The Third Report of the Congressional Oversight

Document type: Report
Date: 2020-07-20

Full text

The Third Report of the Congressional Oversight
Commission

July 20, 2020

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

TABLE OF CONTENTS

Introduction 1

Executive Summary 6

Treasury and Federal Reserve Recent Developments 17

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

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

INTRODUCTION

This is the third 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.

At this time, the emergency lending facilities established by the Federal Reserve that are
receiving 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.3 As of
July 15, 2020, the Treasury has invested $37.5 billion in the special purpose vehicle

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 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.

(SPV) it uses for the PMCCF and SMCCF.4 As of July 15, the SMCCF has purchased
$11.4 billion of bond ETFs and individual corporate bonds.5 The Federal Reserve has not
announced that the PMCCF has purchased any bonds or syndicated loans.

 The Main Street Lending Program (MSLP): The Treasury has announced it intends to
make an equity investment of $75 billion in this program, which backs loans to small and
medium-sized businesses with up to 15,000 employees. The Federal Reserve has decided
to expand this program to include certain nonprofit organizations. The MSLP can support
up to $600 billion in lending.6 As of July 15, 2020, the Treasury has invested $37.5
billion in this program.7 The MSLP is operational and able to purchase eligible loans
submitted by lenders registered to participate in the program. There are approximately
300 lenders that have registered or are in the process of registering,8 though only 130 of
them have publicized that they are accepting loan applications from new customers.9 As
of July 15, 2020, the MSLP has purchased a single $12 million loan.10

 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

4 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, July 16, 2020,
https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for July 16, 2020 release). The
SPV for the PMCCF and SMCCF is Corporate Credit Facilities LLC (CCFL). Footnote 14 to table 1 in
the H.4.1 statistical release dated July 16, 2020 indicates that the Treasury has made a $37.5 billion equity
investment in the CCFL.
5 Id. at Table 4.
6 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.
7 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, July 16, 2020,
https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for July 16, 2020 release). The
SPV for the MSLP is MS Facilities LLC (MSFL). Footnote 14 to table 1 in the H.4.1 statistical release
dated July 16, 2020 indicates that the Treasury has made a $37.5 billion equity investment in the MSFL.
8 U.S. House Committee on Financial Services hearing on Coronavirus and the CARES Act, 116th Cong.
(June 30, 2020) (statement of Jerome Powell, Chair, Board of Governors of the Federal Reserve).
9 Federal Reserve Bank of Boston, Listing of Lender Accepting New Business Customers, Information for
Borrowers, https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-
street-lending-program/information-for-borrowers.aspx (last visited on July 19, 2020).
10 Id. at Table 4; U.S. House Small Business Committee hearing on Oversight of the Small Business
Administration and Department of Treasury Pandemic Programs, 116th Cong. (July 17, 2020) (statement
of Steven Mnuchin, Secretary, U.S. Department of the Treasury).

lending.11 As of July 15, 2020, the Treasury has invested $17.5 billion in this facility.12
The MLF has made a single purchase of $1.2 billion in notes from the state of Illinois, as
of July 15, 2020.13

 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 July 15, 2020, the Treasury has invested $10 billion in this
facility.15 The TALF has lent $937 million, as of July 15, 2020.16

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.

11 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.
12 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, July 16, 2020,
https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for July 16, 2020 release). The
SPV for the MLF is the Municipal Liquidity Facility LLC (MLFL). Footnote 14 to table 1 in the H.4.1
statistical release dated July 16, 2020 indicates that the Treasury has made a $17.5 billion equity
investment in the MLFL.
13 Id. at Table 4; 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.
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, July 16, 2020,
https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for July 16, 2020 release). The
SPV for the TALF is TALF II LLC. Footnote 14 to table 1 in the H.4.1 statistical release dated July 16,
2020 indicates that the Treasury has made a $10 billion equity investment in the TALF II LLC.
16 Id. at Table 4.

 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.17

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?18

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, 2020, 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.19 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, 2020 and answers to the tier 2 questions by
June 29, 2020.

On June 8, the Treasury and the Federal Reserve sent a response letter to the Commission that
provided answers to the tier 1 questions.20 The Commission’s second report to Congress on June
18, 2020 discussed those answers.21 On June 29, 2020, the Treasury and the Federal Reserve sent
a response letter to the Commission that provided answers to the tier 2 questions.22

The Commission’s letter of May 29, 2020 also requested a meeting between the Commission and
Secretary Mnuchin and Chair Powell. On June 24, 2020, the Commission met with Secretary
Mnuchin and Chair Powell on Capitol Hill. The conversation, which focused on the Treasury and
the Federal Reserve’s design and implementation of emergency lending programs, was frank,
productive, and thoughtful.

17 CARES Act, Pub. L. No. 116-136, § 4020, 134 Stat. 281 (2020).
18 Congressional Oversight Commission, Questions About the CARES Act’s $500 Billion Emergency
Economic Stabilization Funds, May 18, 2020, at 5,
https://www.toomey.senate.gov/files/documents/COC%201st%20Report_05.18.2020.pdf.
19 Appendix A of this report contains a copy of the Commission’s letter of May 29, 2020.
20 Appendix B of this report contains a copy of the Treasury and the Federal Reserve’s letter of June 8,
2020.
21 Congressional Oversight Commission, The Second Report of the Congressional Oversight
Commission, June 18, 2020,
https://www.toomey.senate.gov/files/documents/Congressional%20Oversight%20Commission%20Report
%20(June%2018,%202020).pdf.
22 Appendix C of this report contains a copy of the Treasury and the Federal Reserve’s letter of June 29,
2020.

The CARES Act empowers the Commission to hold hearings as part of its oversight work.23 In
the coming weeks, the Commission plans to hold a hearing about the MSLP, which backs loans
to small and medium-sized businesses with up to 15,000 employees.

In this report, we describe recent key actions the Treasury and the Federal Reserve have taken
under Subtitle A and list and discuss the current status and effects of the Treasury and the
Federal Reserve's emergency lending programs.

23 CARES Act, Pub. L. No. 116-136, § 4020(e)(1), 134 Stat. 281 (2020).

EXECUTIVE SUMMARY

The Treasury and the Federal Reserve have announced how they plan to use $195 billion of the
$454 billion Congress allocated in the CARES Act to support emergency lending facilities
established by the Federal Reserve. As of July 15, 2020, these facilities have made a total of
$13.6 billion in purchases and loans,24 up from a total of $6.7 billion in purchases as of our last
report on June 18, 2020. Since our last report, the Treasury has also made one loan, totaling $700
million, to a business it decided was critical to maintaining national security.25 As of today, all of
the Federal Reserve facilities funded by the CARES Act are operational.

Larger Businesses with Access to the Capital Markets

The Commission’s last report noted that the Federal Reserve’s mere announcement that it was
establishing emergency facilities improved market function, enabling certain larger companies to
access credit through the debt capital markets to help fund their operations at rates lower than
those available when the market was severely stressed. Since the last report, the Federal Reserve
has increased its presence in these markets, including by purchasing individual corporate bonds
for the first time.

These interventions can help stabilize the economy and support employment. According to the
Treasury and Federal Reserve, “[c]orporate bonds support the operations of companies with
more than 17 million employees based in the United States . . . . If companies are unable to issue
corporate bonds, they may be unable to invest in inventory and equipment, meet current
liabilities, or pay employees.”26 The evidence available to the Commission suggests that while
some companies that have been able to borrow through the capital markets are using the funds to
maintain or even expand payroll, other companies have cut payroll while continuing to issue
dividends to shareholders.27 It is also clear that some of the companies that have been able to
borrow since the announcement of these facilities were in strong financial condition.28

24 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 16,
2020, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for June 16, 2020
release).
25 U.S. Department of the Treasury, Treasury to Provide Loan to YRC Worldwide, July 1, 2020,
https://home.treasury.gov/news/press-releases/sm1049.
26 Appendix B at 3.
27 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.
28 Joy Wiltermuth, Apple borrows $8.5 billion, joins record corporate debt borrowing spree, May 4,
2020, https://www.marketwatch.com/story/apple-pulls-in-pricing-joins-record-corporate-debt-borrowing-
spree-2020-05-04.

Given the powerful impact the announcement of these facilities had on market function, our last
report questioned whether the Federal Reserve should even continue its secondary market
corporate bond-buying activity activities. Chair Powell addressed this issue in his testimony
before the U.S. Senate Banking Committee (the “Senate Banking Committee”) and U.S. House
of Representatives Financial Services Committee (the “House Financial Services Committee”) in
June. He testified that “markets are functioning pretty well” and “as those markets continue to
normalize, our purchases will decline.”29 But he noted that if market function deteriorated, the
SMCCF’s purchases would increase.30 In addition, Chair Powell said that even though the
corporate bond market is currently functioning well, the Federal Reserve decided to begin buying
individual corporate bonds with the SMCCF, in part, in order to maintain its credibility with
market participants by following through on its previously announced plan to buy such bonds.31
At our June 24, 2020 meeting, Chair Powell reiterated that the Federal Reserve’s credibility is
key and that to maintain it, the Federal Reserve needed to follow through on its announcement.

We recognize the importance of the Federal Reserve following through on its commitments. At
the same time, the secondary market for corporate bonds is functioning well already and
continued Federal Reserve intervention can have distortionary effects in both the short term and
the long term. Moreover, the Federal Reserve has the PMCCF as a tool to help individual
companies that may be struggling to borrow money to finance their operations. We will continue
to closely monitor the corporate bond markets and the operation of these facilities.

Small and Medium-Sized Businesses

Our last report noted that there was less evidence, so far, that the actions of the Treasury and the
Federal Reserve have been as beneficial for small and medium-sized businesses as they have
been for larger companies that can access the capital markets. The lending facility intended to
support credit to these companies—the MSLP—became fully operational only on July 6, 2020,
more than three months after the Federal Reserve announced that it would be establishing the
facility. The length of time it took to establish and launch this facility has been an understandable
source of frustration for some small and medium-sized businesses interested in the program.

At our June 24, 2020 meeting and in a June 29, 2020 letter to the Commission, Secretary
Mnuchin and Chair Powell explained that providing support to small and medium-sized
businesses is new territory for the Federal Reserve and very complex because these businesses
are a “broad and heterogeneous class of borrowers” with diverse needs.32 They indicated the

29 U.S. House Financial Services Committee hearing on Monetary Policy and the State of the Economy,
116th Cong. (June 17, 2020) (statement of Jerome Powell, Chair, Board of Governors of the Federal
Reserve).
30 U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on the Quarterly CARES Act
Report to Congress, 116th Cong. (June 16, 2020) (statement of Jerome Powell, Chair, Board of Governors
of the Federal Reserve).
31 Id.
32 Appendix C at 10.

Federal Reserve had to develop a standardized process for the MSLP and “leverage existing
channels of bank lending.”33 In contrast, the agencies noted that the “highly-developed and
standardized bond market utilized by larger companies” provided them with “an established and
effective mechanism for the Federal Reserve to alleviate dislocations in the large corporate credit
markets.”34 While the Commission acknowledges the complexity involved in establishing the
MSLP, we expect the Treasury and the Federal Reserve to act more swiftly in the future if
adjustments need to be made to the MSLP to improve its effectiveness.

If credit is unavailable through other means, the MSLP has the potential to benefit small and
medium-sized businesses that employ millions of workers in the U.S. According to one
economic study, an estimated 45 million employees, or almost 40% of all private-sector workers,
are employed by a business eligible for the MSLP.35 However, we do not know how many
eligible businesses are actually in need of credit from the MSLP. As of July 15, 2020, the facility
has purchased one $12 million Main Street loan from a lender in Wisconsin. While information
about this loan was provided by Secretary Mnuchin at a July 17, 2020 hearing of the U.S. House
of Representatives Small Business Committee, real-time reporting about the MSLP is
unavailable, as the Federal Reserve usually releases detailed disclosures about programs like the
MSLP on a monthly basis.

We raised questions about the utilization of the MSLP at our June 24, 2020 meeting with
Secretary Mnuchin and Chair Powell. We asked them whether low utilization of the MSLP
would reflect that businesses do not need credit or have obtained it elsewhere, or that the
program is not designed properly to provide assistance to businesses that need it. In response,
they noted that low utilization of a program does not necessarily indicate a problem with its
design. For example, they noted that the PMCCF had not been used by any businesses. In their
view, the lack of utilization of the PMCCF is not a design flaw, but a result of the fact that the
corporate bond market is functioning well and businesses are accessing credit through that
market.

Secretary Mnuchin and Chair Powell believe, based on feedback they have received from
lenders, there is currently a fair to modest amount of interest from businesses in the MSLP. They
think this sentiment may reflect the fact that some businesses have been able to obtain credit by
drawing down on existing lines of credit or by getting Paycheck Protection Program (PPP) loans
backed by the Small Business Administration (SBA). Furthermore, it is possible some small and
medium-sized businesses are finding financing from other non-bank lenders sufficient to meet

33 Id.
34 Id. at 2.
35 Nick Timiaraos & Kate Davidson, Fed, Treasury Disagreements Slowed Start of Main Street Lending
Program, Wall Street Journal, July 12, 2020, https://www.wsj.com/articles/fed-treasury-disagreements-
slowed-start-of-main-street-lending-program-11594558800.

their needs.36 Our initial reaction is that a purchase of one $12 million loan over a week and one-
half seems like a small amount, given the economic challenges facing some small and medium-
sized businesses. Chair Powell and Secretary Mnuchin told us that demand for Main Street loans
may increase over time because bank lending in the middle market has tightened and, as a result,
businesses may have less credit to draw on from banks going forward.

Fundamentally, the MSLP is intended to ensure that these businesses can access credit, but there
are indications that at least some small businesses do not need credit or they are able to obtain it
from sources other than the MSLP. The widely followed monthly National Federation of
Independent Business (NFIB) survey of small businesses found that only 3% of business owners
reported that all their borrowing needs were not satisfied in June 2020, and only 1% reported that
financing was their top business problem (down 1% from May 2020). In contrast, 34% of owners
reported all their credit needs were met, and 54% said they were not interested in a loan. The
average rate paid on short maturity loans by businesses was 4.5% (down 1.3% from March and
April 2020 and down 1% from June 2020). According to the NFIB, “[h]istorically, loans have
never been cheaper.”37 What the MSLP cannot do, as a result of the Federal Reserve’s statutory
and regulatory obligations,38 is help businesses facing serious declines in revenue that cannot
take on additional debt to address that problem.

