Back in March,
Congress authorized the Federal Reserve to make trillions
of dollars of loans directly to businesses in an effort to support the economy.
The Treasury would be willing to take hundreds of billions of losses, if
needed, so that the central bank could quickly get money out the door.
But that’s not
what happened. As of last week, the latest date for which we have data, the Fed
had lent a grand total of $12 million dollars as part of its “Main Street
Lending Program.”
One problem was delays. Even though the Cares
Act passed in March and the Fed formally announced
the Main Street program in early April, the facility didn’t become “fully
operational” until July. By that point, many of the businesses that might have
really needed the money either failed or got it from some other source.
Another issue was the terms, which somehow managed to
make the program unattractive for both borrowers and originators:
Businesses
were required to repay the debt within four years, with only one year of
principal deferral. That’s since changed to five-year loans with two years of
deferral, although even that may not be particularly helpful given the way the
pandemic and the economy are evolving. Meanwhile, originators are still forced
to retain 5% of the credit risk, which discourages participation given the low
interest rates on offer.
Read
more from my piece
on Barrons.com.
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