Congress Senate Banking Quarterly Cares Act Report Powell Mnuchin 2020 05 19 Text

Summary

Transcript excerpts of the Senate Banking Committee hearing The Quarterly CARES Act Report to Congress, dated May 19, 2020, with Treasury Secretary Steven T. Mnuchin and Federal Reserve Chairman Jerome H. Powell as witnesses. The excerpts focus on the Main Street Lending Program and include opening statements. Chairman Mike Crapo says Congress had appropriated nearly $3 trillion and that Title IV of the CARES Act provided $454 billion to the Exchange Stabilization Fund. An editor note in the file says the program was not yet operational and both witnesses said facilities would be ready by the end of the month.

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> ...we welcome to this virtual hearing the Honorable Steven T. Mnuchin, Secretary of Department of Treasury; and the Honorable Jerome H. Powell, Chairman of the Board of Governors of the Federal Reserve System. We will receive testimony from the Secretary of the Treasury and the Chairman of the Federal Reserve, as required under Title IV of the CARES Act.
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> Congress has appropriated nearly $3 trillion to protect, strengthen, and support Americans... A large portion of this funding is authorized under Title IV of the CARES Act, which provides significant resources for loans, loan guarantees, and other investments from Treasury and the Federal Reserve's 13(3) emergency lending facilities and programs in support of eligible businesses, States, municipalities, and tribes.
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> Title IV of the CARES Act provided **$454 billion** as an infusion into the Exchange Stabilization Fund to support the Federal Reserve's emergency lending facilities... This unique lending authority, known as "13(3) authority," is authorized under Section 13 of the Federal Reserve Act and plays a critical role in stabilizing markets.
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> Last week, other members of this Committee and I had a robust discussion with Vice Chairman Quarles on these facilities and stressed the importance of getting facilities like the **Main Street Lending Programs** and the Municipal Liquidity Facility up and running quickly to provide a lifeline to struggling businesses, States, and local governments. Again, I stress the importance of setting these facilities up quickly and allowing broad access. There was also a discussion about whether it is acceptable for the Treasury to take any losses on investments put into the special purpose vehicles that the Fed will lend to for various programs. The 13(3) facilities are a critical component of a strong economic recovery, which reinforces the need to have them quickly operational, broadly available, and as flexible as possible.
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> Title IV also contains robust oversight provisions, especially the one that brought us here today, **Section 4026**... Last week, this Committee voted the Special Inspector General for Pandemic Recovery favorably out of Committee, and yesterday the Congressional Oversight Committee published its initial report on oversight of Title IV...
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> During this hearing I look forward to hearing more on an update of the status of the Treasury loan programs, 13(3) emergency facilities, and the Paycheck Protection Program; steps the Fed and Treasury have taken, and will continue to take, to provide transparency into the loans and loan guarantees under the CARES Act; and how the unused funds from Title IV will be prioritized and leveraged to provide additional liquidity to the economy.

> ...Congress has an important responsibility also to make sure the **$500 billion** we have already approved for the Fed and Treasury is actually getting to workers. And from what we know so far, it does not appear that this Administration or the Federal Reserve are making workers their priority.
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> Today I look forward to hearing from both of you, Mr. Secretary and Chairman Powell, not about what you are doing for big banks or big corporations--we already know that--and how you expect that money to trickle down, but how you are making sure the money and the authority Congress gave you actually help the people who make this country work. I want to hear how it is going to be different this time...
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> If Congress does not act now to put money in the hands of the people who actually power our economy--in workers, their families, and Main Street businesses in struggling communities-- we risk making the economic crisis worse.

> ...Turning to the central focus of the hearing today, the CARES Act also provided authority for **$454 billion** in support for the Federal Reserve lending facilities to provide liquidity to the system.
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> Since March 17th, I have approved the following facilities: the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Money Market Mutual Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, the **Main Street Business Lending Program**, the Municipal Liquidity Facility, and the PPP Lending Facility.
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> We have committed approximately **$200 billion** in credit support under the CARES Act. We have the remaining money to create or expand these programs as needed, and we continue to monitor a variety of economic sectors closely and are prepared to support these programs with the Federal Reserve as we need to move forward.

> ...So far, we have created **11 facilities under Section 13(3)** of the Federal Reserve Act to support liquidity, funding, and the flow of credit. All of these facilities have been undertaken with the approval of the Treasury Secretary, and many of them are supported by funding from the CARES Act... At the Fed, we are committed to transparency, particularly in deploying our emergency powers. Public faith in our operations depends on that transparency.