At our June 24, 2020 meeting, we also raised with Secretary Mnuchin and Chair Powell the issue
of creditworthy businesses that may be falling in the gaps between the federal government’s
assistance programs for businesses. Currently, a business’s eligibility for the MSLP is based, in
part, on its adjusted 2019 earnings before interest, taxes, depreciation, and amortization
(EBITDA). There are some businesses, such as those with a real estate focus, retail businesses
with large amounts of inventory, and new and growing businesses, that do not meet the MSLP’s
EBITDA standards and are too large to qualify for PPP loans but nonetheless are creditworthy
because they have substantial assets. These businesses may have low or weak cash flow but
possess a favorable loan-to-value or loan-to-cost ratio. At our meeting, Secretary Mnuchin
indicated they are looking at options to potentially address this situation, including a possible
asset-based lending facility established by the Federal Reserve. As the Treasury and the Federal
Reserve are considering such options, the Commission would also recommend they consider

36 One data set that is helpful for determination of small and medium-sized business access to credit is
bankruptcy filings. While commercial chapter 11 bankruptcy reorganization filings increased for the first
six months of 2020 over the same period for 2019, the total commercial bankruptcy filings across all
chapters fell. American Bankruptcy Institute, Commercial Chapter 11 Filings Increase 26 Percent in
First Half of 2020 over Last Year, Total Filings Drop 23 Percent, July 7, 2020,
https://www.abi.org/newsroom/bankruptcy-headlines/commercial-chapter-11-filings-increase-26-percent-
in-first-half-of.
37 William C. Dunkelberg & Holly Wade, NFIB Small Business Economic Trends, June 2020,
https://assets.nfib.com/nfibcom/SBET-June-2020.pdf.
38 12 U.S.C. § 343(3) (Section 13(3) of the Federal Reserve Act); 12 C.F.R. Part 201 (Federal Reserve’s
Regulation A).

whether it would be appropriate for the MSLP to provide second lien lending to creditworthy
businesses with reasonable cash flow and valued collateral.

In addition, the Commission questioned Secretary Mnuchin and Chair Powell about the MSLP
payroll conditions. The term sheets for the MSLP state that a business participating in the
program “should make commercially reasonable efforts to maintain its payroll and retain its
employees during the time [its Main Street loan] is outstanding,”39 a point reiterated in the
Treasury-Federal Reserve letter to the Commission dated June 8, 2020.40 They also noted that
they “will monitor the program’s impact on the economic recovery and employment broadly,
rather than on a borrower-by-borrower basis.”41

During our meeting, Secretary Mnuchin and Chair Powell addressed how they view this
“commercially reasonable efforts” standard, whether it is sufficient to get businesses to maintain
payrolls, and how they plan to monitor compliance with this standard. They indicated businesses
that participate in the MSLP are not required to attest in their loan documents that they will use
“commercially reasonable efforts” to maintain payrolls. Instead, as Chair Powell described it, the
“commercially reasonable efforts” standard is “hortatory”—meaning it is voluntary, not required.
In his view, it is not beneficial for the health of a business to require it to borrow money to pay
workers who cannot work.42 Secretary Mnuchin and Chair Powell noted that the CARES Act
was the product of careful bipartisan negotiations in Congress, and the legislation does not
require businesses participating in lending programs established by the Federal Reserve to
maintain payrolls. They indicated they are focused on implementing the law as it was written by
Congress, not rewriting the law. Finally, they confirmed that they will not monitor whether
individual businesses that receive Main Street loans are making “commercially reasonable
efforts” to maintain payroll, but rather will monitor the MSLP’s impact on the economic
recovery and employment broadly.

Given these statements by Chair Powell and Secretary Mnuchin, it is clear to the Commission
they are not going to impose mandatory payroll requirements on businesses that borrow through

39 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.
40 In the letter, the Treasury and the Federal Reserve stated that the MSLP “expects borrowers to make
commercially reasonable efforts to maintain payrolls.” Appendix B at 10.
41 Id.
42 Former Federal Reserve officials have also made this same point. Jeremy Stein, chairman of the
Harvard University economics department and a former Federal Reserve governor, stated, “You can’t
expect companies to borrow to pay employees.” Similarly, Mark Carey, a former Federal Reserve staff
member, has stated, “To go to great lengths to make companies keep employees that they don’t need, in
light of new expectations that economic activity will remain below pre-Covid levels for a long while,
doesn’t make sense.” 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.

the MSLP unless Congress mandates it in new legislation. Congress previously considered but
chose not to require the Treasury and the Federal Reserve to impose such requirements on the
Federal Reserve’s lending facilities as part of the CARES Act. For example, Section
4003(c)(3)(D) of the CARES Act describes a potential lending facility to mid-sized businesses
that would impose payroll requirements.43 Congress did not require the Federal Reserve to
establish this facility. In contrast, Congress did mandate that certain Treasury and SBA grant and
loan programs established by the CARES Act impose payroll requirements on businesses.

The Commission will continue to closely monitor this facility and seek to gather additional
information about the credit needs of small and medium-sized businesses. In the coming weeks,
the Commission plans to hold a hearing about the MSLP, at which we intend to inquire about the
efficacy and utilization of the facility.

State and Local Governments

As with small and medium-sized businesses, our last report noted there was less evidence, so far,
that the actions of the Treasury and the Federal Reserve have been as beneficial for state and
local governments as they have been for larger companies that can access the capital markets. As
of July 15, 2020, the facility intended to help state and local governments manage cash flow
problems relating to the COVID-19 crisis—the MLF—has made a single purchase of $1.2 billion
in notes from Illinois. However, at least two other states—New Jersey and Hawaii—are
reportedly planning to utilize the MLF.44 Some commentators have attributed the current low
utilization of the MLF to the fact that it often charges interest rates above rates currently
available in the municipal bond market, and it does not purchase notes with maturities greater
than three years. One analysis of the potential value of the MLF to New Jersey found the facility
could provide the state with significantly more capacity to borrow and spend if its repayment
term were longer than three years.45

In their written answers to the Commission’s questions, the Treasury and Federal Reserve
provided their rationale for the design of this facility. They stated the “Federal Reserve
established the MLF in response to rapid deterioration in the municipal securities market at a
time when it appeared unlikely that the short-term municipal securities market could fully meet

43 CARES Act, Pub. L. No. 116-136, § 4003(c)(3)(D), 134 Stat. 281 (2020).
44 Karen Pierog, Cash-strapped New Jersey to borrow up to $9.9 billion under deal, Reuters, July 10,
2020, https://www.reuters.com/article/us-health-coronavirus-newjersey-debt/cash-strapped-new-jersey-to-
borrow-up-to-9-9-billion-under-deal-idUSKBN24B307; Kevin Dayton, Gov. Ige warns that without more
federal aid, Hawaii public worker pay cuts or furloughs are inevitable, Honolulu Star Advertiser, July 5,
2020, https://www.staradvertiser.com/2020/07/05/hawaii-news/gov-ige-warns-that-without-more-federal-
aid-public-worker-pay-cuts-or-furloughs-are-inevitable/.
45 Gregg Mennis & Ben Henken, New Jersey Considers Tapping New Fed Borrowing Program to Meet
Pension Contributions, Pew Charitable Trusts, July 15, 2020, https://www.pewtrusts.org/en/research-and-
analysis/articles/2020/07/15/new-jersey-considers-tapping-new-fed-borrowing-program-to-meet-pension-
contributions.

the demand for short-term municipal note issuance.”46 According to the agencies, the “MLF was
designed as a short-term lending program to provide bridge financing to states, localities, and
their subdivisions or other governmental entities facing sudden disruptions in their short-term
cash flows as a result of the COVID-19 pandemic.”47 In their view, it “was not designed to
provide long-term financing for capital infrastructure projects because the long-term municipal
capital markets appear to have been disrupted for only a relatively short period.”48

At our June 24, 2020 meeting, the Commission also questioned Secretary Mnuchin and Chair
Powell about the design of the MLF and its low utilization among state and local governments.
Their responses were consistent with the written answers they later provided to us in their June
29, 2020 letter. They emphasized that the goal of the MLF is only to provide short-term liquidity
for state and local governments, not to fund their long-term spending. As to the facility’s low
utilization, they pointed to the fact that conditions in the municipal bond market have improved
significantly, and Illinois, in fact, was able to obtain most of its financing in that market. They
also noted they are not trying to compete with the municipal bond market in terms of interest
rates. In their view, the MLF is a backstop and a lender of last resort if the municipal bond
market is not functioning. If the market improves, in part because of the backstop the MLF
provides, and state and local governments can access credit through the market, they do not view
it as a problem that the MLF has a low utilization.

There is evidence that the Federal Reserve’s actions, including the announcement of the MLF,
have helped to improve conditions in the municipal bond market. In a recent report, economists
at the Federal Reserve Bank of New York concluded that market conditions for municipal
securities have improved significantly in the wake of the Federal Reserve’s actions: “[Y]ields for
most issuers have receded to below pre-pandemic levels, outflows from municipal bond mutual
funds have turned into inflows, and issuance has picked up.”49 In fact, the $48.6 billion in new
municipal bonds issued in June 2020 was the highest monthly municipal bond issuance in eight
months and was a 63% increase over issuance in May 2020.50

The report also noted that “improvements in muni debt markets are not necessarily sufficient to
induce willingness to spend at the local level.” 51 The economists noted that, unlike corporations,
state and local governments “typically operate under balanced budget requirements, which

46 Appendix C at 15.
47 Id.
48 Id.
49 Marco Cipriani, et al., Municipal Debt Markets and the COVID-19 Pandemic, Liberty Street
Economics, June 29, 2020, https://libertystreeteconomics.newyorkfed.org/2020/06/municipal-debt-
markets-and-the-covid-19-pandemic.html.
50 Securities Industry and Financial Markets Association, US Municipal Issuance, July 2, 2020,
https://www.sifma.org/wp-content/uploads/2017/06/municipal-us-municipal-issuance-sifma.xls.
51 Marco Cipriani, et al., Municipal Debt Markets and the COVID-19 Pandemic, Liberty Street
Economics, June 29, 2020, https://libertystreeteconomics.newyorkfed.org/2020/06/municipal-debt-
markets-and-the-covid-19-pandemic.html.

constrain or even prohibit the financing of deficits across fiscal years.”52As a result, the report
noted that “[h]istorically, state and local governments respond to recessions by drawing down on
rainy day reserves, cutting expenses, and temporarily raising revenues” and that such steps
“reflect sound fiscal policies” even though they are “contractionary from a macroeconomic
perspective.”53 The report also indicated that the federal government has responded “with
significant fiscal support for state and local governments” during the COVID-19 crisis, including
$150 billion by way of the Coronavirus Relief Fund, established through the CARES Act.54 Still,
it noted that “[m]ost state and local governments are currently developing their 2021 budgets
with the expectation of additional federal fiscal support that would limit the extent of budgetary
retrenchment and deficit borrowing.”55 The report also concluded that “conditions remain
strained relative to the start of the year, especially given the uncertainty about the path of the
COVID-19 pandemic, its impact on economic recovery, and the degree of fiscal support from the
federal government following the significant revenue losses experienced by state and local
governments.”56

As the Treasury and the Federal Reserve have made clear, the MLF is intended to help state and
local governments with temporary cash flow needs and not longer-term financing problems that
might arise from the impact of COVID-19 on the economy or from some governments’ long-
standing precarious financial situations. While there is mixed evidence about the severity of
those longer-term financing problems,57 many local governments have built up reserves they
could draw upon now,58 and Congress has already provided some federal aid to state and local
governments (including, but not limited to, the $150 billion Coronavirus Relief Fund and $121
billion in various other programs),59 it is evident the MLF, as currently designed, is not a tool for

52 Id.
53 Id.
54 Id.
55 Id.
56 Id.
57 Marco Cipriani, et al., Municipal Debt Markets and the COVID-19 Pandemic, Liberty Street
Economics, June 29, 2020, https://libertystreeteconomics.newyorkfed.org/2020/06/municipal-debt-
markets-and-the-covid-19-pandemic.html.
58 A recent report noted: “Fortunately, many local governments have used the last decade to slowly build
up reserves and rainy day funds, and have access to a pool (but often still limited) of capital. As of 2019,
according to Moody’s [Municipal Finance Ratio Analysis (MFRA)], the median US County’s unreserved,
undesignated operational fund balance covered 39% of revenues, a multi-decade historical high.” JP
Morgan, Municipal Markets Weekly, June 12, 2020, at 13.
59 The CARES Act provided state and local governments $150 billion for the Coronavirus Relief Fund,
$30 billion for education, $25 billion for public transportation, $11 billion for COVID-19 testing, and $5
billion for community development grants. The Families First Coronavirus Response Act, which was
enacted on March 18, 2020, increased federal Medicaid funding for states by an estimated $50 billion.
Pub. L. No. 116–127, 134 Stat. 178 (2020); Letter from Phillip L. Swagel, Director, Congressional
Budget Office to U.S. Representative Nita Lowey, Apr. 2, 2020, https://www.cbo.gov/system/files/2020-
04/HR6201.pdf.

addressing longer-term state and local government financing issues stretching beyond three
years.

Airline Industry and National Security Businesses

At the time of our last report, the Treasury had not made any loans to the airline industry or
businesses critical to maintaining national security under Subtitle A. In response to the
Commission’s questions, the agencies have indicated that, as of June 16, 2020, the Treasury has
received 190 applications for such airline industry loans. They also indicated that, as of June 17,
2020, the Treasury has “received 70 applications for the national security loan program, 25 of
which meet one of the two national security eligibility criteria established by Treasury,” although
one of those applications has been withdrawn.60

The most significant development with this lending program is the Treasury loan of $700 million
to YRC Worldwide Inc. (YRC) under the national security loan program. In the third section of
this report, we describe the terms of the loan and provide detailed information about YRC. In
short, YRC provides transportation and logistics services, including to the U.S. Department of
Defense (the “Defense Department”).61 The company specializes in less-than-truckload (LTL)
shipping where smaller cargos from multiple customers are combined on one trailer.62 According
to the Treasury, YRC “provides 68% of less-than-truckload services to the Defense
Department.”63

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.64 YRC apparently did not meet
either of the two national security eligibility criteria. However, YRC qualified for the program
under a catch-all provision created by the Treasury allowing it to determine if a business is
critical to maintaining national security based solely on a recommendation and certification from
the Secretary of Defense or the Director of National Intelligence.

