifying the employee-size and annual revenue
criteria for the Main Street Lending Program—along with making any other appropriate
modifications to minimize downside risk and encourage prudent underwriting—so that such
businesses have an opportunity to access credit from at least one of the Federal Reserve’s
emergency lending facilities.

3. How did the agencies choose the minimum loan sizes for the facilities in this program?

The agencies considered several factors in determining minimum loan sizes. Consistent with
the desire to assist companies that may have received insufficient support through the PPP or
that are unable to receive support through the PMCCF or SMCCF, the Main Street Lending
Program targeted a minimum loan size that would be attractive to a broad range of small and
medium-sized businesses that may not have been able to receive support from these other
programs. The agencies also had a desire to maintain sufficient overlap with the upper bound
of the PPP in order to avoid excluding inadvertently a set of businesses from assistance. The
agencies considered public feedback received and, in the revised term sheets issued on June 8,
have selected $250,000 (lowered from $500,000) as the minimum loan size for the MSNLF
and MSPLF in an effort to make the Main Street Lending Program accessible to as many
borrowers as possible, while ensuring the program is feasible from an operational perspective.

The minimum loan size of the MSELF, at $10 million, was set significantly higher than that of
the MSNLF or MSPLF because MSELF upsized tranches are likely more attractive to larger,
more sophisticated borrowers with more complex funding structures.

Commission Discussion:

The agencies have provided a helpful response explaining their rationale for the minimum loan
sizes for the Main Street facilities and their modifications to those minimum loan sizes. We
acknowledge that the agencies have already been willing to make modifications to the
minimum loan sizes in response to public feedback they received. When the Main Street
facilities become operational, the agencies should closely monitor whether the minimum loan
sizes have been set appropriately to allow small and medium-sized businesses in need of credit
to access the Main Street facilities. If the minimum loan sizes have not been set appropriately,
we encourage the agencies to identify the types of companies that are unable to access support
and to consider modifying the minimum loan sizes accordingly.

4. Why did the agencies decide not to create the mid-sized business lending facility
that is described but not mandated in Section 4003(c)(3)(D) of the CARES Act?

The agencies designed the Main Street Lending Program to meet the needs of small and

medium-sized businesses as effectively and efficiently as possible, while protecting taxpayer
funds. The program is designed within the parameters of Section 13(3) of the Federal
Reserve Act, the CARES Act, and the Board’s Regulation A, and includes CARES Act
restrictions on executive compensation, capital distributions, and equity repurchases. The
program includes a number of features that are designed to be attractive to small and
medium-sized businesses, including deferral of interest payments for one year and deferral of
repayment of principal for two years.

Commission Discussion:

The response seems to suggest that the agencies did not think the mid-sized business facility
described in the CARES Act would effectively and efficiently meet the needs of small and
medium-sized businesses or be attractive to such businesses. The Commission requests that the
agencies explain why they determined the program recommended in the CARES Act would not
have effectively met the needs of such companies.

5. What is the agencies’ rationale for the adjusted earnings before interest, taxes,
depreciation, and amortization (EBITDA) and leverage standards for loans in this
program?

Fundamentally, the agencies decided to use a leverage test based on EBITDA as the key
parameter to govern the credit risk assumed by the Main Street Lending Program. The use of
EBITDA and leverage requirements is standard industry practice in evaluating a potential
borrower’s creditworthiness for cash flow-based lending. Lenders and borrowers regularly
agree to adjust a borrower’s EBITDA to accommodate differences in business models across
industries and to accommodate one-time events that may positively or negatively impact a
borrower’s earnings. When applied prudently, these adjustments provide a lender with a more
accurate representation of a business’s earnings capacity over time.

Allowing for leverage of 4x or 6x adjusted EBITDA is within the normal range of practice
across the banking industry. The agencies determined that leverage of 4x adjusted EBITDA is
reasonable for the MSNLF given the parameters of MSNLF Loans, but they allowed for
greater leverage within the MSELF and MSPLF because other risk mitigating features and
protections exist in those facilities, such as the additional security required in the MSELF and
the larger risk retention requirement in the MSPLF.

Commission Discussion:

We appreciate the agencies’ explanation of their rationale for the EBITDA standards for loans
in the Main Street facilities. But we note that some stakeholders have raised concerns that the
EBITDA standard for the MSNLF is too burdensome and will prevent some creditworthy
small and medium-sized businesses from obtaining Main Street loans. The agencies should
elaborate as to whether these businesses are in need of financing from the Main Street facilities

or have been able to adequately obtain capital elsewhere.

The agencies’ response justifies the higher EBITDA standard for the MSPLF on the ground
that the MSPLF has a larger risk retention requirement for lenders (15%), which mitigates the
risk of loss for the facility. However, on June 8, the Federal Reserve announced that the
MSPLF’s risk retention requirement for lenders would be lowered to 5%, making it the same
as the risk retention requirement for the MSNLF and MSELF. In light of this modification,
what are the costs and benefits of raising the EBITDA standard for the MSNLF? In addition,
when the Main Street facilities become operational the agencies should monitor whether the
EBITDA standards have been set appropriately to allow creditworthy small and medium-sized
businesses in need of financing to access the Main Street facilities. For instance, we are
interested to know if the agencies have identified industries with businesses that generally do
not meet the EBITDA standards for the Main Street facilities because of the nature of their
industries but are nonetheless creditworthy.

6. Between the initial announcement of the Main Street facilities on April 9 and the
modifications to the facilities the Fed announced on April 30, the Fed reportedly received
more than 2,200 comments from experts, industry groups, and others. Will the Fed release
those comments so the public can review them?

The agencies received more than 2,200 comments from small and medium-sized business
owners, industry groups, nonprofit organizations, and lenders between April 9 and April 30.
After reviewing the comments received, the agencies expanded many aspects of the Main
Street Lending Program to make credit available to a greater number of small and medium-
sized businesses across the country. We are in the process of preparing the comments received
for public release by removing certain proprietary commercial and personally identifiable
information. We anticipate releasing the comments to the public by the end of the month.

Commission Discussion:

We welcome the agencies’ willingness to release these comments to the public. The release of
these comments will help to promote transparency concerning the design of the Main Street
Lending Program. The agencies should work diligently in preparing these comments for public
release so that they can be released in June. We ask that the comments be released in searchable
form, if possible, so that the public can review relevant comments efficiently.

7. As part of its April 30 revisions to the facility term sheets for this program, the
agencies removed the requirement that companies attest that they require financing “due
to the exigent circumstances presented by the coronavirus disease.”

a. Why did the agencies remove that requirement?

b. Without this requirement, how will the agencies ensure they are providing liquidity
“to eligible businesses, [s]tates, and municipalities related to losses incurred as a
result of coronavirus”?