> **Chairman Crapo.** ...there have been some allegations that just big companies are being benefited by these facilities. Could you quickly address that, Secretary Mnuchin?
> **Secretary Mnuchin.** Well, let me just comment. The announcement of the Corporate Bond Facility, without putting up $1 of taxpayer money, unlocked the entire primary and second market for corporate bonds. So companies such as Boeing that I had expected would need to borrow from us on a direct basis were able to borrow $25 billion in the primary markets. So I would say in the best-case scenario, the markets open up and we do not need to use these facilities. In the case of the **Main Street Facility** and the Municipal Facility, which we expect both to be up and running by the end of the month, we expect these to have a big impact on both those markets.

> **Senator Toomey.** ...I want to talk a little bit about the **Main Street** programs. First, give us your best estimate of when we can expect borrowers to actually be able to access funds from these programs?
> **Mr. Powell.** ...So on **Main Street** and, frankly, on all of the other facilities, we expect all of them to be stood up and ready to go by the end of this month. I do not say that it will not be a day or two into June, but that is our expectation, and the funds should be flowing directly after that.
> **Senator Toomey.** And very briefly, would it be possible to characterize the remaining hurdles you have got to get over in order to start actually being operational?
> **Mr. Powell.** Sure. So all of them are complex and challenging, but **Main Street** is in a class by itself, really. It is not the bond market. These are small and medium-size companies. They live in a world of bank lending. That is a world of negotiated documents, and we are trying to enter that world and make loans to qualifying buyers. So we set up, you know, big operations at the Federal Reserve Bank of Boston and hired service providers, and we are doing all of that to be ready to face off against it. It is very diverse, small, medium, and large companies, very different industries, very different credit needs, some of them asset-based, some of them cash-flow-based. So it is a really complex undertaking, and people are working literally around the clock, and have been for weeks, to get it ready by the end of this month.
> **Senator Toomey.** ...one of the conditions of these facilities is that the banks who are acting as lenders--and, by the way, I am hoping that nonbanks can participate as well. Business development companies and others I think would be effective conduits for these funds. But the lender is going to be required to keep some of the risk on their own books, and I am wondering what kind of reaction you have gotten from lenders and potential borrowers. What kind of participation are you anticipating? Do you think there will be strong demand for these facilities given the way they have been structured?
> **Mr. Powell.** There are three facilities. We have had a lot of outreach--to borrowers, lenders, everybody--going back over the last couple of months. And the three facilities will probably attract different levels of demand. We are getting a good deal of interest and inquiry on them, and I think we will find out fairly quickly. You should know that we will continue to be prepared to adapt, as we have shown, if the uptake is not what we would hope, and we will be prepared to go after that and try to find ways to address the needs of this area of the economy.

> **Mr. Powell.** Yes. If I understood your description of the companies, they sound more like **Main Street companies** than primary or secondary credit market. Those are for investment grade issuers who issue public bonds...
> **Senator Cotton.** On the **Main Street Facility**, Mr. Chairman, I think the limitation that some companies might face is that they exceed the employee cap, which I understand to be 10,000. It would be similar to the **Main Street Lending Facility**.
> **Mr. Powell.** Well, I would just echo what Secretary Mnuchin said. We are working on this problem.
> **Senator Cotton.** ...any thoughts on when that decision might be made so these companies can get the certainty on whether they will have access to that facility or another facility or perhaps a brand-new facility?
> **Secretary Mnuchin.** I understand the importance of this, and I will commit to try to get back to you within the next week. And we want to make sure that if there are companies that slip through these two facilities, the Chair and I will work together to make sure that we deal with those issues so that they have funding.

> **Senator Warner.** ...that middle market that the **Main Street Facility** is supposed to address, I am gravely concerned that we need to both get that out and we need to be very aggressive with it... you made mention earlier that you were willing to have some of that $75 billion at risk in this facility. But I would like you to speak to that a little bit more, specifically in terms of, as you build out the baseline of this facility, how much risk and how much of that capital did you expect to potentially lose, and I would love to have then the Fed Chairman very quickly echo whether he is willing to relook at some of the penalty fees that are, to my understanding, Fed regulations but not legislatively mandated...
> **Secretary Mnuchin.** ...As it relates to risking capital, as I have said, almost by definition, anytime that the Fed thinks they need capital, there is a risk to us. We obviously model our various different scenarios. We have obviously continued to adapt the **Main Street Program** to let more and more companies into it, and although we refer to it as one program, it effectively has three subprograms. So we run different scenario analysis. There are scenarios within **Main Street** where we could lose all of our capital, and we are prepared to do that. There are scenarios where the world gets better and we could actually make a small amount of money. But, again, as I have said, no different than Secretary Paulson during the TARP period. They did not think they were going to make money. Our intention is that we expect to take some losses on these facilities. That is our base-case scenario.
> **Senator Warner.** Mr. Chairman, do you want to address it in terms of the penalty rate?
> **Mr. Powell.** I would be glad to. So what we are doing here with these programs is we are making loans in times of severe stress, where markets are not working, not providing credit on reasonable terms, the original purpose of central banks. So what rate should we charge? And what we do is we charge a rate that is a little bit higher than the normal rate, but in most cases much below what the market is currently providing. That encourages prompt repayment. It helps those who cannot get credit, but not those who want credit from us to save a few basis points. And if markets are functioning reasonably well, we do not want to replace them. We want to be a backstop to those markets.