60 Appendix C at 16.
61 YRC and its operating companies employ 30,000 people, including 24,000 members of the
International Brotherhood of Teamsters. YRC Worldwide Inc., YRC Worldwide Expects To Receive $700
Million CARES Act Loan from U.S. Treasury, July 1, 2020, http://investors.YRC.com/news-
releases/news-release-details/yrc-worldwide-expects-receive-700-million-cares-act-loan-us.
62 YRC Worldwide Inc., Annual Report (Form 10-K), March 11, 2020, http://investors.YRC.com/static-
files/8092f183-eb4b-4ba7-bae2-fb4afc4f3e25.
63 U.S. Department of the Treasury, Treasury to Provide Loan to YRC Worldwide, July 1, 2020,
https://home.treasury.gov/news/press-releases/sm1049.
64 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”).

The Commission has questions about the decision to deem YRC a business critical to
maintaining national security and the process for reaching that conclusion. Secretary Mnuchin
has publicly stated that the national security loan program was developed with the thought that
Boeing and General Electric might need loans.65 Given the types of sophisticated services and
products these two companies provide for our national defense, it is not hard to argue that they
are critical to maintaining national security. It is far from clear that the fourth-largest LTL
shipping company in the United States is critical to maintaining national defense because it
reportedly delivers “food, electronics and other supplies to military locations around the
country.”66 The Commission intends to conduct further oversight of this decision.

The Commission intends to explore the decision to designate YRC as critical to maintaining
national security, in part, because the risk of loss of U.S. taxpayer money on this loan appears
high. In fact, the Commission notes that the level of risk taken in the loan to YRC appears
strikingly higher than the risks associated with the other facilities over which the Commission
has oversight. YRC has been rated non-investment grade for over a decade, struggled financially
for years before the COVID-19 crisis, and was at risk of bankruptcy before it obtained a loan
from the Treasury.67 Under the CARES Act, a Treasury loan like this one is supposed to be
“sufficiently secured” or “made at a rate” that “reflects the risk of the loan” and “is to the extent
practicable, not less than an interest rate based on market conditions for comparable obligations
prevalent prior to the outbreak of the coronavirus disease 2019 (COVID–19).”68 It is
questionable whether the loan to YRC meets these standards. The interest rate on YRC’s loan
from the Treasury is 4% lower than the interest rate on the company’s most recent debt
financing, which was a five-year, $600 million term loan that YRC obtained in September 2019
before the COVID-19 crisis.69 As part of the loan agreement, the Treasury has obtained a 29.6%
equity stake in YRC to reportedly provide “appropriate taxpayer compensation” for the loan.70
But given the company’s long-term non-investment grade rating and previous close calls with

65 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.
66 Kate Davidson & Jennifer Smith, U.S. Treasury to Lend $700 Million to Trucking Firm YRC
Worldwide, Wall Street Journal, July 1, 2020, https://www.wsj.com/articles/u-s-treasury-to-loan-700-
million-to-trucking-firm-yrc-worldwide-11593602409.
67 Moody’s Investors Services, YRC Worldwide Inc. Ratings, https://www.moodys.com/credit-
ratings/YRC-Worldwide-Inc-credit-rating-834015 (last visited July 14, 2020); Jennifer Smith, Truckers
Cut Spending as Factory Slowdown Weighs on Operators, Wall Street Journal, April 7, 2020,
https://www.wsj.com/articles/truckers-cut-spending-as-factory-slowdown-weighs-on-some-operators-
11586295247; Standard & Poor’s, U.S.-Based YRC Worldwide Inc. Downgraded To 'CCC' On
Anticipated Covenant Violation, Outlook Negative, May 28, 2020,
https://www.standardandpoors.com/en_US/web/guest/article/-/view/type/HTML/id/2450913.
68 CARES Act, Pub. L. No. 116-136, § 4003(c)(2)(C), 134 Stat. 281 (2020).
69 YRC Worldwide Inc., Current Report (Form 8-K), Sept. 11, 2019, http://investors.YRC.com/static-
files/14d3a39a-13af-4e5f-80fc-bcad38b120f2.
70 U.S. Department of the Treasury, Treasury to Provide Loan to YRC Worldwide, July 1, 2020,
https://home.treasury.gov/news/press-releases/sm1049.

bankruptcy over the years, it is not clear that an equity stake in YRC will provide much, if any,
compensation or protection to taxpayers.71

This loan may indicate that the Treasury believes the national security designation permits a
much higher risk tolerance to provide relief to firms that were struggling well before the
COVID-19 pandemic. If that is the case, the Commission would like to better understand the
rationale for this risk tolerance, especially in light of the statutory restrictions on national
security loan terms and the fact that the single such loan the Treasury has made—to date—is to a
company that may not be critical to maintaining national security.

71 David Twiddy, YRC Worldwide misses restructuring milestone, warns of bankruptcy potential, Kansas
City Business Journal, March 15, 2011, https://www.bizjournals.com/kansascity/news/2011/03/15/yrc-
worldwide-misses-restructuring.html; David Twiddy, YRC Worldwide bondholders approve debt-for-
equity swap, Kansas City Business Journal, Dec. 31, 2009,
https://www.bizjournals.com/kansascity/stories/2009/12/28/daily22.html.

TREASURY AND FEDERAL RESERVE RECENT DEVELOPMENTS

In June and July 2020, the Treasury and the Federal Reserve took a number of actions under
Division A, Title IV, Subtitle A of the CARES Act. We describe the key recent developments
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.72 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 that maintain at least a
BB-/Ba3 rating.73 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.74 As of July 15, 2020, the Treasury has invested $37.5 billion in the SPV it uses for the
PMCCF and SMCCF.75

On June 29, 2020, the PMCCF became operational and available for use by eligible businesses.76
That same day the Federal Reserve Bank of New York released an updated term sheet for the
PMCCF and several forms eligible businesses must complete to borrow under the PMCCF,
including forms to certify compliance with the CARES Act’s U.S. business and conflict of
interest requirements.77

Two weeks before the PMCCF became operational, on June 16, 2020, Chair Powell told the
Senate Banking Committee that “so far” the Federal Reserve had seen “no demand” for the

72 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.
73 Id.
74 Id.
75 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, July 16, 2020,
https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for July 16, 2020 release). The
SPV for the PMCCF and SMCCF is Corporate Credit Facilities LLC (CCFL). Footnote 14 to table 1 in
the H.4.1 statistical release dated July 16, 2020 indicates that the Treasury has made a $37.5 billion equity
investment in the CCFL.
76 Federal Reserve Bank of New York, New York Fed Announces Primary Market Corporate Credit
Facility Launches on June 29, June 29, 2020,
https://www.newyorkfed.org/newsevents/news/markets/2020/20200629.
77 Federal Reserve Bank of New York, New York Fed Announces Primary Market Corporate Credit
Facility Launches on June 29, June 29, 2020,
https://www.newyorkfed.org/newsevents/news/markets/2020/20200629.

PMCCF.78 He attributed the lack of demand to the fact that market functioning in the corporate
bond market “has improved really substantially.”79 As of July 15, 2020, the Federal Reserve had
not announced that the PMCCF had actually purchased any bonds or syndicated loans.

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 on the secondary
market individual corporate bonds issued by corporations rated investment grade as of March 22,
2020 that maintain at least a BB-/Ba3 rating, 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.

The SMCCF began purchasing bond ETFs on May 12, 2020 and, on June 16, 2020, the SMCCF
began purchasing individual corporate bonds, which the Federal Reserve considers a better tool
for fulfilling the facility’s goals.80 The Federal Reserve has stated the SMCCF is initially
purchasing individual “corporate bonds to create a corporate bond portfolio that is based on a
broad, diversified index of U.S. corporate bonds.”81 According to the Federal Reserve, this
82
“indexing approach will complement the [SMCCF’s] current purchases of [ETFs].” In the
83
future, the SMCCF may purchase individual corporate bonds using other methodologies.

78 U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on the Quarterly CARES Act
Report to Congress, 116th Cong. (June 16, 2020) (statement of Jerome Powell, Chair, Board of Governors
of the Federal Reserve).
79 Id.
80 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; 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.
81 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.
82 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.
83 Federal Reserve Bank of New York, FAQs: Primary Market Corporate Credit Facility and Secondary
Market Corporate Credit Facility, June 29, 2020, https://www.newyorkfed.org/markets/primary-and-
secondary-market-faq/corporate-credit-facility-faq.

On June 17, 2020, Chair Powell testified before the House Financial Services Committee about
the SMCCF’s bond buying. He stated that purchasing individual corporate bonds is “going to
form the primary mode of support over time . . . by which we support market function.”84 He
stated that “[o]ver time, we’ll gradually move away from ETFs.” According to Chair Powell,
buying individual corporate bonds is “a better tool ultimately for supporting liquidity and market
function.” He stated that “markets are functioning pretty well” and “as those markets continue to
normalize, our purchases will decline.” The day before, on June 16, 2020, Chair Powell stated at
a Senate Banking Committee hearing that if there was a deterioration in market functioning, the
SMCCF’s purchases would increase.85 In addition, he noted that even though the corporate bond
market is currently functioning pretty well, the Federal Reserve decided, in part, to begin buying
individual corporate bonds with the SMCCF in order to maintain its credibility with market
participants by following through on its previously announced plan to buy such bonds.86

Since May 12, 2020, the Federal Reserve has submitted three periodic reports about the SMCCF
to the Senate Banking Committee and the House Financial Services Committee that disclose
details about the facility’s purchases of bond ETFs and individual corporate bonds.87 Our
analysis of these reports shows that from May 12, 2020, when the SMCCF began purchasing
bond ETFs, through June 15, 2020, the day before the SMCCF began purchasing individual
corporate bonds, the SMCCF purchased an average of $273 million of bond ETFs per day.
During that time period, the highest daily purchase amount was $365 million on June 12, 2020,
and the lowest daily purchase amount was $190 million on May 19, 2020. Since the SMCCF
began purchasing individual bonds on June 16, 2020 through June 29, 2020, the facility’s
average daily amount of bond ETF purchases declined to $134 million. The lowest daily
purchase amount during that period was $67 million on June 29, 2020 and the highest daily
purchase amount was $207 million on June 19, 2020.88

Consistent with Chair Powell’s testimony, these reports show the SMCCF has begun to shift its
bond buying from ETFs to individual corporate bonds. From June 16, 2020 through June 29,
2020, the SMCCF purchased an average of $165 million of individual corporate bonds per day.
During that time period, the highest daily purchase amount of individual bonds was $227 million

84 U.S. House Financial Services Committee hearing on Monetary Policy and the State of the Economy,
116th Cong. (June 17, 2020) (statement of Jerome Powell, Chair, Board of Governors of the Federal
Reserve).
85 U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on the Quarterly CARES Act
Report to Congress, 116th Cong. (June 16, 2020) (statement of Jerome Powell, Chair, Board of Governors
of the Federal Reserve).
86 Id.
87 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.
88 This analysis is based on the Federal Reserve’s July 10, 2020, June 28, 2020, and May 29, 2020
transaction-specific disclosures for the SMCCF, which are available at
https://www.federalreserve.gov/publications/reports-to-congress-in-response-to-covid-19.htm.

on June 16, 2020 and the lowest daily purchase amount was $155 million on June 19, 2020. The
total average daily purchase amount of both bond ETFs and individual corporate bonds during
89
that period was $310 million.

On July 8, 2020, the Executive Vice President of the Federal Reserve Bank of New York, Daleep
Singh, stated the SMCCF has “slowed the pace of purchases, from about $300 million per day to
a bit under $200 million a day.”90 To put the size of those purchases into context, he noted that
“$300 million of ETF purchases a day represented about 10 percent of average daily volumes for
ETFs that were eligible for purchase at the time.”91 Similarly, he stated that the SMCCF’s daily
purchases of “a bit under $200 million a day across ETFs and cash bonds” represent “around 5
percent of the average daily volume of eligible cash bonds, and less than 1 percent of ETF
average daily volume.”92 Like Chair Powell, Mr. Singh stated: “If market conditions continue to
improve, Fed purchases could slow further, potentially reaching very low levels or stopping
entirely. This would not be a signal that the SMCCF’s doors were closed, but rather that markets
are functioning well. Should conditions deteriorate, purchases would increase.”93

As of June 29, 2020, the SMCCF had purchased more than 500 individual corporate bonds from
more than 300 different issuers. The purchase amount for these bonds was $1.76 billion.94 The
chart below lists the SMCCF’s ten largest individual bond holdings by issuer, as of June 29,
2020.95 The bonds of these ten issuers make up 13% of the SMCCF’s total individual bond
holdings.

89 Id.
90 Daleep Singh, The Fed’s Emergency Facilities: Usage, Impact, and Early Lessons, remarks at Hudson
Valley Pattern for Progress, July 8, https://www.newyorkfed.org/newsevents/speeches/2020/sin200708.
91 Id.
92 Id.
93 Id.
94 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 (Transaction-specific
Disclosures), June 28, 2020, https://www.federalreserve.gov/publications/files/smccf-transition-specific-
disclosures-6-28-20.xlsx; 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 (Transaction-specific Disclosures), July 10, 2020,
https://www.federalreserve.gov/publications/files/smccf-transaction-specific-disclosures-7-10-20.xlsx.
95 This chart was compiled using data in the Federal Reserve’s June 28, 2020 and July 10, 2020
transaction-specific disclosures for the SMCCF. 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 (Transaction-specific Disclosures), June 28, 2020,
https://www.federalreserve.gov/publications/files/smccf-transition-specific-disclosures-6-28-20.xlsx;
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 (Transaction-specific
Disclosures), July 10, 2020, https://www.federalreserve.gov/publications/files/smccf-transaction-specific-
disclosures-7-10-20.xlsx.

