fedfin

The CARES Act revises a key provision in the Dodd-Frank Act to allow the FDIC to reopen a sweeping Temporary Liquidity Guarantee Program (TLGP) offered in the midst of the 2008 great financial crisis for uninsured deposits and parent-company debt.  This TLGP lasts for the duration of the COVID crisis, extending this protection for deposits also to credit unions.  Putting it into effect will require FDIC action, with the terms and conditions of its new rule determining the scope and construct of holding-company support.

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In addition to facilities supporting as much as $4.5 trillion in lending for large companies and municipalities, the CARES Act creates a major new program within the Small Business Administration (SBA) for gig employees, the self-employed, and entities with fewer than 500 employees or that meet other criteria for loans up to $10 million to cover payroll, benefit, rent, and other expenses due in the midst of the COVID crisis.  These loans will be rushed out by the SBA through banks and other lenders sure to be contacted by millions of eligible individuals and businesses, not only hard-pressed by the crisis, but also attracted by the fact that – if loan terms are honored – this debt is forgiven.  The program thus establishes a de facto grant program designed to support macroeconomic resilience under acute stress.  Lenders take no risks and absorb few costs in making these loans.  Loans may be sold into the secondary market, but it is likely to take time for the SBA to develop the mechanisms for doing so given the significant differences between these loans and prior SBA obligations.  The law also sets a statutory risk-based capital level for these loans, continuing Congressional precedent for dictating regulatory capital to achieve policy objectives.

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Over the weekend, we assessed the implications of Ginnie’s new pass-through policy and the FSOC task force’s urgent work to craft a mortgage-servicer rescue or, if not that, at least a lifeline.  We conclude that the Fed and other bank regulators are more than reluctant to relax rules that put banks at risk instead of servicers.  As we concluded last week, the CARES Act’s windows do not easily accommodate servicers, putting the onus on Treasury, FHFA, and Ginnie to come up with Plan B.

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In this analysis, we address a question many of you are asking:  could the Home Loan Banks quickly provide liquidity to nonbank servicers or MREITs?  In short, the FHLBs could do whatever FHFA decides to allow within whatever expansive view of the law FHFA is willing to tolerate.  However, a flood of short-term liquidity could pose risk of even systemic proportions through the FHLB transmission channel.  As a result, we think this will be a last resort.

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Landmark U.S. law seeking to counter coronavirus macroeconomic effects authorizes $500 billion in direct Treasury funding on its own and, in concert with the Federal Reserve, as much as $4.5 trillion in Fed facilities backing liquidity for businesses and state/local governments.  Programs for non-profits and mid-sized businesses are also possible.  Prior to enactment, the Fed in fact established several innovative facilities that it once would have viewed as far beyond its statutory authority (e.g., the facility making direct extensions of corporate credit).

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Americans understandably haven’t yet thought much about anything but themselves and their loved ones, preoccupied as they sadly are with fears of illness and economic privation.  Even so, it seems ineluctably clear to me that, when we again go about our daily lives, the U.S. policy landscape will be irrevocably changed.  Americans will be very, very angry.  Populists such as President Trump and new-born progressives like Joe Biden will make sure that companies that got trillions while many couldn’t pay their bills will take a reckoning.  And so they should.

The fundamental goal of the mountains of post-crisis rules after 2008 was to end the moral hazard which propelled investors to take ever more speculative bets secure in the knowledge that taxpayers would bail them out.  Much in U.S. law and rule after 2008 in fact sharply reduced this risk for the very biggest U.S. banks “called too big to fail” because they were.  Now, they’re not or, if they are, the biggest banks are far less so than all the shadow banks now desperate to survive the illiquidity and leverage that made them Wall Street’s darlings for over a decade. 

We’ve said it as did many others:  asymmetric regulation ensures financial-market transformation into a high-risk configuration in which “fortress banks” serve as a source of supply for the rollicking brigands decimating the financial countryside.  Retribution is sure to follow.

The next round of financial regulation will make the Dodd-Frank Act look like a technical clarification.  No financial …

In this analysis, we assess the mortgage-finance provisions of the CARES Act in concert with FSOC’s discussion yesterday of servicers and the Fed’s plans for its manifold windows.  We still see significant statutory challenges and market obstacles to a liquidity backstop for servicers or REITs no matter the trillions soon to flood from Treasury and the Fed.  A way may be found for short-term relief to avoid systemic meltdown resulting from the CARES Act’s generous forbearance provisions, but creativity is the order of the day.

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In this report, we provide our first in-depth assessment of financial-market and -regulatory provisions in the sweeping COVID bill unanimously approved by the Senate late last night.  The House will take this up, but the procedure for doing so remains in flux due to progressive opposition that complicates the unanimous-consent process necessary for remote approval.  The analysis here is preliminary as the bill was in flux up to late last night and drafting in several key sections reviewed yesterday was clearly incomplete.  Almost $1 trillion of loans, guarantees, and warrants is, though, assured from the combination of Treasury and FRB facilities authorized in some cases for specific interests and in others for more general market, municipal, and small-business access.  Terms and conditions apply based on which funding window is used and the type of borrowing.  MMF support via Treasury is also expanded to support the Fed’s new liquidity facility (see Client Report COVID6).

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