Nearly all sectors of the U.S. economy have been affected directly or indirectly by the exigent
circumstances presented by the coronavirus pandemic. As adopted following the expiration of
the public comment period, the Main Street Lending Program includes key features that more
directly and effectively target credit to borrowers that have experienced a change in
circumstances over the past several months. For example, while an eligible borrower’s loans
outstanding with the eligible lender must have received an internal risk rating that is equivalent
to a “pass” rating used by supervisors, the term sheets intentionally specify that the relevant “as
of” date for assignment of that rating is December 31, 2019—a date that precedes the onset of
the COVID-19 disruption in the United States. In similar fashion, the mandatory Main Street
borrower certification requires borrowers to attest that they (i) had generally been paying their
undisputed debts due during the 90 days preceding the Main Street loan (unless the borrower is
behind on its obligations because of disruptions to its business caused by the COVID-19
pandemic), and (ii) will be in a position following receipt of the Main Street loan to bring
current any debts that have fallen into arrears during the period of COVID-19 disruption. These
program features are designed to make Main Street funding available to businesses that were in
sound financial condition prior to the onset of the pandemic, but that may need additional
financing to support operations until conditions normalize.

Commission Discussion:

We appreciate that the agencies have incorporated into the Main Street Lending Program
features to ensure loans are going to businesses that were in sound financial condition prior to
the onset of the COVID-19 pandemic. But the agencies’ response does not address how they
are ensuring that a business applying for a Main Street loan needs financing due to the exigent
circumstances presented by the COVID-19 pandemic. We also understand, as the agencies
note, that “[n]early all sectors of the U.S. economy have been affected directly or indirectly by
the exigent circumstances presented by the coronavirus pandemic.” But that does not mean that
every business in the U.S. economy is in need of financing due to exigent circumstances caused
by the COVID-19 pandemic. In light of these issues, the Commission requests that the agencies
elaborate on why they eliminated this attestation, including explaining whether there were
companies that could have otherwise met the standards currently in the Main Street program
but for the attestation in the original term sheet.

8. As part of its April 30 revisions to the facility term sheets for this program, the agencies
eliminated the requirement that firms attest to making “reasonable efforts” to maintain
payroll and retain employees during the term of the loan and replaced it with a
requirement that firms should make “commercially reasonable efforts” to maintain payroll.

a. Why did the agencies remove the original attestation requirement?

The agencies revised the language regarding “reasonable efforts” to remove ambiguity and
clarify that such efforts should be commercially reasonable—that is, that such efforts should
be within the range that contribute to the health of the business and its ability to support
employment over the longer term. More precisely, the goal of the program is to support the
health of businesses through this difficult period so they are able to contribute to a robust
economic recovery. Employees are critical contributors to the success of a business, and
commercially reasonable efforts to maintain employment contribute to a faster recovery and
to the health of a business in the long run.

Commission Discussion:

The agencies have provided a helpful response explaining why they changed “reasonable efforts”
to “commercially reasonable efforts.” While the Commission does not have a consensus view on
the sufficiency of this requirement, we do agree that businesses receiving Main Street loans
should faithfully adhere to their loan obligations, including making commercially reasonable
efforts to maintain payroll and retain employees while their Main Street loans are outstanding.

b. How do the agencies define “commercially reasonable efforts”?

“Commercially reasonable efforts” is a standard defined in contract law. The application of
such a standard in this context means that businesses that participate in the program are
expected to make good-faith efforts to maintain payroll and retain employees in light of their
respective capacities, economic environment, available resources, and business need for labor.

Commission Discussion:

The Commission appreciate the agencies’ clarification of their definition of “commercially
reasonable efforts.” As the agencies know, the Federal Reserve Bank of Boston has included
this same definition in its Frequently Asked Questions document for the Main Street
Program.115 The agencies should act diligently to make sure that borrowers from the Main
Street Program are appropriately notified of this definition.

115 Federal Reserve Bank of Boston, Main Street Lending Program Frequently Asked Questions, June 8, 2020,
https://www.bostonfed.org/-/media/Documents/special-lending-facilities/mslp/legal/frequently-asked-questions-
faqs.pdf?la=en.

c. How will the agencies enforce this requirement?

The program expects borrowers to make commercially reasonable efforts to maintain payrolls.
Such efforts may take different forms across the broad range of businesses eligible for the
program. Because of the variety of approaches we expect from borrowers, the agencies will
monitor the program’s impact on the economic recovery and employment broadly rather than
on a borrower-by-borrower basis. We expect to make adjustments to the Main Street Lending
Program as needed to ensure the program contributes to robust economic recovery and
employment gains.

Commission Discussion:

The agencies’ response indicates that they do not intend to monitor, on a borrower-by-
borrower basis, whether companies are making “commercially reasonable efforts” to maintain
payroll. If that is the case, the agencies should elaborate on how “monitor[ing] the program’s
impact on the economic recovery and employment broadly” relates to the borrower’s
obligation to satisfy the loan’s payroll term.

D. Municipal Lending Facility

1. How did the agencies decide which municipalities to include in this facility?

The agencies determined eligibility criteria for the MLF with the aim of providing access to
credit through the facility to as many municipalities as possible in the shortest timeframe
possible. The municipal securities market involves upwards of 50,000 individual issuers, and it
would not be logistically feasible for the MLF to stand ready to quickly undertake the
diligence reviews and otherwise work with borrowers in order to directly purchase notes from
all municipal issuers. Initial direct eligibility was therefore limited to U.S. states and a number
of large jurisdictions, while smaller jurisdictions were made eligible to issue notes to the MLF
indirectly through another eligible state or municipality.

The agencies have subsequently expanded the facility to include multi-state entities, revenue
bond issuers, and a broader range of municipalities, in response to feedback identifying legal
barriers that would frustrate indirect participation by previously ineligible entities. The agencies
also have amended the terms of the MLF to allow more than one issuer per eligible state, city,
or county in order to facilitate the provision of assistance to smaller political subdivisions or
other government entities. The MLF continues to encourage large eligible issuers to permit
indirect participation by their political subdivisions or other governmental entities, however,
because it remains logistically infeasible for the Federal Reserve to purchase notes directly
from all U.S. municipalities for the reasons described above.

Commission Discussion:

The agencies have provided a helpful response as to how they decided which municipalities to
include in the MLF. The MLF only recently started to operate. As its operations progress the
agencies should closely monitor whether there are additional modifications that feasibly could
be made to the facility that would help the MLF achieve its purpose.

2. What is the rationale for the population-size criteria that determine the cities and
counties eligible for this facility? What are the concerns, if any, about purchasing notes
from cities or counties smaller than the thresholds established?

As described above, the population-size criteria for the MLF were selected to enable that the
limited number of feasible issuers be allocated to entities serving the greatest number of people
in the shortest timeframe possible. It would not be logistically feasible to purchase notes
directly from all U.S. cities and counties, and smaller cities and counties have therefore been
limited to indirect participation in the MLF through their respective states. Further, all cities
and counties—even those ineligible to directly participate in the facility—have benefited from
improving market conditions that have resulted from the presence of the MLF as a backstop to
the short-term municipal securities market. By addressing the liquidity needs of larger cities
and counties, the MLF frees up credit from private market sources to address the needs of
smaller cities and counties. This is already evidenced by the significant increase in bank
lending agreements that have been filed with EMMA, the Municipal Securities Rulemaking
Board’s online disclosure portal, since early April.