Issuer
Sector
Par Value of
Bonds
(U.S. $)
Percentage of SMCCF's
Individual Bond
Holdings (as of 6/29/20)
AT&T Inc.
Communications
$30,500,000
1.85%
Volkswagen Group America
Consumer Cyclical
$26,500,000
1.61%
Verizon Communications
Communications
$25,000,000
1.52%
Apple Inc.
Technology
$25,000,000
1.52%
General Electric Co.
Capital Goods
$24,000,000
1.46%
Toyota Motor Credit Corp.
Consumer Cyclical
$24,000,000
1.46%
Daimler Finance NA LLC
Consumer Cyclical
$23,000,000
1.40%
General Motors Financial Co.
Consumer Cyclical
$22,000,000
1.33%
Comcast Corp.
Communications
$20,000,000
1.21%

As of June 29, 2020, the SMCCF had purchased close to 107 million shares in sixteen ETFs, of
which eleven were investment grade ETFs and six were non-investment grade ETFs. Of these
shares, 12.9% were in non-investment grade ETFs and 86.1% were in investment grade ETFs.
The market value of these shares was $8 billion as of June 29, 2020.96 We calculate the SMCCF
had an unrealized gain of $74 million on its ETF purchases as of that date.

The chart below lists the names of the bond ETFs that the SMCCF has purchased, the number of
shares purchased, and the market value of those shares as of June 29, 2020.97

Name of ETF
Shares Purchased
(as of 6/29/20)
Cost Basis
(U.S. $)
Market Value as of
6/29/20 (U.S. $)
iShares iBoxx US Dollar Investment
Grade Corporate Bond ETF (LQD)
16,965,351
$2,227,773,016
$2,275,392,876
Vanguard Short-Term Corporate Bond
ETF (VCSH)
18,007,435
$1,475,086,310
$1,487,414,131
Vanguard Intermediate-Term Corporate
Bond ETF (VCIT)
13,102,944
$1,220,988,700
$1,244,124,532
iShares Short-Term Corporate Bond
ETF (IGSB)
12,218,042
$662,449,950
$668,571,258
SPDR Portfolio Intermediate Term
Corporate Bond ETF (SPIB)
13,045,200
$468,458,987
$475,627,992
SPDR Bloomberg Barclays High Yield
Bond ETF (JNK)
4,644,986
$468,180,579
$465,102,448

96 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 (Transaction-specific
Disclosures), July 10, 2020, https://www.federalreserve.gov/publications/files/smccf-transaction-specific-
disclosures-7-10-20.xlsx.
97 Id.

Name of ETF
Shares Purchased
(as of 6/29/20)
Cost Basis
(U.S. $)
Market Value as of
6/29/20 (U.S. $)
iShares Intermediate-Term Corporate
Bond ETF (IGIB)
7,229,491
$428,127,220
$434,492,409
iShares iBoxx High Yield Corporate
Bond ETF (HYG)
3,434,502
$278,160,583
$277,782,521
SPDR Portfolio Short Term Corporate
Bond ETF (SPSB)
8,831,593
$275,314,736
$276,605,492
iShares Broad US Dollar Investment
Grade Corporate Bond ETF (USIG)
2,719,912
$160,266,222
$163,738,702
Xtrackers US Dollar High Yield
Corporate Bond ETF (HYLB)
1,435,025
$66,888,341
$66,412,957
iShares Broad US Dollar High Yield
Corporate Bond ETF (USHY)
1,387,688
$52,696,559
$52,426,852
iShares 0-5 Year Investment Grade
Corporate Bond ETF (SLQD)
841,975
$43,490,249
$43,866,897
SPDR Bloomberg Barclays Short Term
High Yield Bond ETF (SJNK)
1,220,506
$31,065,310
$30,463,829
VanEck Vectors Fallen Angel High
Yield Bond ETF (ANGL)
1,057,195
$29,314,191
$29,918,618
iShares 0-5 Year High Yield Corporate
Bond ETF (SHYG)
606,927
$25,693,745
$25,782,258

The Federal Reserve also provides weekly disclosures of the value of the bond ETFs and
individual corporate bonds owned by the SPV for the SMCCF and PMCCF. The most recent
disclosure indicates that SPV owns $11.4 billion worth of bond ETFs and individual corporate
bonds as of July 15, 2020.98

Main Street Lending Program (MSLP)

The MSLP 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 MSLP 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). The Federal Reserve has decided to expand the
MSLP to include two facilities to provide loans to certain nonprofit organizations. The Treasury

98 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, July 16, 2020,
at Table 4, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for July 16, 2020
release).

has announced it intends to make an equity investment of $75 billion in the MSLP. Collectively,
the facilities can support up to $600 billion in lending.99

On June 15, 2020, the Federal Reserve Bank of Boston, which administers the MSLP, began
accepting applications from lenders to participate in the program and announced that the
program would begin buying loans soon.100 On June 19, 2020, the president of the Federal
Reserve Bank of Boston, Eric Rosengren, stated that more than 200 lenders had begun the
registration process.101 He also stated that interest in the MSLP from businesses was
“tremendous” and that he “anticipate[d] plenty of borrowers and plenty of banks participating in
the program as it continues to roll out.”102

Later in the month, on June 30, 2020, Chair Powell testified before the House Financial Services
Committee that approximately 300 lenders had registered or were in the process of registering to
participate in the MSLP.103 He also stated that banks were telling the Federal Reserve that they
were “not getting a ton of interest from borrowers” for the MSLP. However, he noted that many
banks have told the Federal Reserve that they expect that will change “over the course of the
next few months” and that “demand from borrowers will . . . increase.”104 Chair Powell stated
that as the MSLP “fully comes online” the Federal Reserve would continue “to look to see
whether there are ways that we can improve it” and that it was “open to . . . making adjustments
going forward.”105

On July 1, 2020, after receiving a request from the Commission, the Federal Reserve released
over one thousand pages of public comments it received from April 9, 2020 through April 30,
2020 regarding the MSNLF and the MSELF. These comments, which are available on the
Federal Reserve’s website, come from a range of interested stakeholders, including lenders and
borrowers.106

99 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.
100 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.
101 Christopher Condon & Catarina Saraiva, Fed’s Rosengren Expects Main Street Program to Build Over
Time, Bloomberg, June 19, 2020, https://www.bloomberg.com/news/articles/2020-06-19/fed-s-rosengren-
outlines-dark-forecast-with-warning-over-virus?sref=hKSAni5g.
102 Id.
103 U.S. House Committee on Financial Services hearing on Coronavirus and the Cares Act, 116th Cong.
(June 30, 2020) (statement of Jerome Powell, Chair, Board of Governors of the Federal Reserve).
104 Id.
105 Id.
106 Ann Saphir, et al., Fed deluged by letters from needy over U.S. loan program, Reuters, July 1, 2020,
https://www.reuters.com/article/us-usa-fed-mainstreet/fed-deluged-by-letters-from-needy-over-u-s-loan-
program-idUSKBN242782. The comments are available on the Federal Reserve’s website at
https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm.

On July 6, 2020, the Federal Reserve Bank of Boston announced the MSLP was fully operational
and ready to purchase eligible loans submitted by lenders registered to participate in the
program.107 Two days later, on July 8, 2020, the Federal Reserve Bank of Boston began listing
on its website the names of certain registered lenders in the program. This list, which continues
to be updated, reflects registered lenders by state “who are accepting [Main Street loan]
applications from new business customers, in addition to existing ones; and also elect to be
listed.”108 As of July 19, 2020, this list includes 130 lending institutions.109 The Federal Reserve
has not released the names of registered lenders who are accepting Main Street loan applications
only from existing business customers.

The number of registered lenders on the Federal Reserve’s list varies by state. As of July 19,
Texas has the highest number of lenders on the list, with 18 lenders, and Florida, Illinois,
Michigan, and New Jersey all tie for second, with 13 lenders each.110 Hawaii and Puerto Rico
each only have one lender listed. Among the nation’s four largest banks, Bank of America is the
only one included in the Federal Reserve’s list. It is accepting applications from new business
customers in all fifty states and the District of Columbia. The nation’s three other largest
banks—JPMorgan Chase, Wells Fargo, and Citigroup—have publicly indicated they have
registered or plan to register for the program.111 However, Citigroup has stated it will accept
applications only from existing business customers.112

On July 17, 2020, the Federal Reserve announced that it was expanding the MSLP by
establishing two facilities intended to support lending by banks to certain small and medium-
sized nonprofit organizations.113 These facilities—the Nonprofit Organization New Loan Facility
(NONLF) and Nonprofit Organization Expanded Loan Facility (NOELF)—are available to
certain nonprofit organizations with up to 15,000 employees or up to $5 billion in 2019

107 Federal Reserve Bank of Boston, Boston Fed announces Main Street Lending Program is Fully
Operational, July 6, 2020, https://www.bostonfed.org/news-and-events/press-releases/2020/boston-fed-
announces-main-street-lending-program-is-fully-operational.aspx?utm_source=email-
alert&utm_medium=email&utm_campaign=mslp&utm_content=pr-nc-200706.
108 Federal Reserve Bank of Boston, Information for Business Borrowers,
https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-street-lending-
program/information-for-borrowers.aspx (last visited on July 19, 2020).
109 Federal Reserve Bank of Boston, Information for Business Borrowers,
https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-street-lending-
program/information-for-borrowers.aspx (last visited on July 19, 2020).
110 Id.
111 Rachel Siegel, Fed’s Main Street lending program doesn’t have many large banks making loans to
new customers, Washington Post, July 8, 2020,
https://www.washingtonpost.com/business/2020/07/08/fed-main-street/.
112 Id.
113 Board of Governors of the Federal Reserve System, Federal Reserve Board modifies Main Street
Lending Program to provide greater access to credit for nonprofit organizations such as educational
institutions, hospitals, and social service organizations, July 17, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200717a.htm.

revenues.114 A month earlier, on June 15, the Federal Reserve had announced that it was seeking
public feedback, until June 22, 2020, on its draft loan terms for these facilities.115 Based on the
public feedback the Federal Reserve received, it modified the terms of these facilities, including
reducing the minimum employee size threshold for nonprofits from 50 employees to ten, and
adjusting several financial eligibility criteria “to accommodate a wider range of nonprofit
operating models.”116

In general, the loan terms for the Main Street loans for nonprofit organizations are similar to
those for Main Street loans for businesses, including the interest rate, principal and interest
payment deferral, five-year loan term, and minimum and maximum loan sizes. Only a nonprofit
organization that is a tax-exempt organization under section 501(c)(3) or 501(c)(19) of the
Internal Revenue Code are eligible for NONLF and NOELF.117 However, at the discretion of the
Federal Reserve, “other forms of organization may be considered for inclusion as a Nonprofit
Organization” under the facilities.118

The chart below shows the current key terms and conditions of the Main Street nonprofit
organization facilities, as amended by the Federal Reserve’s July 17, 2020 announcement.

114 Board of Governors of the Federal Reserve System, Nonprofit Organization New Loan Facility Term
Sheet, July 17, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200717a2.pdf; Board of
Governors of the Federal Reserve System, Nonprofit Organization Expanded Loan Facility Term Sheet,
July 17, 2020, https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200717a1.pdf.
115 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.
116 Id.
117 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.
118 Id.

Proposed Main Street
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
Eligibility Criteria

Minimum number of employees 10 (previously 50)

Total non-donation revenues equal to or greater than 60% of
expenses for the period from 2017 through 2019 (previously 70%
of revenues)

2019 operating margin of 2% or more (previously 5%)

Current days cash on hand 60 days (previously 90 days)

Current debt repayment capacity—ratio of cash, investments and
other resources to outstanding debt and certain other liabilities—of
greater than 55% (previously 65%)
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%

As of July 15, 2020, the MSLP has purchased a single $12 million loan.119 According to
Secretary Mnuchin, this loan was “to doctors’ offices consisting of 15 practices in Wisconsin.”120

119 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, July
16, 2020, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for July 16, 2020
release). The SPV for the MSLP is MS Facilities LLC (Main Street Lending Program); U.S. House Small
Business Committee hearing on Oversight of the Small Business Administration and Department of
Treasury Pandemic Programs, 116th Cong. (July 17, 2020) (statement of Steven Mnuchin, Secretary, U.S.
Department of the Treasury).
120 U.S. House Small Business Committee hearing on Oversight of the Small Business Administration and
Department of Treasury Pandemic Programs, 116th Cong. (July 17, 2020) (statement of Steven Mnuchin,
Secretary, U.S. Department of the Treasury).

The lender was a family-owned community bank.121 Secretary Mnuchin also stated there’s a $50
million construction loan “in the working” under the MSLP.122

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
purchase up to $500 billion in notes.123

On May 19, 2020, Chair Powell testified before Congress that he expected the MLF to be
operational by the end of May or the beginning of June.124 The MLF became operational on May
26, 2020.125

On June 5, 2020, Illinois borrowed $1.2 billion from the MLF through the sale of one-year notes,
making it the facility’s first participant.126 Illinois will pay an interest rate of 3.82% on these
notes, which is more than a full percentage point less than the 4.875% interest rate it paid on
comparable short-term notes during a public market sale in mid-May 2020.127

On June 29, 2020, economists at the Federal Reserve Bank of New York released a report
concluding that “conditions in the municipal markets have improved significantly, in part [as] a
result of the announcement and implementation” of several emergency lending facilities

121 Id.
122 Id.
123 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.
124 U.S. 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, Board of Governors
of the Federal Reserve).
125 Federal Reserve Bank of New York, FAQs: Municipal Liquidity Facility, June 3, 2020,
https://www.newyorkfed.org/markets/municipal-liquidity-facility/municipal-liquidlity-facility-faq.
126 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.
127Id.; 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%20Il
linois-General%20Obligation%20Bonds%20Series%20of%20May%202020-Official%20Statement.pdf.

established by the Federal Reserve, including the MLF.128 The report notes that “both the
primary and secondary markets for municipal securities underwent considerable stress during the
early stages of the COVID-19 pandemic,” including increased yields on bonds, significant
outflows from municipal bond mutual funds, and decreased issuance of new municipal bonds.129
In the wake of the Federal Reserve’s actions, including the announcement of the MLF, the report
concludes that “[m]arket conditions for municipal securities have improved significantly since
then: yields for most issuers have receded to below pre-pandemic levels, outflows from
municipal bond mutual funds have turned into inflows, and issuance has picked up.”130
According to the report, “[t]hese improvements in municipal market conditions help ensure that
state and local governments have better access to funding.”131 Moreover, the report noted that
“improvements in muni debt markets are not necessarily sufficient to induce willingness to spend
at the local level.” The economists noted that, unlike corporations, state and local governments
“typically operate under balanced budget requirements, which constrain or even prohibit the
financing of deficits across fiscal years.”132

On July 5, 2020, the Honolulu Star Advertiser reported that Hawaii Governor David Ige stated
his new financial plan for Hawaii, in response to the COVID-19 crisis, includes borrowing $750
million from the MLF, but that he is wary of borrowing more than that amount.133 He noted that
the cost of borrowing under the MLF “is very low” but said “once you get over $1 billion, it
really is not that helpful because we’ve got to pay it back in such a short interval.”134

On July 10, 2020, New Jersey Governor Phil Murphy announced that he had reached an
agreement with New Jersey legislative leaders on a bill that if enacted would allow the state to
issue up to $9.9 billion in bonds through the MLF or the public capital markets in response to the
COVID-19 crisis.135 He signed the bill into law on July 16, 2020.136 According to Governor

128 Marco Cipriani, et al., Municipal Debt Markets and the COVID-19 Pandemic, Liberty Street
Economics, June 29, 2020, https://libertystreeteconomics.newyorkfed.org/2020/06/municipal-debt-
markets-and-the-covid-19-pandemic.html.
129 Id.
130 Id.
131 Id.
132 Id.
133 Kevin Dayton, Gov. Ige warns that without more federal aid, Hawaii public worker pay cuts or
furloughs are inevitable, Honolulu Star Advertiser, July 5, 2020,
https://www.staradvertiser.com/2020/07/05/hawaii-news/gov-ige-warns-that-without-more-federal-aid-
public-worker-pay-cuts-or-furloughs-are-inevitable/.
134 Id.
135 Karen Pierog, Cash-strapped New Jersey to borrow up to $9.9 billion under deal, Reuters, July 10,
2020, https://www.reuters.com/article/us-health-coronavirus-newjersey-debt/cash-strapped-new-jersey-to-
borrow-up-to-9-9-billion-under-deal-idUSKBN24B307.
136 Stacey Barchenger & Dustin Racioppi, Murphy approves $9.9B borrowing plan that taxpayers could
be repaying for 35 years, NorthJersey.com, July 16, 2020,
https://www.northjersey.com/story/news/2020/07/16/nj-lawmakers-vote-billion-borrowing-plan-phil-
murphy-backed/5436239002/.

