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Continuing actions to neutralize key rules, federal banking agencies have temporarily revised the liquidity coverage ratio (LCR) to exempt most assets and liabilities created in the course of supporting the money market mutual fund liquidity facility (MMLF) and PPP Liquidity Facility (PPPLF).  The need to neutralize so many core post-crisis prudential standards may lead to broader questions about the U.S. prudential framework, but in the near term it gives considerably more latitude for banks to support Fed market-rescue facilities.

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The Federal Reserve Bank of New York on Tuesday released its uniquely-useful quarterly survey of U.S. household debt derived from non-public credit data cross-tabbed in new ways to show not just total household debt burdens, but also which income group is most likely to manage all the debt accumulated before COVID ripped into family balance sheets.  Based on total amounts of debt in the first quarter, the FRB-NY analysis concludes that debt burdens coming close to real record highs are nonetheless manageable due to credit-line capacity.  However, as we read the debt-burden data once broken down by income, we are far less sanguine.

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On its Friday investor call, Fannie Mae reaffirmed our forecasts of the capital impact of the CRT shut-down and forbearance-portfolio policy.  However, Fannie also expects FHFA to move forward with its capital proposal, suggesting imminent collision between a rock – GSE capital under stress – and a hard place – FHFA’s determination to end the conservatorship.  In this analysis, we note some steps Fannie plans to take to avoid getting crushed in the middle and who else might get rolled over along the way.

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As we noted yesterday, Freddie Mac’s 1Q earnings statement included doubts about CRT’s long-term viability.  Fannie today is less gloomy but has nonetheless shuttered back-end CRT for as long as the financial markets remain inhospitable.  We had expected both GSEs to take this prudent course, but the necessity for each to do so makes it still more clear that CRT’s future under even benign market conditions is wholly uncertain.

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The Washington Post columnist, Steven Pearlstein, yesterday said that the panoply of Fed facilities proves that socialism rules the markets even as capitalism exerts its relentless discipline on everyone else.  Any doubt of this was erased yesterday when the Fed’s ingeniously-named Main Street Facility became still more generous to troubled firms with revenues of as much as $5 billion a year.  I’ve said before that the Fed’s idea of Main Street looks a lot like Park Avenue, but now I think it’s more like Park Avenue between, say, 72^nd and 80^th streets.  In a consumption-based economy with more than thirty million newly unemployed Americans who had record amounts of unsustainable debt even before the crisis, the Fed’s “vast water-hose supplies of money” to the market aren’t going to trickle down.  In this memo, I’ll expand on ways the Fed can use a “Family Financial Facility” to water the economy from the ground up.  Why it must do so is best spelled out in our most recent EconomicEquality blog post entitled “Inequality Rising.”

When I first proposed the FFF on March 13, the Fed was still fastidious about its Section 13(3) obligations to provide only liquidity, not solvency, support.  Since then, it’s thrown caution to the winds, buying or making loans to large companies without even the nicety of requiring them first to demonstrate that they cannot find credit elsewhere. And, with Chairman Powell saying yesterday that the Fed will go still bigger if …

As we most recently said earlier this week, we long expected that pricing for risk via CRT structures would not survive periods of market stress, especially when many CRT counterparties are themselves procyclical ventures thriving on market dislocations without the capital and liquidity resources or business-model construct to ensure continuing credit-absorption capacity.  Freddie Mac’s quarterly report today concludes based on hard 1Q experience that continued CRT viability is up in the air due to the sudden departure of longstanding CRT counterparties and, for those left standing, unacceptable pricing.  In the near term, these CRT challenges combined with other counterparty risks, put still more capital pressure on Fannie and Freddie’s balance sheets.

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Federal Financial Analytics, Inc.

Paycheck Protection Program Pandemonium: Policy Implications

April 29, 2020

The PPP’s second life began with even more pandemonium than its first launch in early April. Its problems compound political risk born of all the financial hardships for American households and small businesses. A culprit will be sought and that culprit could be “Wall Street.” It won’t be drawn and quartered in the current political construct, although near-term risks are significant. Going forward, the nature of the 2020 election and its outcome could lead to legislation making Dodd-Frank look toothless.

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As of this writing, SBA systems are faltering, accusations are flying, and at least four Congressional subpoenas to the largest banks are on their way. It seems certain that, when Congress resumes hearings sometime next month, banks will face heavy, bipartisan fire. Community banks will deflect much of it successfully back to the SBA, but the largest banks will be excoriated for actions real and alleged sure to infuriate populists and progressives. As Karen Petrou noted, the PPP’s problems are easily understood by aggrieved borrowers and many households already angered by mortgage-servicing problems, credit-card bills, and overall challenges making ends meet. With populists and progressives already primed to demand big-bank structural reform, this case could well prove a lightning rod for changes many in the sector would find destructive to established business models.

Risks already on the horizon include:

• increased legal and reputational risk resulting from claims

Now that we’re about six weeks into the pandemic shut-down, underlying trends are increasingly evident even though the length and depth of the crisis is more than uncertain.  In this report, we assess the condition of key mortgage-market sectors, policy developments so far, and resulting structural implications.

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