Commission Discussion:

The agencies have provided a helpful response explaining their rationale for the population-size
eligibility criteria for participation in the MLF. We acknowledge that the agencies have given
smaller cities and counties the opportunity to indirectly participate in the MLF through their
respective states. We also recognize that they have already shown a willingness to modify the
population-size eligibility criteria in response to public feedback. The MLF only recently
started to operate. As its operations progress, the agencies should closely monitor whether there
are additional modifications that could help the MLF achieve its purpose.

3. Why were U.S. territories excluded from this facility?

by a State or municipality under a facility authorized by section 4003(b) of the Act shall not be
reduced through loan forgiveness. This provision substantially restricts the MLF’s ability to
work out or resolve defaulting notes or other obligations that it has purchased. Restricting
access to investment-grade issuers furthers compliance with this restriction by reducing the
likelihood that the facility will hold debt that falls into default. Moreover, given the large
number and heterogeneous nature of issuers of municipal debt, it can be difficult to assess and
compare their creditworthiness. Credit ratings provide an objective, transparent, and efficient
means by which the agencies can assess the risk associated with lending to an issuer.

No U.S. territory is rated investment grade. Given their financial circumstances, additional debt
that cannot be forgiven is unlikely to provide U.S. territories with substantial relief. Further,
Puerto Rico is in default on its general obligation debt and would therefore be prohibited from
accessing the Facility by the Board’s Regulation A. Puerto Rico is the only U.S. territory with
independent local governments, and the Federal Reserve is not aware of any local Puerto Rican
government that carries an investment-grade rating. After Hurricanes Irma and Maria, the U.S.
Virgin Islands and its power authority borrowed approximately $300 million from Federal
Emergency Management Agency (“FEMA”) through its Community Disaster Loan Program and
have already sought loan forgiveness for such loans from FEMA because of their limited debt
repayment capacity.

Commission Discussion:

The agencies have provided a helpful response explaining why U.S. territories are not currently
eligible for the MLF, namely because they are not investment grade. The Commission requests
that the agencies weigh the costs and benefits for treating territories the same as similarly
situated state and local borrowers. The MLF only recently started to operate. As its operations
progress, the agencies should closely monitor whether there are additional modifications that
feasibly could be made, if prudent, to the MLF’s eligibility requirements to enable U.S.
territories to participate in the facility consistent with the requirements of the Federal Reserve
Act, the Federal Reserve’s Regulation A, and the CARES Act.

May 29, 2020
The Honorable Steven T. Mnuchin
Secretary
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
The Honorable Jerome H. Powell
Chairman
Board of Governors of the Federal Reserve
20th Street and Constitution Avenue, NW
Washington, D.C. 20551
Dear Secretary Mnuchin and Chairman Powell:
We write as members of the Congressional Oversight Commission (the “Commission”)
created by the CARES Act. The Commission’s role is to conduct oversight of the implementation of
Division A, Title IV, Subtitle A of the CARES Act (“Subtitle A”) by the Treasury Department (the
“Treasury”) and the Federal Reserve. On May 18, the Commission issued its first report, outlining,
among other things, some preliminary questions we have about the actions of the Treasury and the
Federal Reserve in implementing Subtitle A so far. The Commission is required by statute to issue a
report every thirty days.
As we carry out our responsibilities and prepare for future reports, we request your
assistance in two ways. First, we ask that you provide answers to the questions that we posed in our
May 18 report. Second, we ask that you meet with us to discuss the Treasury and Federal Reserve’s
implementation of Subtitle A and that the meeting be held promptly.
We have broken down the questions we asked in our May 18 report into two tiers, which are
identified in the appendix to this letter. We request that you provide answers to the tier 1 questions
by June 8. We request that you provide answers to the tier 2 questions by June 29. We look forward
to receiving your answers in writing or through conversations with our staff.
Thank you for your attention to this matter.
Sincerely,
/s/
/s/
French Hill
Bharat Ramamurti
Member of Congress
Commissioner
/s/
/s/
Donna E. Shalala
Pat Toomey
Member of Congress
U.S. Senator
Enclosure: Appendix
APPENDIX A

APPENDIX

TIER 1 QUESTIONS

I. General Questions

1. How will the Treasury and the Fed (the “agencies”) assess the success or failure of this
program?

II. Program and Facility-Specific Questions

Primary Market Corporate Credit Facility (PMCCF)

1. How did the agencies determine the eligible assets for purchase by this facility?

2. Why did the agencies require an issuer to be rated investment grade by the credit rating agencies
as of March 22, 2020 to be an eligible issuer for this facility? What would be the implications of
broadening eligibility to this facility to issuers rated non-investment grade?

3. Why did the agencies choose March 22, 2020 as the cutoff date for an issuer to be rated
investment grade to be an eligible issuer for this facility? How will this date selection impact the
ability of issuers that have been downgraded from investment grade to non-investment grade to
access capital through this facility?

4. Why did the agencies limit eligible issuers to those rated by a major nationally recognized
statistical rating organization (NRSRO) as opposed to issuers rated by other credit rating
organizations?

Secondary Market Corporate Credit Facility (SMCCF)

1. Is there a concern that changes in secondary market bond prices will reduce the flow of credit to
households and businesses or create risk to the financial system? If so, how and what is the
strategy for using this facility to address that concern?

2. On May 4, the Federal Reserve Bank of New York announced that it plans to use this facility to
purchase Exchange Traded Funds (ETFs) that may own bonds rated below investment grade.
How did the Fed reach this decision, and how does it measure the trade-offs of purchasing such
ETFs?

3. The Fed has hired the firm Blackrock to serve as an investment manager for this facility. How is
the Fed ensuring Blackrock is acting in the best interest of the Fed and the public?1

4. Does Blackrock have a duty of best execution to the Fed?

5. BlackRock has entered into a contract with the New York Federal Reserve Bank to provide
management and advisory services to the facility. In that role, BlackRock employees will have
access to material non-public information. Per the contract, certain BlackRock executives with
access to that information will have the ability to provide "investment management, trading,
and/or advisory services to other clients with respect to securities other than corporate bonds,
ETFs, equity securities, or derivatives the value of which are tied to such instruments, including
providing general market views and market views related to securities other than corporate
bonds, ETFs, equity securities, or derivatives the value of which are tied to such instruments."
They are also permitted to provide "investment management, trading or advisory services" in
any asset class and to purchase investments for themselves in any asset class after a two-week
cooling-off period.

a. Why is two weeks an appropriate cooling-off period?

b. How will any breaches of the non-public information be reported? What will be the
discipline for such breaches?

Main Street Lending Program

1. Why did the agencies choose the 85% and 95% purchase rates for the SPVs in this program?

2. Why did the agencies choose the employee-size and annual revenue criteria that determine
which businesses are eligible for this program?

3. How did the agencies choose the minimum loan sizes for the facilities in this program?

4. Why did the agencies decide not to create the mid-sized business lending facility that is
described but not mandated in Section 4003(c)(3)(D) of the CARES Act?

5. What is the agencies’ rationale for the adjusted earnings before interest, taxes, depreciation, and
amortization (EBITDA) and leverage standards for loans in this program?