Murphy’s office, the MLF is “an option for a significant portion of the borrowing” authorized by
the bill.137 Governor Murphy has previously stated the MLF “is very attractive” for New
Jersey.”138 On July 15, 2020, the Pew Charitable Trusts (Pew) released an article indicating the
New Jersey legislature had asked Pew to conduct an analysis of the MLF and its potential value
to New Jersey.139 In that analysis, Pew found that “[h]igh borrowing costs, which include the
[MLF’s] penalty rate above the typical market rate, may limit widespread use of the MLF as
anything other than a last resort.” However, Pew reported that the “MLF pricing as of early July
is favorable for New Jersey and Illinois, the two states with the lowest credit ratings and largest
unfunded pension liabilities per capita.”140 Pew’s analysis estimated that the MLF could provide
New Jersey “additional budget capacity of approximately $1.4 billion under the current terms of
the program, and up to $4.5 billion if terms were extended to allow for borrowing over five years
instead of three.”141

As of July 15, 2020, the MLF has made no additional loans beyond its $1.2 billion loan to the
state of Illinois.142

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.”143 The Federal Reserve, through
an SPV, will “make loans to U.S. companies secured by certain AAA-rated asset-backed
securities (ABS) backed by recently originated consumer and business loans.”144 The Treasury

137 Id.
138 Office of New Jersey Governor Phil Murphy, Transcript: May 1st, 2020 Coronavirus Briefing, May 1,
2020, https://www.nj.gov/governor/news/news/562020/20200501e.shtml.
139 Gregg Mennis & Ben Henken, New Jersey Considers Tapping New Fed Borrowing Program to Meet
Pension Contributions, Pew Charitable Trusts, July 15, 2020, https://www.pewtrusts.org/en/research-and-
analysis/articles/2020/07/15/new-jersey-considers-tapping-new-fed-borrowing-program-to-meet-pension-
contributions.
140 Id.
141 Id.
142 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, July
16, 2020, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for July 16, 2020
release).
143 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.
144 Id.

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.145

The TALF made its first loan on June 25, 2020.146 On June 30, 2020, Chair Powell testified
before the House Financial Services Committee that since the TALF was announced on March
23, 2020, “ABS spreads have contracted significantly.”147 As a result, he noted the TALF “might
be used relatively little and mainly serve as a backstop, assuring lenders that they will have
access to funding and giving them the confidence to make loans to households and
businesses.”148

The Federal Reserve submitted a periodic report about the TALF to the Senate Banking
Committee and the House Financial Services Committee on July 10, 2020 that disclosed details
about the facility’s initial loans.149 As of June 30, 2020, the TALF has made 19 loans totaling
$252 million to five different borrowers.150 Those five borrowers are: BlackRock Securitized
Investors, LP; HVS XXVI LLC; MacKay Shields TALF 2.0 Opportunities Master Fund LP;
Palmer Square TALF Opportunity Sub LLC; and TOCU IX LLC.151 Of the 19 loans, 17 support
the commercial mortgage sector, while one supports the small business sector and another
supports the insurance premium finance sector.152 Each loan was originated on June 25, 2020 and
matures on June 26, 2023, and has a fixed interest rate of 1.3%.153

As of July 15, 2020, the TALF has made $937 million in loans to eligible borrowers.154

145 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.
146 U.S. House Committee on Financial Services hearing on Coronavirus and the Cares Act, 116th Cong.
(June 30, 2020) (statement of Jerome Powell, Chair, Board of Governors of the Federal Reserve),
https://www.federalreserve.gov/newsevents/testimony/powell20200630a.htm.
147 Id.
148 Id.
149 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 Ac (Transaction-specific
Disclosures), July 10, 2020, https://www.federalreserve.gov/publications/files/talf-transaction-specific-
disclosures-7-10-20.xlsx.
150 Id.
151 Id.
152 Id.
153 Id.
154 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, July
16, 2020, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for July 16, 2020
release). The SPV for the TALF is TALF II LLC.

Treasury Loans for the Airline Industry and National Security Businesses

The Treasury has available $17 billion to make loans to businesses critical to maintaining
national security under Subtitle A. To date, it has entered into one agreement to provide such a
loan.

On July 1, 2020, the Treasury announced that it intended to provide a $700 million loan to YRC
Worldwide Inc. (YRC).155 The loan agreement between the Treasury and YRC was finalized on
July 8.156 YRC is a holding company that provides transportation and logistics services
throughout North America via its operating companies, including to the Defense Department.
YRC and its operating companies employ 30,000 people, including 24,000 members of the
International Brotherhood of Teamsters.157 The company specializes in LTL shipping where
smaller cargos from multiple customers are combined on one trailer.158 Based on 2019 revenue,
YRC is the fifth-largest U.S. trucking company and the fourth-largest LTL shipping provider.159
According to the Treasury, YRC “provides 68% of less-than-truckload services to the
Department of Defense.”160 The company reportedly delivers “food, electronics and other
supplies to military locations around the country.”161

155 U.S. Department of the Treasury, Treasury to Provide Loan to YRC Worldwide, July 1, 2020,
https://home.treasury.gov/news/press-releases/sm1049.
156 U.S. Department of the Treasury, Loans to Air Carriers, Eligible Businesses, and National Security
Businesses, https://home.treasury.gov/policy-issues/cares/preserving-jobs-for-american-industry/loans-to-
air-carriers-eligible-businesses-and-national-security-businesses (last visited July 17, 2020).
157 YRC Worldwide Inc., YRC Worldwide Expects To Receive $700 Million CARES Act Loan from U.S.
Treasury, July 1, 2020, http://investors.YRC.com/news-releases/news-release-details/yrc-worldwide-
expects-receive-700-million-cares-act-loan-us.
158 YRC Worldwide Inc., Annual Report (Form 10-K), March 11, 2020, http://investors.YRC.com/static-
files/8092f183-eb4b-4ba7-bae2-fb4afc4f3e25.
159 Jennifer Smith, Trucker YRC Seeks to Defer Millions in Benefits Payments, Wall Street Journal, June
18, 2020, https://www.wsj.com/articles/trucker-yrc-seeks-to-defer-millions-in-benefits-payments-
11592508252.
160 U.S. Department of the Treasury, Treasury to Provide Loan to YRC Worldwide, July 1, 2020,
https://home.treasury.gov/news/press-releases/sm1049.
161 Kate Davidson & Jennifer Smith, U.S. Treasury to Lend $700 Million to Trucking Firm YRC
Worldwide, Wall Street Journal, July 1, 2020, https://www.wsj.com/articles/u-s-treasury-to-loan-700-
million-to-trucking-firm-yrc-worldwide-11593602409.
162 U.S. Department of the Treasury, Q&A: Loans to Air Carriers and Eligible Businesses and National
Security Businesses, April 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”).

satisfy either of these two criteria, it 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.163 In YRC’s case, the Treasury determined that it was critical to
maintaining national security based on a certification by the Secretary of Defense.164 It is unclear
how the Treasury and the Defense Department reached their decisions.

YRC’s most recent quarterly report reveals that it had significant liquidity issues. As of March
31, 2020, the company had $879.9 million in total debt and only $118 million in liquidity.165 It
has stated that “[i]n response to the uncertainty related to cash flows associated with COVID-19,
[it] began taking liquidity preservation efforts late in the first quarter of 2020.”166 These efforts
included, among other things, “the reduction of capital expenditures, temporary deferrals of
operating lease payments, union health & welfare payments, [and] contributions to our non-
union and multi-employer pension plans.”167 YRC’s operating companies contribute to 33 multi-
employer pension plans that cover approximately 79% of YRC’s 30,000 employees.168

The Treasury’s loan to YRC contains two parts (i.e., tranches) that mature on September 30,
2024.169 The first tranche of $300 million (tranche A) has an interest rate of London Inter-bank
Offered Rate (LIBOR) +3.50%.170 YRC will use these funds to cover, among other things,
healthcare and pension liabilities, real estate and equipment leases, and interest payments on
debt.171 The second tranche of $400 million (tranche B) also has an interest rate of LIBOR
+3.50%. YRC will use these funds to finance the purchase of tractors and trailers in accordance
with the company’s capital expenditures plan that must be submitted to, and approved by, the
Treasury.172

163 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.
164 Id.
165 YRC Worldwide Inc., Quarterly Report (Form 10-Q), May 11, 2020, http://investors.YRC.com/static-
files/a46b9f22-71b7-4bd8-acf6-b12aabb24bf5.
166 Id.
167 Id.
168 YRC Worldwide Inc., Annual Report (Form 10-K), March 11, 2020, http://investors.YRC.com/static-
files/8092f183-eb4b-4ba7-bae2-fb4afc4f3e25.
169 U.S. Department of the Treasury, Transaction Summary, July 8, 2020,
https://home.treasury.gov/system/files/136/YRC-Transaction-Summary.pdf.
170 Id.; U.S. Department of the Treasury, Transaction Documentation, July 8, 2020,
https://home.treasury.gov/system/files/136/YRC-Documentation.pdf.
171 U.S. Department of the Treasury, Transaction Documentation, July 8, 2020,
https://home.treasury.gov/system/files/136/YRC-Documentation.pdf.
172 U.S. Department of the Treasury, Transaction Summary, July 8, 2020,
https://home.treasury.gov/system/files/136/YRC-Transaction-Summary.pdf; U.S. Department of the
Treasury, Transaction Documentation, July 8, 2020, https://home.treasury.gov/system/files/136/YRC-
Documentation.pdf.

Before YRC obtained this loan, it deferred millions of dollars of pension and healthcare
payments for its largely unionized workforce for March, April, and May 2020.173 In April 2020,
YRC “told a large multiemployer health-care fund that the missed contributions would be paid
once YRC received” a loan from the Treasury.174 On July 1, 2020, YRC’s Chief Executive
Darren Hawkins stated that the funds from the Treasury will allow the company to pay off three
months of missed pension and healthcare payments, which were “roughly $40 million a
month.”175 On or around July 2, 2020, after Treasury announced its intent to provide a loan to
YRC, the company began to repay some of these missed payments.176

Both tranches will be secured by a combination of a first-priority security interest in certain
escrow accounts, a third-priority security interest in YRC’s personal property, a third-priority
mortgage or deed on certain real property, and a third-priority pledge of YRC’s equity
interests.177 In addition, both tranches are subject to financial covenants that require the company
to maintain certain minimum liquidity and earnings before interest, taxes, depreciation, and
amortization (EBITDA) standards.178 The covenants also require YRC to comply with the
CARES Act’s direct lending restrictions on employee compensation, stock repurchases,
dividends, and reductions in employment levels.

In connection with the loan, YRC will issue almost 16,000,000 shares of common stock to the
Treasury, which is equivalent to 29.6% of the company’s fully diluted outstanding stock.179 To
comply with the CARES Act’s requirement that the Treasury “shall not exercise voting power
with respect to any shares of common stock,” the Treasury will hold its shares of YRC’s
common stock through a voting trust, which will be required to vote the shares in the same
proportion that all other unaffiliated shares of YRC’s common stock are voted.180

173 Jennifer Smith, Trucker YRC Seeks to Defer Millions in Benefits Payments, Wall Street Journal, June
18, 2020, https://www.wsj.com/articles/trucker-yrc-seeks-to-defer-millions-in-benefits-payments-
11592508252.
174 Id.
175 Kate Davidson & Jennifer Smith, U.S. Treasury to Lend $700 Million to Trucking Firm YRC
Worldwide, Wall Street Journal, July 1, 2020, https://www.wsj.com/articles/u-s-treasury-to-loan-700-
million-to-trucking-firm-yrc-worldwide-11593602409.
176 Brian Kaberline, YRC makes partial payment to employee health funds, Kansas City Business Journal,
July 6, 2020, https://www.bizjournals.com/kansascity/news/2020/07/06/yrc-makes-partial-payment-to-
employee-health-funds.html.
177 U.S. Department of the Treasury, Transaction Documentation, July 8, 2020,
https://home.treasury.gov/system/files/136/YRC-Documentation.pdf.
178 Id.
179 Id.
180 CARES Act, Pub. L. No. 116-136, § 4003(d)(2)(B), 134 Stat. 281 (2020); YRC Worldwide Inc.,
Current Report (Form 8-K), June 30, 2020, http://investors.YRC.com/static-files/aac3d537-bae1-4f0c-
b0ef-99269b0d0b53; YRC Worldwide Inc., YRC Worldwide Expects To Receive $700 Million CARES Act
Loan from U.S. Treasury, July 1, 2020, http://investors.YRC.com/news-releases/news-release-details/yrc-
worldwide-expects-receive-700-million-cares-act-loan-us.

