America’s Jobless Crisis Goes Nuclear. Fed Leaps In With $2.3 Trillion In New Lending

The US got another stark reminder of just how dire the economic situation really is in the world’s largest economy on Thursday, as jobless claims surged for a third consecutive week.

6.61 million Americans filed for unemployment benefits in the week through April 4, more than the 5.5 million consensus was expecting.

The prior week was revised up to 6.9 million.

That brings the three-week total to an astounding 16.8 million.

Suffice to say this counts as an existential economic crisis on par with the most dramatic such episodes the nation has ever witnessed.

This also means that, for the third consecutive week, jobless claims have printed multiples of the pre-2020 weekly record, set in 1982.

The bottom line is that if it didn’t happen in the past four weeks, it doesn’t register on the proverbial radar screen anymore.

Lawmakers, in conjunction with Steve Mnuchin, are rushing to get money into the accounts of struggling small businesses which, according to data from a Fed study conducted late in 2019, came into the crisis on somewhat shaky footing, depending on how you measure financial “health”.

The study (released Tuesday) showed that only one in five “healthy” firms had sufficient cash buffers to survive a two-month revenue shock without resorting to mitigation actions (e.g., layoffs) and/or curtailing operations.

The so-called “Paycheck Protection Program” hasn’t been a complete debacle, but as you’d expect with a hastily-construed $349 billion emergency credit scheme, the rollout was somewhat rocky. Mitch McConnell is set to grant Mnuchin’s request for $250 billion in additional funding for the program, but because most lawmakers are out of town, the push needs unanimous consent in both chambers. Schumer and Nancy Pelosi want more out of the deal in exchange for their acquiescence, including $100 billion for hospitals and $150 billion for state and local governments.

In other words, Mnuchin and McConnell want $250 billion added to the $349 billion program now, while Schumer and Pelosi want $500 billion added to it, and have very clear ideas on where they want it to be channeled. For example, Democrats want half of the $250 billion earmarked for small businesses to go directly to community-based organizations serving firms owned by farmers, families, women, minorities and veterans.

In any event, the PPP had seen nearly 400,000 loan applications processed for $100 billion through lunchtime Wednesday. And, as you can see from the claims figures, “we’re gonna need a bigger program”, to roll out the old Jaws joke.

To that end, the Fed stepped up to the plate on Thursday morning with a plan to provide up to $2.3 trillion in loans to the economy. The measures announced include both the expected “Main Street” lending program for mid-sized businesses that are stuck between PPP and the Fed’s assistance to massive corporate issuers, and assistance for PPP itself.

The Fed will, according to the details, do the following:

• Bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP) by supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value;
• Ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans through the Main Street Lending Program. The Department of the Treasury, using funding from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) will provide $75 billion in equity to the facility;
• Increase the flow of credit to households and businesses through capital markets, by expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) as well as the Term Asset-Backed Securities Loan Facility (TALF). These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury; and
• Help state and local governments manage cash flow stresses caused by the coronavirus pandemic by establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities. The Treasury will provide $35 billion of credit protection to the Federal Reserve for the Municipal Liquidity Facility using funds appropriated by the CARES Act.

So, first, the Fed will loan banks money against the government-guaranteed loans they make as part of PPP. It’s notable that those loans will, in some cases anyway, be forgiven when this is all over, so it’s not entirely clear why we need the charade – why not just ask small businesses how much they need and send them a check? Instead, we’re now asking banks to intermediate, allowing the banks to post the loans they make as collateral for cash from the Fed, and all so the Treasury can forgive (some of) the loans later. That seems like a lot of obfuscation for no readily apparent purpose.

For businesses employing up to 10,000 workers or with revenues of less than $2.5 billion, the Fed will leverage $75 billion in protection from the Treasury (money from the relief package) to provide $600 billion in loans (i.e., Treasury will provide $75 billion in equity to the facility which will purchase most of the loans from the originating banks). Here are the specifics on that (from the Fed):

Principal and interest payments will be deferred for one year. Eligible banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses. Banks will retain a 5 percent share, selling the remaining 95 percent to the Main Street facility, which will purchase up to $600 billion of loans. Firms seeking Main Street loans must commit to make reasonable efforts to maintain payroll and retain workers. Borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act. Firms that have taken advantage of the PPP may also take out Main Street loans.

Again, that facility is for firms who fall somewhere between the small businesses participating in PPP and the companies whose debt are benefiting from facilities like the corporate bond purchase programs rolled out by the Fed last month. But, as you can see, there’s some overlap. That is, you can participate in the PPP and the Main Street lending program simultaneously, if you’re a firm.

Meanwhile, the collateral requirements for TALF have been expanded to include triple-A rated tranches of CMBS and newly issued CLOs. That facility already encourages the issuance of ABS with collateral pools including everything from student loans to auto loans to credit card receivables.

Finally, the Fed will buy a half-trillion in short-term muni debt directly from states and counties as long as they have a population of at least two million people, and also from cities with a population of at least one million residents.

“Our country’s highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus”, Jerome Powell said Thursday. “The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible”.

Will it be enough? Probably not. And the irony is, there’s a decent chance that by the time all of this is up and running, the economy will have at least partially restarted.

Just in time for a possible second wave of COVID-19 which, one could plausibly suggest, may come right around the election.