6. Between the initial announcement of the Main Street facilities on April 9 and the modifications
to the facilities the Fed announced on April 30, the Fed reportedly received more than 2,200
comments from experts, industry groups, and others. Will the Fed release those comments so the
public can review them?

1 This question about BlackRock was in the Commission’s May 18 report. However, the two questions about
BlackRock that follow (questions #4 and #5) were not.

3
7. As part of its April 30 revisions to the facility term sheets for this program, the agencies
removed the requirement that companies attest that they require financing “due to the exigent
circumstances presented by the coronavirus disease.”
a.
Why did the agencies remove that requirement?
b. Without this requirement, how will the agencies ensure they are providing liquidity “to
eligible businesses, [s]tates, and municipalities related to losses incurred as a result of
coronavirus”?
8. As part of its April 30 revisions to the facility term sheets for this program, the agencies
eliminated the requirement that firms attest to making “reasonable efforts” to maintain payroll
and retain employees during the term of the loan and replaced it with a requirement that firms
should make “commercially reasonable efforts” to maintain payroll.
a.
Why did the agencies remove the original attestation requirement?
b. How do the agencies define “commercially reasonable efforts”?
c.
How will the agencies enforce this requirement?
Municipal Lending Facility
1. How did the agencies decide which municipalities to include in this facility?
2. What is the rationale for the population-size criteria that determine the cities and counties
eligible for this facility? What are the concerns, if any, about purchasing notes from cities or
counties smaller than the thresholds established?
3. Why were U.S. territories excluded from this facility?
TIER 2 QUESTIONS
I. General Questions
1. If the agencies use economy-wide metrics, like GDP growth, unemployment rates, or wage
growth, to assess the success or failure of this program how will they isolate the effects of this
program from other factors, including other federal and state relief measures?
2. If the agencies use more narrow metrics, like bond spreads, to assess the success or failure of
this program how will they assess how changes in those metrics affect the broader economy,
including the financial well-being of the people of the United States?
3. Do the agencies believe the Fed’s emergency lending programs are better suited to assist bigger
companies that can access the capital markets than smaller firms that cannot? If not, why not? If
so, what are the agencies doing to counteract that issue?

4
4. Will the agencies faithfully follow the statutory requirements of Subtitle A when implementing
the lending programs and facilities?
5. How can the agencies best determine the lending capacity of, and Treasury investment into,
each Fed lending facility under Subtitle A in order to help support and stabilize the economy?
6. How can the agencies best determine how much of the Treasury’s $454 billion in CARES Act
funds to allocate among Fed lending facilities and when to allocate such funds in order to help
support and stabilize the economy?
7. How can the agencies best estimate the risk of loss to taxpayer funds in each Fed lending
facility?
8. How will the Fed ensure it complies with all restrictions to emergency lending under Section
13(3) of the Federal Reserve Act, including those prohibiting lending to insolvent borrowers?
9. How can the agencies best monitor compliance with and enforce the conflict of interest rules
governing the agencies’ lending programs and facilities?
10. How can the agencies best enforce the statutory terms and conditions for borrowers under their
lending programs and facilities under Subtitle A, including the condition that borrowers are U.S.
businesses, as defined by the CARES Act?
11. How will loans under these programs and facilities comply with Bank Secrecy Act (BSA) and
the Anti-Money Laundering (AML) rules?
12. How will the agencies decide when to hire third parties to help manage the program or specific
facilities? How will the agencies mitigate conflicts of interest these third parties might have?
13. Regarding outside services to assist the agencies to manage the programs and facilities, what is
the competitive selection process for custody and fund management services? How are conflicts
of interest mitigated?
14. The agencies’ emergency lending programs and facilities provide lending directly through
government loans and indirectly through banks and other qualified lenders. What are the trade-
offs involved with these different delivery mechanisms?
15. While quickly providing lending to borrowers may result in more fraud and abuse, it may also
assist many eligible borrowers that need money quickly. How should the agencies balance these
trade-offs?

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16. The Congressional Budget Office (CBO) recently published its preliminary estimate of the
budgetary effects of the CARES Act. CBO’s estimate concludes that “the income and the costs
stemming from” the Fed’s emergency lending facilities funded by the CARES Act “are
expected to roughly offset each other.” CBO notes that the Fed did “not sustain losses on similar
lending . . . [d]uring the financial crisis of 2008 and 2009.”2 Do you believe CBO is correct in
its assumptions of a no net cost result? In order to accomplish the goal of economic stabilization
and return to economic growth, is this a reasonable assumption?
17. How can the agencies best incentivize private-sector financial institutions to help facilitate the
Treasury and the Fed’s lending programs and facilities to ensure credit gets to American
households and businesses, while ensuring that taxpayer dollars are well spent?
18. How can the agencies best set rates and fees for the Treasury and the Fed’s lending programs
and facilities under Subtitle A to ensure their workability and that the federal government
remains the lender of last resort?
19. What will the effect of Treasury and Fed lending be on overall employment?
20. Do the agencies believe it is appropriate to modify the facilities to ensure specific companies or
industries have access to some or all of the funds? If so, how are those modifications being
considered in a manner that also addresses all industries and sectors?
II. Program and Facility-Specific Questions
Primary Market Corporate Credit Facility (PMCCF)
1. Through this facility, the Fed, through an SPV, will be purchasing new bonds from companies.
Do the agencies intend to place limitations or parameters around companies receiving this
support, or use of proceeds? Are such limitations workable in capital markets transactions? Do
the agencies believe the proceeds of bond purchases will help stabilize the economy regardless
of how the proceeds are used?
2. The Federal Reserve Bank of New York, which is implementing this facility, recently stated that
a U.S. subsidiary of a foreign company can qualify for support through the facility. How does
the Federal Reserve Bank of New York plan on enforcing its requirement that proceeds derived
from participation in the facility may only be used for the benefit of the U.S. subsidiary issuer,
its consolidated U.S. subsidiaries, and affiliates of the U.S. subsidiary issuer that are U.S.
businesses, rather than for the benefit of its foreign affiliates?
Main Street Lending Program
1. Do the agencies plan to expand eligible lenders in this program beyond depository institutions?
Why or why not?
2 Letter from Phillip L. Swagel, Director, Congressional Budget Office to U.S. Senator Mike Enzi, Apr. 27, 2020,
https://www.cbo.gov/system/files/2020-04/hr748.pdf.

6
Municipal Lending Facility
1. What conditions, if any, including those related to policies, will the agencies impose on states
and municipalities that receive funding under this facility?
2. What is the rationale for the three-year repayment terms under this facility?
3. Will the agencies disclose information about any states, counties, and cities whose applications
for loans from this facility are denied?
Loans for the Airline Industry and National Security Businesses Under Subtitle A
1. How many applications has the Treasury received for loans under Subtitle A?
2. How is the Treasury measuring and evaluating any proposals that loan applicants submit “on the
form and amount of taxpayer protections they propose to provide” as part of their loan
agreements, such as a warrant or equity instrument in an applicant’s business?
3. When does the Treasury anticipate approving and disbursing these loans?
4. Under Subtitle A, the Treasury’s loan agreements with the airline industry and businesses
critical to maintaining national security must require a borrower to “not reduce its employment
levels by more than 10 percent from the levels” as of March 24, 2020. How does Treasury
intend to faithfully apply this statutory requirement?