Notably, the interest rate on YRC’s loan from the Treasury is 4% lower than the interest rate on
its most recent debt financing, which was a five-year, $600 million term loan that YRC obtained
in September 2019 before the COVID-19 crisis.181 YRC has been rated non-investment grade for
over a decade.182 On April 6, 2020, a research report by investment bank Stephens Inc. indicated
that YRC might be at risk of a “potential bankruptcy.”183 One month later, on May 11, 2020,
YRC stated there was “substantial doubt” about its ability to continue to operate as a going
concern without “governmental assistance or a meaningful stabilization of the economy in the
near-term.”184 On May 28, 2020, Standard & Poor's (S&P) downgraded YRC from CCC+ to
CCC after the company announced it did not believe it would be able to comply with the
financial covenant under its term loan agreement.185 In its downgrade report, S&P stated it
believed that YRC’s “capital structure will be unsustainable over the long term,” in part due its
heavy pension burden.186

After YRC entered its loan agreement with the Treasury, which improved the company’s
liquidity position, S&P upgraded the company only one notch to CCC+.187 S&P noted, among
other things, that it “believe[d] the company will remain highly leveraged given its contingent
exposure to substantially underfunded Teamster multiemployer pension plans (MEPPs),” which
includes “about $8 billion of contingent obligations related to MEPPs.”188

The Treasury has available $29 billion to make loans to the airline industry under Subtitle A. To
date, it has not entered into any agreements to provide such loans. However, the Treasury has
signed letters of intent with ten passenger air carriers that set out the terms on which the Treasury
is prepared to extend loans to these carriers.189 It has not released the details of these terms.

181 YRC Worldwide Inc., Current Report (Form 8-K), Sept. 11, 2019, http://investors.YRC.com/static-
files/14d3a39a-13af-4e5f-80fc-bcad38b120f2.
182 Moody’s Investors Services, YRC Worldwide Inc. Ratings, https://www.moodys.com/credit-
ratings/YRC-Worldwide-Inc-credit-rating-834015 (last visited July 14, 2020).
183 Jennifer Smith, Truckers Cut Spending as Factory Slowdown Weighs on Operators, Wall Street
Journal, April 7, 2020, https://www.wsj.com/articles/truckers-cut-spending-as-factory-slowdown-weighs-
on-some-operators-11586295247.
184 YRC Worldwide Inc., Quarterly Report (Form 10-Q), May 11, 2020, http://investors.YRC.com/static-
files/a46b9f22-71b7-4bd8-acf6-b12aabb24bf5.
185 Standard & Poor’s, U.S.-Based YRC Worldwide Inc. Downgraded To 'CCC' On Anticipated Covenant
Violation, Outlook Negative, May 28, 2020,
https://www.standardandpoors.com/en_US/web/guest/article/-/view/type/HTML/id/2450913.
186 Id.
187 Standard & Poor’s, YRC Worldwide Inc. Upgraded To 'CCC+' On Improved Liquidity; Outlook
Stable, July 9, 2020, https://www.standardandpoors.com/en_US/web/guest/article/-
/view/type/HTML/id/2475963.
188 Id.
189 U.S. Department of the Treasury, Statement from Secretary Steven T. Mnuchin on CARES Act Loans to
Major Airlines, July 2, 2020, https://home.treasury.gov/news/press-releases/sm1054.

35
On July 2, 2020, the Treasury announced that five passenger air carriers—American Airlines,
Frontier Airlines, Hawaiian Airlines, Sky West Airlines, and Spirit Airlines—had signed letters
of intent for loans under Subtitle A.190 The next week, on July 7, 2020, the Treasury announced
that five additional passenger air carriers—Alaska Airlines, Delta Air Lines, JetBlue Airways,
United Airlines, and Southwest Airlines—also had signed such letters of intent.191
On July 9, 2020, Secretary Mnuchin stated during a television interview that he thought “many
of these airlines aren’t going to need to use [Subtitle A loans] and we’ll finance them in the
capital markets. But we wanted to make sure that the airlines had backstops so that they had
liquidity.”192
To date, the Treasury has not announced loan agreements with any airline industry businesses for
loans under Subtitle A.
190 U.S. Department of the Treasury, Treasury and Five Major Airlines Agree on Loan Terms, July 2,
2020, https://home.treasury.gov/news/press-releases/sm1050.
191 U.S. Department of the Treasury, Statement from Secretary Steven T. Mnuchin on CARES Act Loans to
Major Airlines, July 2, 2020, https://home.treasury.gov/news/press-releases/sm1054.
192 CNBC, CNBC Transcript: Treasury Secretary Steven Mnuchin Speaks with CNBC’s “Squawk on the
Street” Today, July 9, 2020, https://www.cnbc.com/2020/07/09/cnbc-transcript-treasury-secretary-steven-
mnuchin-speaks-with-cnbcs-squawk-on-the-street-today.html.

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

1
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?
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?
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?

2
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.

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?

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?

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.

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



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Primary

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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?

its

first

report

May

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.
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

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.

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.

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.

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

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.

a. Why did the agencies remove that requirement?

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

10
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.

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?

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

11
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.
At
the
ti me
of

12
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.

The Honorable French Hill
U.S. House of Representatives
Washington, DC 20515
Mr. Bharat Ramarnurti
Commissioner
Washington, DC 20515
June 29, 2020
The Honorable Donna E. Shalala
U.S. House of Representatives
Washington, DC 20515
The Honorable Pat Toomey
United States Senate
Washington, DC 20510
Dear Members of the Congressional Oversight Commission:
We write in further response to 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. Please fmd attached answers to the Tier 2
questions posed by the Commission in your correspondence.
Steven T. Mnuchin
Secretary
U.S. Department of the Treasury
Enclosure
Sincerely,
rH.P
Jerome H. Powell
Chair
Board of Governors of the
Federal Reserve System
APPENDIX C

Congressional Oversight Commission: Answers to 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?
The lending facilities put in place by 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”) 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”) have two main
goals—restoring financial market functioning and access to short-term funding markets and
supporting the flow of credit to households, businesses, and communities. By doing so, these
facilities will provide significant support for economic growth and employment. It is difficult to
identify the causal effect of these government programs on macroeconomic aggregates isolated
from other factors. Given the difficulty of measuring these impacts in real time, we monitor a
variety of indicators to assess the effect of the facilities on a targeted market or area of the
economy, as noted in our previous response to the Tier 1 questions. That being said, the
agencies intend to explore in the longer-term a variety of techniques that have been successfully
employed in economics and finance literature to isolate the effect of government programs.
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?
As noted in our previous response to the Tier 1 questions, the agencies will assess the
performance of the 13(3) facilities by monitoring a wide range of indicators, such as issuance,
maturity, outstandings, transaction costs, and spreads in a variety of debt and money market
instruments. While it is difficult to directly measure how much improvements in these metrics
will impact the broader economy or employment, these indicators can demonstrate the
effectiveness of a specific facility on a targeted market or area of the economy.
For example, the Federal Reserve established the Primary Market Corporate Credit Facility
(“PMCCF”) and Secondary Market Corporate Credit Facility (“SMCCF”) to backstop issuance
and liquidity for corporate bonds and syndicated loans of issuers who were rated investment
grade prior to the announcement of the facilities and maintain at least a BB-/Ba3 rating. Key
indicators we monitor in the corporate credit markets include spreads on investment-grade debt,
levels of issuance, bid-ask spreads, and dislocations between the investment-grade and high-
yield markets. As noted by the Federal Reserve Bank of New York (“FRBNY”), the
announcement of the PMCCF and SMCCF had a positive impact on these indicators.1 These
indicators have continued to show improved functionality in the corporate credit markets over

1 Federal Reserve Bank of New York, The Primary and Secondary Market Corporate Credit Facilities
https://libertystreeteconomics.newyorkfed.org/2020/05/the-primary-and-secondary-market-corporate-credit-
facilities.html

2
the past few months. Improvements in these indicators can help to establish that the facilities
have supported the flow of credit to businesses, thus allowing them to continue to operate,
provide employment, and support the growth of the economy.
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?

The agencies have established eleven emergency lending facilities, which are each targeted at
providing liquidity to a segment of the economy or financial markets. The overall intent of the
facilities is to address the severe economic dislocations suffered by communities, households,
and businesses of all sizes as a result of the COVID-19 pandemic and efforts to contain its
spread.

The Federal Reserve and Treasury have worked to develop facilities that can provide
assistance to both larger and smaller firms. The highly-developed and standardized bond market
utilized by larger companies provides an established and effective mechanism for the Federal
Reserve to alleviate dislocations in the large corporate credit markets, while the provision of
corresponding support to small and medium-sized businesses has required the development of
lending programs that make use of depository institutions as intermediaries to reach a broader
and much more numerous universe of borrowers.

With regard to smaller and mid-sized businesses, the agencies have established 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 Main Street Lending Program aims to provide credit to small businesses that have been
impacted by the decline in economic activity and rely on banks to originate loans.2

The Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”) will provide
additional support to small businesses by enabling the issuance of asset-backed securities backed
by loans guaranteed by the SBA and certain other assets.

The Federal Reserve is actively engaged in conversations with small businesses and
monitoring small business conditions, such as borrowing and lending. In addition, Federal
Reserve staff are reaching out to banks, credit unions, community development financial
institutions, other non-profit lenders, and small business groups to gather insights on the
financial challenges of small businesses and the appropriate public policy response.

2 In addition, with the approval of the Secretary of the Treasury, the Federal Reserve has established the Paycheck
Protection Program Liquidity Facility (“PPPLF”). The PPPLF helps ensure that any limits on the balance-sheet
capacity of a lender do not unduly curtail its ability to lend under the Paycheck Protection Program implemented by
the Small Business Administration (“SBA”) with support from Treasury. Treasury has not provided financial
support for the PPPLF using funds made available under Division A, Title IV, Subtitle A of the CARES Act or
otherwise.

3
4. Will the agencies faithfully follow the statutory requirements of Subtitle A when implementing
the lending programs and facilities?

Yes. The statutory requirements applicable to Treasury’s investments are incorporated into
the fundamental structure and terms of the facilities as set forth in the governing term sheets,
frequently asked questions, required certifications and transaction documentation published for
each facility. As discussed further below and as provided in the program documentation,
participants in the facilities are required to make representations and warranties and submit
certifications and undertakings as to compliance with relevant statutory requirements. In
addition, the Board has complied with its obligation to regularly report to Congress on the
facilities and has gone beyond statutory requirements to voluntarily provide enhanced public
disclosure with respect to each of the 13(3) facilities that makes use of CARES Act funding. The
agencies recognize the important public policy objectives behind these statutory requirements,
which align with the agencies’ goals of targeting the provision of credit to those employers,
consumers, and municipalities in need of support during this extraordinary period.

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?

In establishing each of the 13(3) facilities that involve a Treasury investment of funds
authorized under the CARES Act, a determination is made jointly by the agencies regarding the
maximum amount of Federal Reserve lending that will be supported by a given investment of
Treasury loss-absorbing capital. This ratio constitutes the “gearing ratio” for the overall facility,
and in certain cases is arrived at by the specification of individual gearing ratios for particular
classes of credit exposure to be assumed by the facility. Consistent with section 13(3) of the
Federal Reserve Act, the agencies establish the gearing ratio for a particular facility to ensure
that the Federal Reserve is unlikely to suffer losses on its lending, even in downturn scenarios.

For instance, the SMCCF will leverage Treasury equity at 10 to 1 when acquiring corporate
bonds of issuers that are investment grade at the time of purchase and when acquiring ETFs
whose primary investment objective is exposure to U.S. investment-grade corporate bonds. The
SMCCF will leverage Treasury equity at 7 to 1 when acquiring corporate bonds of issuers that
are rated below investment grade at the time of purchase and in a range between 3 to 1 and 7 to
1, depending on risk, when acquiring any other type of eligible asset. Correspondingly, the
PMCCF will leverage Treasury equity at 10 to 1 when acquiring corporate bonds or syndicated
loans from issuers that are investment grade at the time of purchase. The PMCCF will leverage
its equity at 7 to 1 when acquiring any other type of eligible asset. Thus, given the initial
allocation of $25 billion in Treasury equity to the SMCCF and $50 billion to the PMCCF, the
maximum potential combined size of the two facilities is $750 billion assuming that the
maximum 10 to 1 gearing ratio is applicable to all facility exposures. However, the facilities
stand ready to assume (and in the case of the SMCCF have already assumed) non-investment
grade exposures that correspond to a lower gearing ratio in view of their higher level of
underlying credit risk. So the ultimate maximum size of each corporate credit facility will
depend on the nature—and associated gearing ratio—of the exposures assumed.

4
The agencies monitor facility usage on an ongoing basis, including asset composition and
associated underlying gearing ratios where relevant. Using the authority provided by the
CARES Act, Treasury stands ready to allocate further equity contributions to existing or new
13(3) facilities where warranted in order to support U.S. economic recovery.

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?

In the evolving context of the COVID-19-related economic disruption, the current set of
CARES-funded 13(3) facilities—supported by $195 billion out of the total $454 billion
authorized amount of CARES Act funds—represents the agencies’ best judgment as to a broad-
based and effective initial set of lending measures to support U.S. economic activity and
employment under the severe strains presented by the pandemic. These facilities cover a broad
spectrum of U.S. economic activity and funding markets—including states and municipalities,
small to medium-sized businesses, large corporate issuers, and market-based finance supporting
auto loans, student loans, credit card funding, equipment loans and leases, commercial mortgages
and small business loans guaranteed by the SBA.

As indicated most recently by the proposed expansion of the Main Street Lending Program to
cover non-profit borrowers, the agencies have exhibited a continuous willingness to expand
existing facilities or introduce new facilities where an unaddressed need for liquidity presents
itself. As the full set of these introduced facilities achieves operational functionality, the
agencies will rigorously assess the adequacy and appropriateness of the 13(3) facilities’ coverage
and the corresponding allocations of CARES Act funds.

Where readjustment or increased commitment is necessary, the agencies stand ready to act
using the full scope of authority provided by section 13(3) of the Federal Reserve Act and
CARES Act appropriations.

