September 20, 2020

Oversight Member Blasts the Fed’s Efforts to Rescue Main Street

“Many banks seem disinterested in the program because they either wish to retain more than five percent of a profitable loan or they have no interest in retaining any stake at all in an unprofitable loan,” a group of four Republican Senators, led by Kelly Loeffler, wrote in an Aug. 4 letter to Fed Chair Jerome H. Powell and Treasury Secretary Steven Mnuchin.

The senators recommended reducing the minimum loan size and increasing the debt-to-earnings ratio allowed for borrowers. They also want the Fed and Treasury to eliminate the loan stake that banks must retain, or promise that taxpayers will take the earliest losses on bad loans rather than sharing those losses evenly with banks.

Mr. Mnuchin has resisted taking on too much risk with the program, saying at one point that he did not want to lose money on it if the economy played out as expected. While some of the program’s terms have eased, it is clear that they have not changed enough to spur its widespread use so far.

Some Fed and Treasury officials have indicated that the fact that few businesses are using the program is not necessarily a sign of failure. Boston Fed President Eric S. Rosengren, who is testifying at the commission’s hearing, has made the case that the program would be successful if it was available to help companies if a second wave of the virus erupts and credit conditions worsen.

Mr. Rosengren’s branch of the Fed is running the Main Street program. He is testifying ahead of officials from banking and business groups and a labor union.

“I would note that in addition to providing loans for borrowers in current need of funds, the program offers a credit backstop for firms that do not currently need financing, but may if the pandemic continues to erode the financial condition of these firms over late summer and fall,” Mr. Rosengren said in his prepared testimony Friday.

“We actually have seen significant pickup, recently,” Mr. Rosengrenadded.

Mr. Rosengren said that while more than $100 million in loans had actually been settled, more than $600 million in total were somewhere in the process as of Thursday night. He also pointed out that setting up a program to quickly service the bespoke private loan market at a large scale has been “inherently difficult.”

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