June 8, 2020
The Honorable French Hill

The Honorable Donna E. Shalala
U.S. House of Representatives
U.S. House of Representatives
Washington, DC 20515
Washington, DC 20515
Mr. Bharat Ramamurti
The Honorable Pat Toomey
Commissioner
United States Senate
Washington, DC 20515
Washington, DC 20510
Dear Members of the Congressional Oversight Commission:
Thank you for your letter dated May 29, 2020, regarding the actions of the Department of the
Treasury and the Board of Governors of the Federal Reserve System under Division A, Title IV,
Subtitle A of the CARES Act. We look forward to working with the Commission to ensure that
implementation of the CARES Act is carried out consistent with the statute’s text and purpose.
Please find attached answers to the Tier 1 questions posed by the Commission in your
correspondence.
Sincerely,
Steven T. Mnuchin

Jerome H. Powell
Secretary
Chair
U.S. Department of the Treasury
Board of Governors of the
Federal Reserve System
Enclosure
APPENDIX B

Congressional Oversight Commission: Answers to Tier 1 Questions

I. General Questions

1. How will Treasury and the Fed (“the agencies”) assess the success or failure of this
program?
The Board of Governors of the Federal Reserve System (the “Board”; together with the
Federal Reserve Banks, the “Federal Reserve”) with the support and approval of the Department
of the Treasury (“Treasury”; together with the Federal Reserve, the “agencies”) has established a
set of lending facilities pursuant to the Coronavirus Aid, Relief, and Economic Security Act
(“CARES Act”) and under section 13(3) of the Federal Reserve Act (the “13(3) facilities”). The
agencies created the 13(3) facilities in response to the unprecedented financial and economic
strains imposed by the COVID-19 pandemic and by the public health measures employed in
response. The agencies monitor a broad range of economic and financial indicators to judge
economic activity, credit flows, and market functioning as a whole. The Federal Reserve
designed the facilities to work together to protect financial stability and support achievement of
its dual mandate of full employment and price stability.

Broadly speaking, the 13(3) facilities established with the support and approval of Treasury
using funds made available by the CARES Act—the corporate credit facilities (the Primary
Market Corporate Credit Facility (“PMCCF”) and Secondary Market Corporate Credit Facility
(“SMCCF”)), the Main Street Lending Program (the Main Street New Loan Facility
(“MSNLF”); the Main Street Priority Loan Facility (“MSPLF”); and the Main Street Expanded
Loan Facility (“MSELF”)); the Term Asset-Backed Securities Loan Facility (“TALF”); and the
Municipal Liquidity Facility (“MLF”)—have as their immediate goal the promotion of the flow
of credit to businesses, households and state and local governments. The effectiveness of all
these facilities is generally best measured by the degree to which the targeted market or area of
the economy recovers by having the program present.

As noted, the agencies monitor a variety of indicators to assess the performance of the 13(3)
facilities. With respect to short-term funding markets, among other indicators, we monitor
issuance, maturity, outstandings and spreads for a range of money market instruments, including
repurchase agreements, commercial paper, certificates of deposit, and variable-rate demand
notes. We also measure pressures on key institutions and intermediaries in these markets, which
include, but are not limited to, money market funds, commercial banks and dealers. Finally, we
monitor the volume and key features of assets pledged to, or purchased by, these facilities as well
as the counterparties to these transactions.

When judging the flow of credit to households, businesses, and state and local governments,
we use similar metrics. Among these, we monitor the issuance, maturity, outstandings, and
spreads for a wide range of debt instruments, including auto, credit card, and other consumer
loans; loans to small businesses; syndicated loans; corporate bonds; municipal notes and bonds;
and asset-backed securities. We also monitor measures of market functioning, such as bid-ask
spreads, trading costs, order book depth, trading volumes, and price volatility. Moreover, the
agencies monitor the health of key institutions and intermediaries in these credit markets, which
include, but are not limited to, open-end mutual funds, commercial banks, and dealers. Finally,

2
as these facilities come to operational readiness, we monitor the volume and key characteristics
of loans made (or assets purchased) by these facilities, as well as the set of businesses and
governmental entities (e.g., states and municipalities) using the facilities.

2. The agencies are supposed to use this program to stabilize the economy and help companies
and municipalities with liquidity issues stemming from the COVID-19 crisis. How will the
agencies attempt to achieve this goal while protecting taxpayer dollars? Are the agencies
prepared to lose taxpayer dollars in an effort to facilitate more lending and support to a broader
set of entities?
In implementing the 13(3) facilities using the authority provided by the CARES Act, and
under the Federal Reserve Act, the agencies are committed to addressing the severe economic
dislocations that have occurred as a result of the impact of COVID-19. We have designed the
13(3) facilities to provide liquidity to solvent borrowers—businesses and states and
municipalities—to better enable these organizations to either rehire their workers when the
economy reopens or keep them on board. Consistent with the CARES Act, these facilities also
are designed and implemented in compliance with section 13(3) of the Federal Reserve Act,
which provides that the Federal Reserve is restricted to making loans that are secured to the
satisfaction of the lending Reserve Bank and that carry sufficient credit protections to protect
taxpayers from losses. Equity investments provided by Treasury, including equity investments
made by Treasury using funds appropriated by Congress under the CARES Act, are designed to
cover losses on loans made by the facility, including in downside economic scenarios—and thus
inherently may take loss. Treasury accepts the possibility that losses may occur with respect to
the funds it has committed, and believes that the terms and conditions of the 13(3) programs to
which it has committed funds appropriately balance the interests of taxpayer protection and
program efficacy.

We have focused to date on the most pressing needs for liquidity support in the U.S.
economy. We are willing to adapt and extend these programs—or adopt additional programs—if
appropriate to address the economy’s evolving needs or our evolving understanding of its needs.
The Federal Reserve expects that its loans made to fund the 13(3) facilities will be fully repaid
under a very broad range of economic outcomes. The performance of Treasury equity
investment in the 13(3) facilities will depend on program features and future economic
conditions.

II. Program and Facility-Specific Questions

Primary Market Corporate Credit Facility (PMCCF)

1. How did the agencies determine the eligible assets for purchase by this facility?

Under the PMCCF term sheet, there are two groups of eligible assets. First, the PMCCF
may purchase eligible corporate bonds as the sole investor in a bond issuance. Second, the
PMCCF may purchase portions of syndicated loans or bond issuances of eligible issuers at

3
issuance; the PMCCF may purchase no more than 25 percent of any such loan syndication or
bond issuance.

The agencies established the PMCCF to ensure that creditworthy companies that rely on
capital markets to fund their operations have access to credit during the current unusual and
exigent circumstances in which financial markets are experiencing extraordinary disruptions,
volatility, and illiquidity. Corporate bonds support the operations of companies with more than
17 million employees based in the United States, and these bonds are key investment assets for
retirees and pension funds. If companies are unable to issue corporate bonds, they may be
unable to invest in inventory and equipment, meet current liabilities, or pay employees. The
PMCCF seeks to ensure that creditworthy companies with maturing capital markets instruments
(namely, syndicated loans and corporate bonds) retain the ability to refinance debt as well as
access additional credit to ensure liquidity through this unprecedented period of COVID-19-
related disruption.