7. How can the agencies best estimate the risk of loss to taxpayer funds in each Fed lending
facility?

In accordance with the statutory and regulatory requirements applicable to Federal Reserve
lending under section 13(3) of the Federal Reserve Act—and consistent with statements in its
regular periodic reports to Congress—the Federal Reserve does not expect to incur losses with
respect to the loans it has extended as part of any of its currently authorized and outstanding
13(3) facilities. For 13(3) facilities that are supported by Treasury’s investments of capital using
funds appropriated under the CARES Act, such equity contributions function as credit protection
for the Federal Reserve and are inherently exposed to loss. Whether any loss in respect of
Treasury funds will ultimately be sustained in a given facility depends on a number of factors
relating to future U.S. economic conditions as well as the future operational performance of the
facilities.

In coordination with the Office of Management and Budget and applying relevant provisions
of the Federal Credit Reform Act of 1990, Treasury has modeled the estimated lifetime cost of

5
its investment in each facility to which it has committed funds appropriated by the CARES Act.
This modeling, based on estimated expected cash flows on a net present value basis, takes into
account a range of possible future economic scenarios. The ultimate loss or gain on Treasury’s
investment will depend, among other things, on the future path of U.S. economic and financial
market performance. Overall, the terms and conditions of each facility involving CARES Act
funds have been set by the agencies with a view toward achieving an appropriate balance
between taxpayer protection and the achievement of program policy goals.

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?

Section 13(3) of the Federal Reserve Act and the Board’s Regulation A allow the Board to
authorize a Reserve Bank to extend credit under certain conditions, including that the
circumstances are “unusual and exigent,” that the facility is “broad-based,” that the borrower
lacks adequate credit accommodations but is not “insolvent,” that the facility protects taxpayers
from loss, and that the facility charges an interest rate that is set at a premium to normal market
conditions. In determining whether to authorize a facility under Section 13(3), the Board
considers a range of economic and financial information, including data such as yields or spreads
on debt, to reach the determination that circumstances are unusual and exigent. The Board also
carefully sets the features of the proposed facility to ensure that the program is broad-based, that
taxpayers are well protected, and that the interest rate charged to borrowers is set at a premium to
normal market conditions. The Federal Reserve ensures compliance with statutory provisions
related to borrower insolvency and availability of adequate credit accommodations by requiring
borrowers to provide certifications regarding their solvency and the availability of adequate
credit accommodations.

9. How can the agencies best monitor compliance with and enforce the conflict of interest rules
governing the agencies’ lending programs and facilities?

Section 4019 of the CARES Act requires entities that seek to enter into a transaction with a
facility under Section 4003 to certify that they comply with the Act’s conflict of interest
requirements. The Federal Reserve mandates that participants submit these certifications to the
Federal Reserve as part of the participant eligibility process. Participants are required to
maintain a file documenting the basis for each certification submitted to the Federal
Reserve. The files are subject to auditor attestation or direct inspection by the Federal Reserve to
check their accuracy.

In addition, the Federal Reserve and Treasury monitor and enforce conflict of interest rules
applicable to their employees. Federal Reserve and Treasury employees are subject to 18 U.S.C.
§ 208. Section 208, in relevant part, prohibits Federal Reserve and Treasury employees from
participating personally and substantially in matters in which, to the employee’s knowledge, the
employee or certain related parties has a financial interest directly and predictably affected by the
matter. Federal Reserve Banks also share a common Code of Conduct that incorporates the
requirements of Section 208 and additionally instructs employees to avoid any situation that
might create an appearance of a conflict of interest.

The Federal Reserve also imposes substantial conflicts of interest restrictions on the vendors
it employs to administer its emergency lending facilities. See, e.g., BlackRock Investment
Management Agreement
(https://www.newyorkfed.org/medialibrary/media/markets/SMCCF_Investment_Management_A
greement.pdf).

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?

The agencies have incorporated applicable provisions of the CARES Act directly into the
terms of the facilities and require borrowers and counterparties to execute certifications
regarding CARES Act eligibility requirements prior to participating in the 13(3) facilities. The
methods differ depending on the facility structure.

With respect to the U.S. business requirement in particular, there are common elements of
the certifications across each facility. Where certifications are required, they must be made in
writing by the applicable institution’s chief executive officer and chief financial officer, or
individuals performing similar functions. If the certifying entity no longer meets the U.S.
business test, the institution must immediately notify the Reserve Bank. If the certification is
found to have included a knowing material misrepresentation, the Board or the Reserve Bank
will promptly refer the matter to appropriate law enforcement authorities. There may be other
consequences as well. For example, under PMCCF and the Main Street Lending Program, the
extension of credit will also become immediately due and payable. Under the TALF, the
facility’s loan to the borrower automatically converts from a limited recourse loan into a recourse
loan.

11. How will loans under these programs and facilities comply with Bank Secrecy Act (BSA) and
the Anti-Money Laundering (AML) rules?

The Federal Reserve and Treasury place a high priority on compliance with the Bank Secrecy
Act and anti-money laundering (“BSA/AML”) requirements and on preventing illicit financial
activity from occurring within the Federal Reserve lending facilities supported by Treasury
equity investments under section 4003(b) of the CARES Act. Although under U.S. law Federal
Reserve entities are not explicitly subject to BSA/AML rules, for those Federal Reserve facilities
that are intermediated through banks and other U.S. financial institutions, including the CARES
Act facilities, the participating institution is required to apply its BSA/AML policies and
procedures to its customers.

Under the Main Street Lending Program, the eligible lenders that originate the Main Street
loans are banking organizations, all of which are subject to extensive BSA/AML requirements,
including the requirement to maintain an adequate BSA/AML compliance program, customer
due diligence (CDD) program, and suspicious activity transaction monitoring program.
Likewise, under the TALF, each eligible borrower is required to establish an account with a
“TALF Agent”—a financial institution specially designated by FRBNY, and currently comprised

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of primary dealers who also serve the Federal Reserve as counterparties in its open market
operations. TALF Agents are required to subject all prospective borrowers to their BSA/AML
compliance programs and to report suspicious activity to law enforcement as required by law.

The CARES Act corporate credit facilities, the PMCCF and the SMCCF, also are structured
to minimize risk of financial fraud. Generally speaking, these facilities involve relatively low
BSA/AML risk, as they are mostly limited to purchasing U.S. corporate bonds of issuers with
investment-grade credit ratings as of the day before announcement of the facility, as well as
U.S.-listed bond ETFs. More specifically, the Investment Manager for the facilities is obligated
to, among other things, manage the facilities in accordance with all laws and regulations
applicable to it, including BSA/AML requirements.

Finally, the Municipal Lending Facility (“MLF”) likewise entails relatively low BSA/AML
risk, since it mostly involves the purchase of investment-grade notes issued by a U.S. state or
local governmental authority. Nevertheless, an affiliate of Bank of New York Mellon, which
provides, among other things, settlement services for the facility, must comply with applicable
BSA/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?
The Federal Reserve balances various factors when evaluating whether and when to hire
third parties to help manage the emergency lending programs and facilities. Some key
considerations include expertise and timing. The Federal Reserve often needs specialized
knowledge and expertise possessed by third parties, which can be leveraged to establish and
operate the programs and facilities in an effective and timely manner. On timing and duration,
the Federal Reserve considers how quickly and urgently the program or facility needs to become
operational, as well as the expected duration of the program or facility. Third parties are often
the most effective option to support the robust establishment of programs and facilities while
mitigating potential delays and unnecessary costs.
In agreements with third-party vendors, the Federal Reserve has incorporated contractual
terms to mitigate conflicts of interest. Examples of provisions include, but are not limited to:
 Requirements to maintain the confidentiality of non-public information;
 Prohibitions against use of non-public information for vendor’s own benefit or the benefit
of another client;
 Requirements to wall-off particular staff members from other members of the firm, when
appropriate;
 Requirements for adequate information barrier procedures and training on those
procedures;
 Requirements for acceptable processes to identify, escalate and remediate conflicts of
interest; and

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 Requirements to comply with reviews and audits by Federal Reserve and other
appropriate oversight bodies.
The Federal Reserve has published program and facility-related contracts, including vendor
contracts. Those contracts are available here:
 https://www.newyorkfed.org/aboutthefed/vendor_information.html; and
 https://www.bostonfed.org/supervision-and-regulation/supervision/special-
facilities/main-street-lending-program/vendors.aspx.
Additionally, the Federal Reserve has established hotlines for members of the public to make
anonymous reports on any illicit or unethical behavior in connection with any of the facilities
(FRBNY Integrity Hotline: 877-52-FRBNY (877-523-7269) or
https://secure.ethicspoint.com/domain/media/en/gui/58813/index.html).
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?

The Federal Reserve employed a competitive selection process when engaging outside
services relating to custody and fund management services, unless it determined that an
exception was appropriate due to an urgent and exigent need to expeditiously support financial
markets. As part of the competitive selection process, the Federal Reserve issued Requests for
Proposals (“RFPs”) and evaluated potential vendors based on quantitative and qualitative criteria
the Federal Reserve deemed relevant for the particular program or facility. The contracts for
vendors engaged without an RFP process are for a limited duration. For those contracts, the
Federal Reserve anticipates engaging in a competitive selection process once economic
circumstances permit, if the need for the outside service persists.

The application of these principles to each facility is outlined below.

 Main Street Lending Program: An RFP was issued for custodian and accounting
administration services. This RFP considered implementation and operational
capabilities, as well as overall qualifications needed to support the program. A separate
RFP was issued for a vendor to provide asset purchase intake and due-diligence as well
as credit administration services for this facility. This second RFP considered
technological and operational capabilities, the ability to deliver a control environment
across an integrated solution, and technical expertise needed to execute the defined
services.
 Municipal Liquidity Facility: A vendor was selected through an RFP process to serve as
the custodian and administrator. This RFP focused chiefly on operational capabilities.
 Primary Market and Secondary Market Corporate Credit Facilities: A separate RFP was
issued for each of custody services and fund management services. The RFPs considered
implementation and operational capabilities, as well as overall qualifications needed to
support the facility.

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 Term Asset-Backed Securities Loan Facility: Given the urgent and exigent need to
expeditiously support financial markets, FRBNY authorized an exception to the
competitive bidding process. The custodian/administrator and collateral monitor were
both selected on a short-term basis after considering the custodian/administrator’s
operational and technological capabilities and the collateral monitor’s knowledge and
experience in the asset-backed securities market, as well as both agents’ prior experience
with TALF, which have allowed for a quick time to market.

Federal Reserve employees are subject to 18 U.S.C. § 208. Section 208, in relevant part,
prohibits Federal Reserve employees from participating personally and substantially in matters in
which, to the employee’s knowledge, the employee or certain related parties has a financial
interest directly and predictably affected by the matter. Federal Reserve Banks also share a
common Code of Conduct that incorporates the requirements of Section 208 and additionally
instructs employees to avoid any situation that might create an appearance of a conflict of
interest.

In connection with the programs and facilities, Federal Reserve employees who personally
and substantially participate in the vendor selection process certify that they have no conflicts
with any of the prospective vendors involved in the selection process. If a particular conflict of
interest cannot be resolved in consultation with Federal Reserve compliance staff, that individual
is recused from the selection process.

Contracts with prospective vendors are carefully reviewed by Federal Reserve staff. In
contract negotiations with each vendor, Federal Reserve staff ensure that the agreements contain
appropriate contract language regarding identification and mitigation of conflicts. Staff also
review the vendors’ conflict of interest policies and procedures, and help resolve potential
conflicts highlighted by vendors.
The Federal Reserve has published program and facility related contracts, including vendor
contracts. Those contracts are available at the links provided above.
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?

The agencies have designed each facility to provide credit to a particular market or class of
borrower in the most efficient and effective manner possible. Where it has made sense to do so,
the agencies have used existing lending channels to provide support to the economy.

In the case of several facilities that have been established to support access to credit via
securities and capital markets, including the PMCCF, SMCCF, and MLF, the facilities are able
to acquire bonds from issuers and market participants directly, relying significantly on external
credit ratings in the evaluation of credit quality. In designing and implementing these facilities,
the agencies have chosen to make use of existing modes of debt capital markets financing in
order to maximize the effectiveness of the facilities in achieving policy aims. Reflecting existing
securities market financing techniques, the PMCCF may acquire bonds not only as the sole

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investor but may also acquire a portion of a syndicated bond issue. Further, recognizing that
corporate borrowers rely not only on bond issuance but also on bank lending, the agencies have
provided that the PMCCF may also purchase portions of a syndicated bank loan at issuance.
Likewise, the SMCCF leverages existing market infrastructure by not only acquiring individual
corporate bonds from primary dealers that have qualified as eligible sellers, which specialize in
making markets in such debt, but also by acquiring shares of U.S.-listed ETFs whose investment
objective is to provide broad exposure to the market for U.S. corporate bonds. This, along with
the facility’s purchases of individual bonds to track a broad, diversified market index developed
by the Federal Reserve, represents a particularly efficient way to provide broad support for the
corporate bond market.

In the case of the Main Street Lending Program, which provides financing to small and
medium-sized businesses, the agencies will leverage existing channels of bank lending by
acquiring participations in loans extended to borrowers by financial institutions. The loans in
which the facility will acquire participations and associated documentation must contain specific
terms that incorporate applicable CARES Act requirements and restrictions. Relying on bank
intermediation as a central element of the Main Street Lending Program allows the agencies to
take advantage not only of lending institutions’ existing customer relationships but also their
underwriting expertise to reach a broad and heterogenous class of borrowers that generally lack
the external ratings or public credit standing necessary to access the securities markets.

With the establishment of the TALF, the agencies are supporting the securitization markets
that fund a substantial share of credit to consumers and businesses. The TALF is designed to
increase credit availability for businesses and consumers by facilitating the issuance of ABS
backed by loans to consumers and businesses at more normal interest rate spreads. In providing
credit to borrowers that acquire securities backed by consumer receivables and other such assets,
the TALF is able to provide support to the consumers to whom it would be impractical to lend
directly and to provide another means of support to businesses beyond what is available under
the PMCCF, SMCCF and the Main Street Lending Program.

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?

The agencies have worked hard to establish and implement the 13(3) facilities as quickly as
possible given the urgent need to support market functioning and economic activity. However,
in doing so, the agencies have also sought to ensure that the facilities are being used
appropriately by eligible parties.

