Home Federal Reserve Is the Fed’s Latest Round of Stimulus Legal? – Robert Aro (06/08/2020)

Is the Fed’s Latest Round of Stimulus Legal? – Robert Aro (06/08/2020)

The Fed cites section 13(3) of the Federal Reserve Act in order to engage emergency lending programs whenever “unusual and exigent circumstances” occur. Read the legislation below and decide for yourself if the forgivable loans under the Paycheck Protection Program Lending Facility (PPP/ PPPLF) are in defiance of the law.

The first dubious action occurred when the Fed-Congress symbiosis created “Special Purpose Vehicles” (SPV) owned by the US Government with appropriations from treasury. This is important as many of the Fed loan programs would be illegal if this loophole wasn’t created. As of latest release, the treasury funded $66.5 Billion for equity to the Fed’s facilities.

Luckily, the Act contains provisions to ensure taxpayers are protected from these lending facilities, right? It states :

Such policies and procedures shall be designed to ensure that any emergency lending program or facility is for the purpose of providing liquidity to the financial system, and not to aid a failing financial company, and that the security for emergency loans is sufficient to protect taxpayers from losses and that any such program is terminated in a timely and orderly fashion.

Surely this protects taxpayers from corporate bailouts? We can see this for the (not yet opened) Main Street Lending Program, where the term sheet says the loans are recourse loans and are not forgivable. Meaning, the borrower will be personally liable if the money is not repaid. But what about PPP loans? How are they structured to protect taxpayers from losses?

The Act goes on to say:

The policies and procedures established by the Board shall require that a Federal reserve bank assign, consistent with sound risk management practices and to ensure protection for the taxpayer, a lendable value to all collateral for a loan executed by a Federal reserve bank under this paragraph in determining whether the loan is secured satisfactorily for purposes of this paragraph.

In order to protect the taxpayer, the Fed must take “collateral” for these loans. But, this seems at odds with the US Small Business Administration (SBA) who facilitates the PPP loans as they specify:

No collateral or personal guarantees are required.

Even more absurd, the PPP FAQ notes:

Under the Facility, the Federal Reserve Banks (“Reserve Banks”) will lend to eligible borrowers on a non-recourse basis, taking PPP Loans as collateral.

The lending facility can only lend against collateral for the purpose of protecting taxpayers, but the PPP facility will lend against zero collateral forgivable loans. Something just doesn’t add up!

The initial report to congress regarding the PPP would be comical if it weren’t so serious, as the Fed states under the heading Expected Cost to Taxpayers:

PPP loans under the PPP are fully guaranteed as to principal and interest by the SBA, and these guaranteed loans will fully collateralize extensions of credit under the PPPLF. As a result, the Board does not expect that the PPPLF will result in losses to the Federal Reserve.

The Act  also requires the Treasury Secretary’s approval for each loan facility. In a more reasonable time, the Secretary would veto every facility proposed to him, citing that the Act forbids taxpayer funding of these facilities for bailouts. Naturally, this didn’t happen as Secretary Mnuchin proudly declared:

We are fully prepared to take losses’ on coronavirus business bailouts.

Unfortunately for the rest of us, all losses from the PPP will be added to the mortgage Mnuchin and friends have taken out against our future, seen by higher prices, weaker currency and greater debt burden.