Since the PMCCF’s goal is to provide general support to creditworthy companies, and not to
select among different industries and companies, the PMCCF utilizes a broad, transparent and
simple ratings-based eligibility standard. In addition, since depository institutions and
depository institution holding companies have access to other sources of support, their debt
instruments are excluded from eligibility, as are companies that received specific lending support
from Treasury under the CARES Act. Finally, because the equity provided to the PMCCF by the
Treasury includes funds appropriated under the CARES Act, companies that participate in the
PMCCF must comply with the U.S. business, conflict company, and other applicable CARES
Act requirements.

2. Why did the agencies require an issuer to be rated investment grade by the credit rating
agencies as of March 22, 2020, to be an eligible issuer for this facility? What would be the
implications of broadening eligibility to this facility to issuers rated non-investment grade?

The PMCCF seeks to support creditworthy companies that rely on capital markets to fund
their operations during unusual and exigent circumstances. Section 13(3) of the Federal Reserve
Act and the Board’s Regulation A require that a lending Reserve Bank secure itself to its
satisfaction and ensure protection of the taxpayer. A historical investment-grade rating reflects
positively on the creditworthiness of a firm prior to the unprecedented period of COVID-19-
related disruption. Issuers that are rated investment grade have historically realized default rates
that are significantly lower than issuers rated non-investment grade. Therefore, acquiring capital
markets instruments of investment-grade issuers provides greater security than acquiring capital
markets instruments of non-investment-grade issuers.

If the eligibility criteria of the PMCCF were broadened to include issuers that were not rated
investment grade as of March 22, 2020, the number of companies eligible to obtain credit from
the PMCCF would increase. Such an expansion, however, would increase the credit risk to the
PMCCF at a rate greater than the proportionate increase in potential borrowers, due to the higher
leverage and default risk of high-yield borrowers.

4
3. Why did the agencies choose March 22, 2020, as the cutoff date for an issuer to be rated
investment grade to be an eligible issuer for this facility? How will this date selection impact the
ability of issuers that have been downgraded from investment grade to non-investment grade to
access capital through this facility?

The two corporate credit facilities were initially authorized by the Board and approved by
the Secretary of the Treasury on March 22, 2020. That cut-off date was chosen for the ratings
criteria in order to extend the reach of the facilities to include all companies eligible at the
announcement date, regardless of how long it would take to operationalize the facilities.

Issuers that were investment grade prior to March 22, 2020, but were subsequently
downgraded, may still be eligible to access the PMCCF. They must be rated at least BB-/Ba3 as
of the date on which the PMCCF makes a purchase. If rated by multiple major NRSROs, such
issuers must be rated at least BB-/Ba3 by two or more NRSROs at the time the PMCCF makes a
purchase.

4. Why did the agencies limit eligible issuers to those rated by a major nationally recognized
statistical rating organization (NRSRO) as opposed to issuers rated by other credit rating
organizations?

Secondary Market Corporate Credit Facility (SMCCF)

1. Is there a concern that changes in secondary market bond prices will reduce the flow of credit
to households and businesses or create risk to the financial system? If so, how and what is the
strategy for using this facility to address that concern?

Since the onset of the COVID-19 pandemic, the corporate bond market has experienced
significant dislocations. By facilitating market functioning, the SMCCF is intended to reduce the
risk that secondary market prices for corporate bonds become subject to fire sales or price
dislocations. These price dislocations are important because they affect the primary markets for
American companies to access capital. Potential buyers may purchase bonds sold at distressed
prices in the secondary market rather than buying newly issued bonds directly from companies,
reducing the availability of new credit to fund companies. By providing support to the secondary
market, the SMCCF reduces the cost of credit and increases the availability of credit to
borrowers who might otherwise not be able to access the market with new corporate bond
issuances at reasonable rates. In addition, there is a direct relationship between the secondary
market and the primary market, as most new corporate bond prices are set based on secondary
market spreads.

5
2. On May 4, the Federal Reserve Bank of New York announced that it plans to use this facility to
purchase exchange-traded funds (ETFs) that may own bonds rated below investment grade. How
did the Fed reach this decision and how does it measure the trade-offs of purchasing such ETFs?

Market functioning in the corporate credit market has been impaired based on metrics such
as prices, bid ask spreads, trading volumes, and price volatility as well as limited primary market
issuance from high-yield issuers. By purchasing ETFs that have exposure to high-yield issuers,
the SMCCF seeks to provide support to the more dislocated segments of the corporate bond
market and to limit discontinuities between the different segments of the market. Such
discontinuities can lead to extreme outcomes where companies downgraded a single notch—
from low investment-grade to the upper end of high-yield—find themselves facing sharply
higher funding costs and thus are under increased pressure to cut costs, including by reducing
their workforces. The increased risk associated with acquiring instruments issued by high-yield
companies is managed by investing through instruments that allow for the creation of a
diversified portfolio and by the increased amount of Treasury’s equity allocated to support these
purchases. The agencies also limit the amount of risk to the SMCCF from purchases of high-
yield ETFs by ensuring that the large majority of ETF purchases target the investment-grade
corporate bond market.

3. The Fed has hired the firm Blackrock to serve as an investment manager for this facility. How
is the Fed ensuring Blackrock is acting in the best interest of the Fed and the public?

On May 11, 2020, Corporate Credit Facilities LLC (“CCF”), a special purpose vehicle
created to facilitate the operations of SMCCF, entered into an Investment Management
Agreement (“IMA”) with BlackRock Financial Management, Inc. (“BlackRock”). The Federal
Reserve Bank of New York (“FRBNY”) is the sole managing member of the CCF.

Pursuant to the IMA, BlackRock acts as a fiduciary to the CCF in performing investment
management services. In order to best advance the CCF’s objectives as a fiduciary, BlackRock
is required to follow FRBNY’s specific and detailed investment guidelines and to buy and sell
corporate bonds, corporate loans, and corporate bond ETFs on a best execution basis.
BlackRock is required to communicate with the CCF on a daily basis regarding its planned
purchase activity for the day and respond to requests for updates from the CCF on market
functioning and asset purchases.

6
These are select examples of provisions relating to the Federal Reserve’s efforts to ensure
that Blackrock is acting in the best interest of the public. The IMA, including the investment
guidelines, is available in full on the FRBNY website. See
https://www.newyorkfed.org/medialibrary/media/markets/SMCCF Investment Management A
greement.pdf.

4. Does Blackrock have a duty of best execution to the Fed?

Yes. The Operating Guidelines set out in the IMA provide that “[a]ll transactions in
Eligible ETFs will be effected through Eligible Sellers at market prices on a best execution basis
in accordance with [the IMA], whether in the secondary market or via primary creations and
redemptions.”