In addition to required certifications related to CARES Act eligibility requirements,
discussed above, mandatory certifications required in order to participate in the CARES Act
13(3) facilities also cover restrictions and eligibility requirements imposed by section 13(3) of
the Federal Reserve Act and the Board’s Regulation A, particularly the requirements that (i)
credit not be provided to an entity that is insolvent and (ii) participants in the facility must be
unable to secure adequate credit accommodations from other banking institutions. If the facility
participant includes a knowing material misrepresentation in its certification, all extensions of

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credit made by the facility to the participant would become immediately due and payable. The
participant would also be referred to the relevant law enforcement authorities for investigation.
In addition, the Main Street facilities’ reliance on bank lending channels will help reduce
borrower fraud and abuse.

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.” 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?

The CBO prepares its estimates under its own statutory mandate and in a manner that is
separate and independent from the agencies’ administration of the 13(3) facilities. Consequently,
the agencies do not believe it would be appropriate to directly comment on the assumptions or
conclusions CBO has arrived at in fashioning its published estimate.

As noted above in response to Question 7, the Federal Reserve does not expect to incur loss
with respect to the loans it has extended as part of any of its currently authorized and outstanding
13(3) facilities. For 13(3) facilities that are supported by Treasury’s investment of loss-
absorbing capital using funds appropriated under the CARES Act, such equity contributions
function as credit protection for the Federal Reserve and are inherently exposed to loss. Whether
any loss in respect of Treasury funds will ultimately be sustained in a given facility depends on a
number of factors relating to future U.S. economic conditions as well as the future operational
performance of the facilities.

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?
As discussed above, the agencies have structured the facilities to take advantage of, when
appropriate, existing lending channels to increase efficiency and the provision of credit. In
particular, the agencies have structured the TALF and the Main Street Lending Program in a way
that leverages existing financing structures. Under the TALF, the facility provides credit to
borrowers to permit them to acquire ABS, CMBS, and CLOs that are in turn pledged as
collateral for the loan. Lending is conducted by the facility at a premium to normal market rates,
in accordance with section 13(3) of the Federal Reserve Act and Regulation A, which helps
ensure that the facility appropriately functions as a funding backstop that will naturally lose
economic appeal as private funding markets return to a more normalized condition over time.

The Main Street Lending Program’s purchase of 95 percent participations will make it easier
for financial institution lenders to extend credit during the current challenging environment. At
the same time, the lenders must agree to certain covenants that are intended to preserve the credit
position of the Main Street facility against certain actions that lenders might otherwise be
incentivized to take. Specifically, lenders must commit that they will not request that the

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borrower repay debt extended by the lender to the borrower or pay interest on such outstanding
obligations until the Main Street loan is repaid in full, unless the debt or interest payment is
mandatory and due or in the case of default and acceleration. Each lender also must commit that
it will not cancel or reduce any existing committed lines of credit to the borrower, except in an
event of default.
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?

Under section 13(3) of the Federal Reserve Act and the Federal Reserve’s Regulation A, the
interest rates and fees payable by borrowers under a 13(3) facility must be set at levels generally
higher than the rates that would have been paid by such borrowers under the normal market
conditions that prevailed prior to the onset of the “unusual and exigent circumstances” that gave
rise to the 13(3) authorization. By setting rates that meet that standard—but that are nonetheless
lower than rates that might prevail in highly disrupted, poorly functioning markets adversely
affected by the COVID-19 disruption—the pricing terms of the facilities can be set in a manner
that enables the facility to function as an effective lending backstop while still properly
conforming to a “lender of last resort” role that limits overreliance on public sector credit.

19. What will the effect of Treasury and Fed lending be on overall employment?

The Federal Reserve and the Treasury have designed the 13(3) facilities to improve the
functioning of financial markets and improve economic conditions broadly, including, in
particular, overall employment. As we noted in our response to Question 1, it is difficult to
identify the causal effect of government programs on macroeconomic aggregates. A variety of
techniques have been successfully used in the economics and finance literature. For example,
there is a substantial amount of evidence that financial conditions impact real economic activity.
More generally, if firms, states, and localities were to be shut out of credit markets, many would
be pressured to slash payrolls to control costs. Some might shut down completely. Our section
13(3) facilities help alleviate those pressures by supporting the flow of credit. However, making
precise estimates in real time is a significant challenge.

To meet this challenge, we monitor a variety of market and economic indicators to assess the
performance of the facilities as noted in our previous response to Tier 1 questions.

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?

The lending facilities that the agencies have established using CARES Act authority and
section 13(3) of the Federal Reserve Act are, individually and collectively, broad-based
programs that are intended to support liquidity and economic activity across a wide range of
industries and business sectors, including the state and municipal sectors. The agencies are
committed to continuous evaluation of these programs to identify and fill any unwarranted gaps
in the scope of the facilities. The agencies have demonstrated—and will continue to

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demonstrate—willingness to adjust the terms and scope of programs to address the liquidity
needs of additional broad classes of borrowers whose inclusion would further program goals.

II. Program and Facility-Specific Questions

Primary Market Corporate Credit Facility (PMCCF)

The purpose of the PMCCF is 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. The PMCCF offers terms, conditions, and pricing that are intended to support
companies in times of stress but discourage use of the facility as economic conditions improve.

While the CARES Act applies capital distribution and executive compensation restrictions to
programs or facilities that provide direct loans, Congress explicitly exempted securities and
capital markets transactions, as well as syndicated loans, from these provisions. Because the
PMCCF purchases bonds, which are securities and capital markets transactions, and participates
in syndicated loans, the CARES Act direct loan provisions do not apply to the PMCCF. The
PMCCF complies with all requirements of the CARES Act that apply, including the U.S.
business and conflict of interest provisions.

The agencies have designed the PMCCF to charge an interest rate that is a premium to
normal market conditions and to impose use of proceeds restrictions on participants that are U.S.
subsidiaries of foreign companies, but otherwise to impose contractual obligations that mirror
standard market terms. The PMCCF’s requirement that the proceeds of bond purchases from, or
loans made to, U.S. subsidiaries of foreign companies are used in the United States is consistent
with the U.S business requirement in the CARES Act. The PMCCF’s premium interest rate is
consistent with the Board’s emergency lending regulation and long-standing policies. Imposing
additional restrictions on capital markets transactions that are not consistent with standard market
terms could limit the PMCCF’s ability to support the corporate credit markets and could,
therefore, reduce the ability of U.S. companies to preserve their operations and maintain
payrolls.

There is a substantial amount of evidence that financial conditions impact real economic
activity. Difficulties in accessing debt at rates and in quantities consistent with typical market
functioning negatively affect the economy and increase the probability of very severe
recessions. Bond purchase programs, such as the PMCCF, help to ensure that corporations have
access to sufficient credit at rates that are not as high as they might otherwise be during an
unprecedented period of financial market disruption and economic uncertainty. This economic
benefit could derive less from actual PMCCF purchases, which may turn out to be small, than
from its presence as a backstop, which reduces uncertainty and bolsters confidence that credit

14
markets will continue to function rather than exacerbate economic difficulties. By improving the
cost of and access to credit, PMCCF potential and actual bond purchases help to ensure that
corporations can maintain existing operations and continue to invest in the U.S. economy. In
turn, this helps to stabilize the economy.

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?

The Federal Reserve is requiring that issuers that are U.S. subsidiaries of foreign companies
use any PMCCF borrowings to support their U.S. businesses and U.S. employees. This is a
requirement that goes beyond what the law mandates.

Specifically, provided that other requirements are met, an issuer to the PMCCF must be
created or organized in the United States or under the laws of the United States. An issuer may
be a subsidiary of a foreign company, provided that (i) the issuer itself is created or organized in
the United States or under the laws of the United States, and (ii) the issuer on a consolidated
basis has significant operations in and a majority of its employees based in the United States. An
issuer in the PMCCF that is a U.S. subsidiary of a foreign company must use the proceeds
derived from participation in the PMCCF only for the benefit of the issuer, its consolidated U.S.
subsidiaries, and other affiliates of the issuer that are U.S. businesses, and not for the benefit of
its foreign affiliates.

Additional protection is offered by the fact that the CEO and CFO (or the individuals
performing similar functions) of the issuer must certify to compliance with this requirement in
order to borrow from the PMCCF. The issuer will be required to keep records of its certification
process and underlying due diligence. These records will be available to the Federal Reserve
upon request. A knowing material misrepresentation in these certifications would provide a
basis for the Federal Reserve to refer the matter to law enforcement authorities.

In addition, the issuer will be contractually bound. The standard form PMCCF transaction
documents require that the issuer ensure that funds will not be used for the benefit of foreign
affiliates, and require immediate repurchase of the bond if this requirement is violated.

Main Street Lending Program

1. Do the agencies plan to expand eligible lenders in this program beyond depository
institutions? Why or why not?

A wide range of financial institutions are eligible to participate in the Main Street Lending
Program. Eligible Lenders include U.S. federally insured depository institutions (banks, savings
associations, and credit unions), U.S. branches or agencies of foreign banks, U.S. bank holding

15
companies, U.S. savings and loan holding companies, U.S. intermediate holding companies of
foreign banking organizations, or any U.S. subsidiary of any of the foregoing.

Recognizing that small and medium-sized businesses often access credit through a variety of
sources and types of institutions, the Federal Reserve is studying the feasibility of expanding the
scope of eligible lenders in the future.

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?

The MLF imposes no policy conditions on eligible issuers other than restrictions on the use
of note proceeds. An eligible issuer may use the proceeds of notes purchased by the MLF to
help manage the cash flow impact of income tax deferrals resulting from an extension of an
income tax filing deadline, deferrals or reductions of tax and other revenues or increases in
expenses related to or resulting from the COVID-19 pandemic, and requirements for the payment
of principal and interest on obligations of the issuer or its political subdivisions or other
governmental entities. An eligible State, City, or County issuer also may use the proceeds of the
notes purchased by the MLF to purchase similar notes issued by, or otherwise to assist, political
subdivisions and other governmental entities of the issuer for the purposes enumerated in the
prior sentence.

2. What is the rationale for the three-year repayment terms under this facility?

The MLF was designed as a short-term lending program to provide bridge financing to states,
localities, and their subdivisions or other governmental entities facing sudden disruptions in their
short-term cash flows as a result of the COVID-19 pandemic. The Federal Reserve established
the MLF in response to rapid deterioration in the municipal securities market at a time when it
appeared unlikely that the short-term municipal securities market could fully meet the demand
for short-term municipal note issuance. The MLF was not designed to provide long-term
financing for capital infrastructure projects because the long-term municipal capital markets
appear to have been disrupted for only a relatively short period. A relatively short repayment
term is also consistent with the Federal Reserve’s mandate under section 13(3) and the Board’s
Regulation A to design facilities that provide credit in unusual and exigent circumstances, but
encourage repayment of the credit and disuse of the facility as the unusual and exigent
circumstances recede. Short repayment terms also allow the agencies to buy and hold municipal
securities and passively exit the market without causing significant disruption as market
conditions normalize.

The facility was initially announced with a two-year repayment term. After the initial
announcement of the facility, the agencies extended the maximum repayment term to three years
based on feedback from states and municipalities. The longer term was intended to provide more
flexibility for issuers to manage their cash flow and liquidity challenges through the COVID-19
pandemic and uncertain economic recovery and provide more time for fiscal recovery and
repayment or refinancing of the notes.

3. Will the agencies disclose information about any states, counties, and cities whose
applications for loans from this facility are denied?

The agencies do not expect to deny applications to issue notes to the facility because the
MLF does not make individualized credit determinations for entities seeking to issue notes to the
facility. Instead, the MLF’s eligibility and pricing are based upon objective, transparent
criteria. For example, the most recent MLF term sheet includes a list of eligible issuers,
maximum borrowing amounts, use of proceeds limitations, and credit ratings-based eligibility
and pricing criteria. Applications that meet these public criteria will be approved. If these
criteria are not met, the issuer would know in advance and would be unlikely to apply.

The MLF is committed to transparency and will fully meet its disclosure obligations pursuant
to section 13(3) of the Federal Reserve Act, the Board’s Regulation A, and the CARES Act.

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?

The CARES Act provides funding for up to $46 billion in loans to provide liquidity to certain
eligible businesses related to losses incurred as a result of coronavirus. Eligible businesses
include air carriers and related U.S. businesses that have not otherwise received adequate
economic relief in the form of loans or loan guarantees provided under the CARES Act and
businesses critical to maintaining national security.

Specifically, $25 billion is available for loans to passenger air carriers; eligible businesses
that are certified under 14 CFR Part 145 and approved to perform inspection, repair, replace, or
overhaul services (“Part-145 certified repair station operators”); and ticket agents as defined in
49 U.S.C. § 40102. In addition, $4 billion is available for loans to cargo air carriers, and $17
billion is available for loans to businesses critical to maintaining national security.

Treasury has released guidance and application materials and, as of June 16, 2020, has
received 190 applications from air carriers, Part-145 certified repair station operators, and ticket
agents. As of June 17, 2020, Treasury has received 70 applications for the national security loan
program, 25 of which meet one of the two national security eligibility criteria established by
Treasury, although one of those has been withdrawn.

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?

Section 4003(d) of the CARES Act generally requires that Treasury receive a warrant or
equity instrument in the borrower if the borrower is a public company, or a warrant, equity
instrument, or senior debt instrument if the borrower is a private company. Applicants were
invited to submit proposals on the form and amount of taxpayer protections they proposed to

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provide. Together with the other data and information provided in the applications, Treasury
will develop standards for adequate and appropriate taxpayer protections.

Treasury has not yet determined the final form of taxpayer protection that will be required,
but anticipates applying a uniform standard that satisfies the requirements of Section 4003(d).

3. When does the Treasury anticipate approving and disbursing these loans?

Treasury is continuing to review loan applications in accordance with its statutory
obligations, communicate with applicants as appropriate, and make determinations regarding the
timing of loan approvals and disbursements. Treasury anticipates approving and disbursing
loans in the near future.

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?

Treasury intends to include this statutory requirement as a covenant in the loan agreements
between Treasury and each borrower. Specifically, to receive a loan, a borrower must agree that,
until September 30, 2020, it will maintain employment levels as of March 24, 2020 to the extent
practicable, and in any case not reduce its employment levels by more than 10 percent from the
levels on such date.

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