Fed Announces New Facilities to Support $2.3 Trillion in Lending -- 3rd Update
April 09 2020 - 3:18PM
Dow Jones News
By Nick Timiraos
The Federal Reserve went farther than ever before to shore up
the U.S. economy by unveiling programs to lend directly to state,
cities and midsize businesses that have seen revenues evaporate
amid efforts to combat the novel coronavirus.
The central bank also said it would expand previously announced
plans to backstop lending to large companies by supporting riskier
bonds issued by companies that had recently lost their
investment-grade status.
Altogether, the Fed said nine lending programs that it is
creating or expanding would provide as much as $2.3 trillion in
loans, and officials signaled they were prepared to expand those
programs as needed to stem long-lasting damage to the U.S.
economy.
"It's really an awesome display of creativity and decisiveness
-- the breadth and diversity of programs," said Antonio Weiss, a
Treasury official in the Obama administration who is now a senior
fellow at Harvard's Kennedy School of Government. "They are taking
a role well beyond any the Fed has played in its modern history,
and the economy needs it."
In leading the Fed past its efforts to support lending during
the Great Depression or after the 2008 financial crisis, Fed
Chairman Jerome Powell is pushing deeper into areas of credit and
fiscal policy the central bank has traditionally left deferred to
elected officials.
During and after the 2008 crisis, the Fed left it to the White
House and Congress to provide financial assistance to failing auto
makers and local governments facing declining revenues and rising
expenses, viewing such decisions as essentially political.
Now, with a far broader swath of the economy shut down to
prevent the spread of infection, companies and local governments of
all sizes are struggling to make payroll, pay bills and service
their debts. This time, the Fed has signaled a willingness to buy
assets or make loans in any market it thinks will be necessary to
stave off further job losses and business failures.
The Fed has tried to identify "the priority areas where we
thought help was needed," said Chairman Powell during an online
forum Thursday. "As we identify other areas, we won't hesitate to
move."
The Fed first fired its arsenal at funding markets last month to
prevent a public-health crisis from morphing into a financial
crisis, and it later said it would throw another volley at credit
markets that have broken down. On Thursday, the Fed introduced a
new generation of lending programs to prevent a liquidity crunch
from turning into a solvency crisis for American businesses, states
and cities.
Congress made the latest rearming of those stockpiles possible
last month when it gave the Treasury Department more than $450
billion to cover losses the Fed might sustain in its lending
programs. The Fed relied on $185 billion in additional support from
the Treasury in launching the programs announced Thursday.
That leaves the Fed with a significant amount of resources
available still to expand these programs or introduce new ones
should they be needed. "For credit policy, the Fed still has plenty
of bullets left," said JPMorgan Chase economist Michael Feroli.
The steps unveiled Thursday will finance loans that banks make
through the government's emergency small-business lending program
and allow banks to exclude those loans from required capital
ratios, freeing them up to make more of those loans, which are
separately guaranteed by the Small Business Administration.
The Fed will create two facilities to encourage banks to lend to
midsize businesses, which it defined as those with fewer than
10,000 employees or less than $2.5 billion in revenues last year.
This Main Street Lending Program will enable as much as $600
billion in lending to firms that are too large to qualify for the
small-business loans but too small to access corporate debt
markets.
The central bank announced it would backstop some pieces of
riskier corporate debt in two previously established facilities,
and the Treasury increased to $75 billion from $20 billion the
amount of money available to cover losses the Fed might sustain as
a result.
One corporate credit backstop to support new debt issuance of
highly rated firms will be expanded to include so-called fallen
angels that were investment-grade in mid-March but have
subsequently been downgraded one notch, from triple-B to double-B.
A second corporate credit backstop will allow a limited amount of
purchases of noninvestment-grade debt in exchange-traded funds.
Another program will allow new classes of debt in the previously
announced Term Asset-Backed Securities Loan Facility, or TALF, that
were excluded from that facility when it was used after the 2008
financial crisis to support consumer and business credit
markets.
The Fed will now accept triple-A-rated tranches of existing
commercial mortgage-backed securities and newly issued
collateralized loan obligations. Under TALF, the Fed lends money to
investors to buy securities backed by credit-card loans and other
consumer debt. The Fed has made $100 billion available for that
program and didn't increase the amount Thursday.
To ease funding strains for cities and states seeing large
revenue drops and rising expenses from simultaneous economic and
health crises, the Fed said it would purchase as much as $500
billion in short-term debt directly from U.S. states, the District
of Columbia, U.S. counties with at least two million residents, and
U.S. cities with at least one million residents.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
April 09, 2020 16:03 ET (20:03 GMT)
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