5. BlackRock has entered into a contract with the New York Federal Reserve Bank to provide
management and advisory services to the facility. In that role, BlackRock employees will have
access to material non-public information. Per the contract, certain BlackRock executives with
access to that information will have the ability to provide “investment management, trading,
and/or advisory services to other clients with respect to securities other than corporate bonds,
ETFs, equity securities, or derivatives the value of which are tied to such instruments, including
providing general market views and market views related to securities other than corporate
bonds, ETFs, equity securities, or derivatives the value of which are tied to such instruments.”
They are also permitted to provide "investment management, trading or advisory services" in
any asset class and to purchase investments for themselves in any asset class after a two-week
cooling-off period.

a. Why is two weeks an appropriate cooling-off period?

b. How will any breaches of the non-public information be reported? What will be the
discipline for such breaches?

The IMA provides stringent requirements to protect confidential information and to mitigate
conflicts of interest. Confidential information gained by BlackRock or its affiliates or their
respective directors, officers, or employees in the course of this engagement may not be
leveraged for matters unrelated to the CCF. This restriction prohibits, without limitation, use of
any confidential information for the benefit of BlackRock, for the benefit of any other
BlackRock client, or to inform any financial transaction, render any advice or recommendation,
or attempt to influence any market or transaction for the benefit of any individual or entity other
than the CCF. This obligation survives the termination or expiration of the IMA.

7
investments in any of the asset classes held by BlackRock, unless authorized by the Chief
Compliance Officer of FRBNY. The two-week period is intended to ensure that material
nonpublic information loses its value in the market. To be clear, even after the two-week cooling
off period, material nonpublic information may not be leveraged for matters unrelated to the
CCF. Additional information is available in Exhibit G to the IMA, which sets forth the
Information Barrier and Conflicts of Interest Mitigation Procedures. See
https://www.newyorkfed.org/medialibrary/media/markets/SMCCF_Investment_Management_A
greement.pdf.

Main Street Lending Program

1. Why did the agencies choose the 85% and 95% purchase rates for the SPVs in this program?

The Main Street SPV will purchase participations in MSNLF loans, MSPLF loans, and
MSELF upsized tranches. The agencies considered several factors in sizing participations in
Main Street eligible loans and upsized tranches. The agencies created Main Street facilities that
purchase sizable (but less than 100 percent) participations in loans in order to maintain a level of
risk sharing that limits downside risk and creates balance sheet capacity for eligible lenders,
while at the same time ensuring eligible lenders have a strong incentive to apply prudent
underwriting and risk management standards. Upon full consideration of the relevant factors, the
agencies believe that a 95 percent participation provides an appropriate balance of these
considerations for all three Main Street facilities. Accordingly, on June 8 the Board issued
revised term sheets that, among other changes, specify a 95% participation percentage for
MSPLF loans (up from 85%), while maintaining the 95% participation percentage for MSNLF
and MSELF loans.

2. Why did the agencies choose the employee-size and annual revenue criteria that determine
which businesses are eligible for this program?

Employee size and annual revenue criteria are used for the Small Business Administration’s
(SBA) 7(a) program and Payroll Protection Program (“PPP”) and are commonly used to measure
the footprint of a business. The adoption of such metrics was considered prudent, because the
program is designed to support small and medium-sized businesses that are unable to receive
sufficient assistance through other programs, such as the SBA’s PPP, and that lack access to the
Federal Reserve’s Primary and Secondary Market Corporate Credit Facilities. The agencies set
the employee and revenue criteria for the Main Street Lending Program to provide broad access
to companies that lack access to or sufficient support from other existing programs and were
otherwise in sound financial condition prior to the crisis.

8
billion in revenues to 15,000 employees or $5 billion in revenues in response to public feedback
that the lower levels initially proposed would have scoped out businesses that could benefit from
Main Street loans. The changes were also intended to provide a better congruence with the
PMCCF and SMCCF by capturing a wider swath of companies that may not have reached the
scale needed to issue the kinds of capital market instruments that would be purchased under the
PMCCF and SMCCF.

3. How did the agencies choose the minimum loan sizes for the facilities in this program?

The agencies considered several factors in determining minimum loan sizes. Consistent
with the desire to assist companies that may have received insufficient support through the PPP
or that are unable to receive support through the PMCCF or SMCCF, the Main Street Lending
Program targeted a minimum loan size that would be attractive to a broad range of small and
medium-sized businesses that may not have been able to receive support from these other
programs. The agencies also had a desire to maintain sufficient overlap with the upper bound of
the PPP in order to avoid excluding inadvertently a set of businesses from assistance. The
agencies considered public feedback received and, in the revised term sheets issued on June 8,
have selected $250,000 (lowered from $500,000) as the minimum loan size for the MSNLF and
MSPLF in an effort to make the Main Street Lending Program accessible to as many borrowers
as possible, while ensuring the program is feasible from an operational perspective.

The minimum loan size of the MSELF, at $10 million, was set significantly higher than that
of the MSNLF or MSPLF because MSELF upsized tranches are likely more attractive to larger,
more sophisticated borrowers with more complex funding structures.

4. Why did the agencies decide not to create the mid-sized business lending facility that is
described but not mandated in Section 4003(c)(3)(D) of the CARES Act?

The agencies designed the Main Street Lending Program to meet the needs of small and
medium-sized businesses as effectively and efficiently as possible, while protecting taxpayer
funds. The program is designed within the parameters of Section 13(3) of the Federal Reserve
Act, the CARES Act, and the Board’s Regulation A, and includes CARES Act restrictions on
executive compensation, capital distributions, and equity repurchases. The program includes a
number of features that are designed to be attractive to small and medium-sized businesses,
including deferral of interest payments for one year and deferral of repayment of principal for
two years.

5. What is the agencies’ rationale for the adjusted earnings before interest, taxes, depreciation,
and amortization (EBITDA) and leverage standards for loans in this program?

Fundamentally, the agencies decided to use a leverage test based on EBITDA as the key
parameter to govern the credit risk assumed by the Main Street Lending Program. The use of
EBITDA and leverage requirements is standard industry practice in evaluating a potential
borrower’s creditworthiness for cash flow-based lending. Lenders and borrowers regularly agree
to adjust a borrower’s EBITDA to accommodate differences in business models across industries
and to accommodate one-time events that may positively or negatively impact a borrower’s

9
earnings. When applied prudently, these adjustments provide a lender with a more accurate
representation of a business’s earnings capacity over time.

Allowing for leverage of 4x or 6x adjusted EBITDA is within the normal range of practice
across the banking industry. The agencies determined that leverage of 4x adjusted EBITDA is
reasonable for the MSNLF given the parameters of MSNLF Loans, but they allowed for greater
leverage within the MSELF and MSPLF because other risk mitigating features and protections
exist in those facilities, such as the additional security required in the MSELF and the larger risk
retention requirement in the MSPLF.

6. Between the initial announcement of the Main Street facilities on April 9 and the modifications
to the facilities the Fed announced on April 30, the Fed reportedly received more than 2,200
comments from experts, industry groups, and others. Will the Fed release those comments so the
public can review them?

The agencies received more than 2,200 comments from small and medium-sized business
owners, industry groups, nonprofit organizations, and lenders between April 9 and April 30.
After reviewing the comments received, the agencies expanded many aspects of the Main Street
Lending Program to make credit available to a greater number of small and medium-sized
businesses across the country. We are in the process of preparing the comments received for
public release by removing certain proprietary commercial and personally identifiable
information. We anticipate releasing the comments to the public by the end of the month.

