The latest “outrage” from the Fed came on Thursday, with the announcement that the Main Street lending program will be expanded.
Initially, the goal of the program was to ensure credit continued to flow to small- and medium-sized corporates who could plausibly be described as “in sound financial condition before the pandemic”.
That’s still the raison d’être, but some of the updates to the program drew immediate criticism from those looking for yet another excuse to suggest (tacitly or otherwise) that the Fed is using the crisis to hand money to companies that don’t “deserve” it or to “bailout” Wall Street. Here’s the “offending” passage from the new terms:
Additionally, businesses with up to 15,000 employees or up to $5 billion in annual revenue are now eligible, compared to the initial program terms, which were for companies with up to 10,000 employees and $2.5 billion in revenue. The minimum loan size for two of the options was also lowered to $500,000 from $1 million. With the changes, the program will now offer more options to a wider set of eligible small and medium-size businesses.
As you can imagine, not everyone agrees with the notion that a business with, say, $4.5 billion in revenue and/or 14,000 employees counts as “medium-sized”.
Bloomberg’s Cameron Crise was quick to scoff at the new guidelines. “By my calculation, more than 40% of the S&P 500 qualifies for participation in this program”, he wrote. ‘”Main Street’ indeed”.
The Fed also announced a new loan option under the program (there are three now) that will expand access to more leveraged entities on the stipulation that the lender retains a larger share of the loan. Under the “priority” option, lenders will be subject to 15% risk retention and the maximum loan size is the lesser of $25 million or six times a borrower’s income, adjusted for interest payments, taxes, and depreciation when added to existing debt.
All three options are LIBOR +300bps.
Crise suggests that’s pretty generous. “Just about anyone who’s ever borrowed money to pay for college is paying a lot more than that come Ragnarok or Armageddon”, he wrote, in a subsequent tweet expanding on his original Bloomberg post.
I’m absolutely sympathetic to the thrust of that (as we all should be) but let’s face it, this is an apples-to-oranges comparison, at best.
First, from a kind of cold-hearted perspective, there is no sense in which you can compare a company with, say, $3 billion in pre-COVID revenue and 12,000 employees, to a would-be indebted undergrad. Anyone who has ever tried to model default rates inclusive of the myriad deferral options and multi-tiered repayment choices offered on student loans (both government-backed and private), knows you might as well just call a good chunk of it bad debt.
Second (and far more importantly) the whole discussion is a false equivalence. It is by now painfully obvious to most sensible people that one way or another, America’s student debt burden will have to be forgiven and college will eventually become free. The current system isn’t sustainable in any sense of the word. The ~$1.6 trillion Americans now owe in student debt is never going to be paid back. Period. All those loans are doing is serving as an albatross around the necks of young adults who might otherwise be buying homes or, at the very least, consuming goods and services to the benefit of the broader economy.
The point is, these two issues (the expansion of the Main Street lending facility and America’s student debt problem) don’t belong in the same discussion. One is a narrow debate about the parameters of an emergency lending program for corporations, and the other is a macro discussion about the relative merits of a Progressive solution to one of the country’s most vexing, endemic economic problems.
Some lawmakers did, in fact, argue that the crisis offers as good an excuse as any to move ahead with plans to forgive student debt, and Trump did take some steps to alleviate the monthly payment burden. But until Congress gets totally on board with the idea of just writing the entirety of that $1.6 trillion pile of toxic waste off, there isn’t much the Fed can do.
Meanwhile, if you’re curious to know why the Fed decided to expand this particular program as they did, the short answer is obviously because they were lobbied relentlessly at their own invitation. To wit, from the statement:
When the initial terms of Main Street were announced, the Board indicated that, because the financial needs of businesses vary widely, it was seeking feedback from the public on potential refinements. More than 2,200 letters from individuals, businesses, and nonprofits were received.
But more generally, I’m growing increasingly weary of belabored attempts on the part of what seems like a larger and larger percentage of market participants to spend every waking second pretending as though they don’t understand why it is that the Fed is willing to take on more risk and, yes, chance funneling large sums to entities which may not deserve it.
There is a clear rationale behind this cavalier behavior by the Fed. That rationale is that the US economy is in a depression. Personal spending data out Thursday showed consumption plunging 7.5% in March. If you had to confine yourself to what, before COVID-19, would have been a “reasonable” range for the y-axis, you wouldn’t have been able to show that on a chart. Have a look:
Also on Thursday, the Chicago PMI printed in the 30s. This isn’t a particularly crucial data point, but I include it just to underscore the extent to which depression-like numbers aren’t just a daily thing, they are an hourly thing, now. From the time traders turn on their monitors until around 11 AM in New York, it is just shocker, after shocker, after shocker. And that’s not even counting the deluge of horrible news flow from the overnight session.
This is why the Fed is unconcerned about moral hazard, and why you should be similarly unconcerned right now.
If what you want is “justice” and “accountability” when it comes to where all of this support is going, fear not, good Samaritan. Because when this is all over, you can be absolutely sure that every lawmaker on both sides of the aisle is going to go looking for witches to burn. And there will be no shortage of them.
These facilities will be scrutinized relentlessly for who got what from whom at what price and when, if for no other reason than the fact that it provides virtually unlimited opportunities for Democrats and Republicans alike to do their best Monty Python impressions on the way to leveraging the spectacle for political gain. “We found a witch, may we burn her?”