> **Senator Warren.** ...You say the economy is going to recover. It is going to take jobs in order for that to happen. So what I want to know is: Are you going to require companies that receive money from this half a trillion dollar slush fund to have to keep people on payroll? It is a simple question. Yes or no, are you going to require that?
> **Secretary Mnuchin.** First, let me say that our number one objective is keeping people employed.
> **Senator Warren.** Good. So are you going to require that----
> **Secretary Mnuchin.** I want to be very clear.
> **Senator Warren.** ----of people who are getting taxpayer money? That is my question.
> **Secretary Mnuchin.** Again, we negotiated very significant restrictions on employee compensation, on dividends, on buybacks, and in the **Main Street Facility** we have put in a provision that we expect people to use their best efforts to support jobs. But----
> **Senator Warren.** But--I am sorry. I have very limited time here, Mr. Secretary. Let me understand what you are saying. In all the facilities that are not the **Main Street Facility**, you are not putting in any requirement for payroll, and the **Main Street Facility** is something about commercial reasonable effort to be able to maintain jobs. In other words, if somebody fires, if a corporation fires a bunch of people, then gets Federal taxpayer money, you are fine with that; or if they take a bunch of Federal taxpayer money, and, well, it did not work out commercially for us, then they can fire people. So I take it your answer to my question whether or not you are going to require as part of the terms of the loan that people be kept on payroll is no? Isn't that right, Secretary Mnuchin?
> **Secretary Mnuchin.** That was discussed with people on both sides of the aisle, and the determination was made----
> **Senator Warren.** I am talking about term sheets.
> **Secretary Mnuchin.** ----at the time----
> **Senator Warren.** ...Taxpayers are on the hook here for nearly half a trillion dollars. You are not going to require that they keep a single person on payroll. There are some rules, though, in the term sheets... like prohibiting companies from getting bailout money, from double-dipping in other CARES programs. And by law, companies that get this money are going to have to sign agreements certifying that they are in compliance. So, Secretary Mnuchin... Will you create a certification process that ensures that executives are held personally liable and are subject to criminal penalties if they provide false information or misuse bailout funds?
> **Secretary Mnuchin.** We will review that, and, again, I would just comment on programs like the airline programs had very specific requirements to keep jobs, which was the intent of Congress.
> **Senator Warren.** That is right, and the rest was left up to you, and what you are saying is that you will not do it... You are in charge of over half a trillion dollars. You are boosting your Wall Street buddies, and you are leaving Americans behind...
> **Secretary Mnuchin.** Senator Warren, I think that is a very unfair characterization, and these issues were discussed with both Republicans and Democrats at the time...
> **Senator Warren.** You were given the authority to determine the terms. You have said it yourself. You are putting out term sheets, and those term sheets do not require that a single corporation... getting billions of dollars in taxpayer money retain one job.

> **Senator Perdue.** ...the five moves you made takes it up to potentially $13.5 trillion. It is around probably $7 trillion today, and it could go north of 14 if, in fact, the **Main Street Program** is fully levered up. Help us understand... how do you put this genie back in the bottle?...
> **Mr. Powell.** So when we expand our balance sheet, when we bought securities... As these facilities grow, we will also expand our balance sheet... I would expect that over time... the assets that we have on our balance sheet from this era will come to maturity. They will roll off, and the balance sheet will again very gradually return. This will be some years down the road, I would think.

> **Senator Tillis.** ...I have a growing sense that we have a bit of a donut hole, those that are not quite right for the Paycheck Protection Program because of their size but not quite big enough or the nature of their business to be eligible for the upcoming **Main Street Lending Facility**... I get a sense that there are going to be some people caught in between. What are your thoughts about more we need to do there?...
> **Secretary Mnuchin.** I would say our objective is to make sure that there are people that do not fall out in between. So between the PPP, the EIDL loans, and the **Main Street Program**, it is our objective to try to cover as many of those companies as possible.
> **Mr. Powell.** In fact, that is one of the reasons why we went to a smaller minimum loan level on the **Main Street Lending Program** in the last turn of the term sheet.
> **Senator Tillis.** ...I also look forward to seeing the **Main Street Lending Act** mobilized in the coming couple weeks...

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