7. As part of its April 30 revisions to the facility term sheets for this program, the agencies
removed the requirement that companies attest that they require financing “due to the exigent
circumstances presented by the coronavirus disease.”

a. Why did the agencies remove that requirement?

b. Without this requirement, how will the agencies ensure they are providing liquidity “to
eligible businesses, [s]tates, and municipalities related to losses incurred as a result of
coronavirus”?

Nearly all sectors of the U.S. economy have been affected directly or indirectly by the
exigent circumstances presented by the coronavirus pandemic. As adopted following the
expiration of the public comment period, the Main Street Lending Program includes key features
that more directly and effectively target credit to borrowers that have experienced a change in
circumstances over the past several months. For example, while an eligible borrower’s loans
outstanding with the eligible lender must have received an internal risk rating that is equivalent
to a “pass” rating used by supervisors, the term sheets intentionally specify that the relevant “as
of” date for assignment of that rating is December 31, 2019—a date that precedes the onset of
the COVID-19 disruption in the United States. In similar fashion, the mandatory Main Street
borrower certification requires borrowers to attest that they (i) had generally been paying their
undisputed debts due during the 90 days preceding the Main Street loan (unless the borrower is
behind on its obligations because of disruptions to its business caused by the COVID-19
pandemic), and (ii) will be in a position following receipt of the Main Street loan to bring current

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any debts that have fallen into arrears during the period of COVID-19 disruption. These
program features are designed to make Main Street funding available to businesses that were in
sound financial condition prior to the onset of the pandemic, but that may need additional
financing to support operations until conditions normalize.

8. As part of its April 30 revisions to the facility term sheets for this program, the agencies
eliminated the requirement that firms attest to making “reasonable efforts” to maintain payroll
and retain employees during the term of the loan and replaced it with a requirement that firms
should make “commercially reasonable efforts” to maintain payroll.

a. Why did the agencies remove the original attestation requirement?

The agencies revised the language regarding “reasonable efforts” to remove ambiguity and
clarify that such efforts should be commercially reasonable—that is, that such efforts should be
within the range that contribute to the health of the business and its ability to support
employment over the longer term. More precisely, the goal of the program is to support the
health of businesses through this difficult period so they are able to contribute to a robust
economic recovery. Employees are critical contributors to the success of a business, and
commercially reasonable efforts to maintain employment contribute to a faster recovery and to
the health of a business in the long run.

b. How do the agencies define “commercially reasonable efforts”?

“Commercially reasonable efforts” is a standard defined in contract law. The application of
such a standard in this context means that businesses that participate in the program are expected
to make good-faith efforts to maintain payroll and retain employees in light of their respective
capacities, economic environment, available resources, and business need for labor.

c. How will the agencies enforce this requirement?

The program expects borrowers to make commercially reasonable efforts to maintain
payrolls. Such efforts may take different forms across the broad range of businesses eligible for
the program. Because of the variety of approaches we expect from borrowers, the agencies will
monitor the program’s impact on the economic recovery and employment broadly rather than on
a borrower-by-borrower basis. We expect to make adjustments to the Main Street Lending
Program as needed to ensure the program contributes to robust economic recovery and
employment gains.

Municipal Lending Facility

1. How did the agencies decide which municipalities to include in this facility?

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reviews and otherwise work with borrowers in order to directly purchase notes from all
municipal issuers. Initial direct eligibility was therefore limited to U.S. states and a number of
large jurisdictions, while smaller jurisdictions were made eligible to issue notes to the MLF
indirectly through another eligible state or municipality.

The agencies have subsequently expanded the facility to include multi-state entities, revenue
bond issuers, and a broader range of municipalities, in response to feedback identifying legal
barriers that would frustrate indirect participation by previously ineligible entities. The agencies
also have amended the terms of the MLF to allow more than one issuer per eligible state, city, or
county in order to facilitate the provision of assistance to smaller political subdivisions or other
government entities. The MLF continues to encourage large eligible issuers to permit indirect
participation by their political subdivisions or other governmental entities, however, because it
remains logistically infeasible for the Federal Reserve to purchase notes directly from all U.S.
municipalities for the reasons described above.

2. What is the rationale for the population-size criteria that determine the cities and counties
eligible for this facility? What are the concerns, if any, about purchasing notes from cities or
counties smaller than the thresholds established?

As described above, the population-size criteria for the MLF were selected to enable that the
limited number of feasible issuers be allocated to entities serving the greatest number of people
in the shortest timeframe possible. It would not be logistically feasible to purchase notes directly
from all U.S. cities and counties, and smaller cities and counties have therefore been limited to
indirect participation in the MLF through their respective states. Further, all cities and
counties—even those ineligible to directly participate in the facility—have benefited from
improving market conditions that have resulted from the presence of the MLF as a backstop to
the short-term municipal securities market. By addressing the liquidity needs of larger cities and
counties, the MLF frees up credit from private market sources to address the needs of smaller
cities and counties. This is already evidenced by the significant increase in bank lending
agreements that have been filed with EMMA, the Municipal Securities Rulemaking Board’s
online disclosure portal, since early April.

3. Why were U.S. territories excluded from this facility?

The MLF is open only to entities that were rated investment grade as of the facility’s
announcement to ensure compliance with provisions of the Federal Reserve Act, the Board’s
Regulation A, and the CARES Act. For example, under the Federal Reserve Act, FRBNY must
assign a lendable value, consistent with sound risk management practices, to all collateral for a
loan extended under section 13(3). The security for any loan under the MLF also must protect
the taxpayer from losses. Both requirements are furthered by lending only to investment grade
borrowers. The CARES Act also provides that the principal amount of any obligation issued by
a State or municipality under a facility authorized by section 4003(b) of the Act shall not be
reduced through loan forgiveness. This provision substantially restricts the MLF’s ability to
work out or resolve defaulting notes or other obligations that it has purchased. Restricting access
to investment-grade issuers furthers compliance with this restriction by reducing the likelihood
that the facility will hold debt that falls into default. Moreover, given the large number and

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heterogeneous nature of issuers of municipal debt, it can be difficult to assess and compare their
creditworthiness. Credit ratings provide an objective, transparent, and efficient means by which
the agencies can assess the risk associated with lending to an issuer.

No U.S. territory is rated investment grade. Given their financial circumstances, additional
debt that cannot be forgiven is unlikely to provide U.S. territories with substantial relief. Further,
Puerto Rico is in default on its general obligation debt and would therefore be prohibited from
accessing the Facility by the Board’s Regulation A. Puerto Rico is the only U.S. territory with
independent local governments, and the Federal Reserve is not aware of any local Puerto Rican
government that carries an investment-grade rating. After Hurricanes Irma and Maria, the U.S.
Virgin Islands and its power authority borrowed approximately $300 million from Federal
Emergency Management Agency (“FEMA”) through its Community Disaster Loan Program and
have already sought loan forgiveness for such loans from FEMA because of their limited debt
repayment capacity.

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The Second Report of the Congressional Oversight

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