By Nick Timiraos
Treasury Secretary Steven Mnuchin and the Federal Reserve
exposed a rare public rift last month when Mr. Mnuchin declined to
extend several emergency lending programs put in place to repair
credit markets convulsed by the coronavirus pandemic in March.
His decision to allow the programs to expire on Dec. 31 also
intensified a partisan divide over the lending programs, which both
parties supported as part of the $2 trillion stimulus package known
as the Cares Act approved in March.
Sen. Pat Toomey (R., Pa.) said he was concerned about how a
Democratic administration might change the programs while Democrats
accused Mr. Mnuchin of sabotaging efforts to rehabilitate the
economy and denying the Biden administration a useful
economic-recovery tool.
Mr. Mnuchin may not get the last word on the matter. The Biden
administration could have enough legal flexibility to restart the
programs next year, according to legal analysts. These issues could
receive a public airing when Mr. Mnuchin and Fed Chairman Jerome
Powell testify over two days of congressional hearings beginning
Tuesday.
Here's a look at the issues:
What are the emergency lending programs and how do they
work?
The Federal Reserve Act allows the central bank to extend such
loans by citing "unusual and exigent" circumstances. They sometimes
are referred to as "13(3) loans," after the relevant section of the
act.
The Fed faced blowback for how it used these loans to rescue
failing financial institutions in 2008. In 2010, Congress required
the Treasury secretary to approve any new emergency loan programs
in the future. The Fed also collaborates with the Treasury because
the central bank doesn't believe it is legally allowed to sustain
capital losses on such programs.
How many emergency loan programs are there?
The Fed and Treasury launched nine loan programs in March and
April. The Treasury agreed to provide money to cover loan losses in
seven of them, initially using a special purse called the Exchange
Stabilization Fund, created by Congress in 1934 to stabilize the
value of the dollar.
At first, the lending programs this spring backed money-market
mutual funds and critical funding markets on Wall Street.
A subsequent round of programs were made larger with money from
the Cares Act and covered markets for corporate debt, short-term
municipal securities and consumer and other debt that is packaged
and bundled into securities. The Fed also said it would purchase
loans made to small and midsize businesses that weren't able to
benefit from these other programs, called the Main Street Lending
Program.
Which programs are ending at the end of the year?
This second group of programs will end after Dec. 31.
In the Cares Act, Congress agreed to turbocharge the Fed's
lending by providing $454 billion to the Treasury to cover losses,
allowing the Fed to make riskier loans. Mr. Mnuchin declined to
renew five lending facilities with Treasury funds made available
through the act.
In April, Mr. Mnuchin approved $195 billion, or around $3 for
every $7 Congress provided, for the five different lending programs
-- for corporate credit, municipal debt, asset-backed securities,
and the Main Street Lending Program. Those programs had purchased
around $25 billion in assets through Nov. 25. Currently, they have
around $102.5 billion of Treasury capital behind them to cover
losses.
Why is the Treasury ending the programs?
Mr. Mnuchin says the programs are no longer needed because
markets have healed. Second, he says he lacks the authority to
extend the programs because he believes the Cares Act doesn't allow
for them to continue. Third, Mr. Mnuchin says the money would be
better spent on other relief measures for which Congress can't
agree on funding.
In his Nov. 19 letter, Mr. Mnuchin asked the Fed to return all
of the money that has been committed to the programs except for $25
billion, an amount equal to the sum of assets the Fed has purchased
in the lending programs.
What does the Fed say? Does the central bank have to give the
money back?
The Fed says that even though most of the lending programs have
seen little demand because market conditions have improved
substantially, the programs are providing an important source of
security should conditions worsen amid rising virus cases.
In a Nov. 20 letter, Mr. Powell said he would return unspent
funds. The Fed isn't legally required to do so but acting against
Mr. Mnuchin's wishes would likely have provoked a political fight
the Fed would prefer to avoid.
Can the next Treasury secretary restart the programs?
Yes. Establishing any emergency lending program simply requires
a vote of at least five governors of the Federal Reserve Board and
the approval of the Treasury secretary. President-elect Joe Biden
is set to nominate former Fed Chairwoman Janet Yellen as Treasury
secretary. If confirmed, Ms. Yellen could restart the programs.
They would have a small amount of funding to cover losses.
Many of these programs were effective at convincing the markets
the Fed could do whatever it takes because of the substantial
Treasury funding made available through the Cares Act.
Can these programs be restarted using the Cares Act money?
Possibly. That will be up to how the next Treasury secretary and
the department's lawyers interpret the Cares Act.
Mr. Mnuchin says the answer is no. Moreover, the Treasury says
it will move the unused Cares Act funds into the general fund, an
account beyond the reach of the Treasury secretary. The Cares Act
says these funds can't be moved until 2026.
The Cares Act says the Treasury can't make investments in new
Fed lending programs after Dec. 31, but it does say that the
Treasury can use any remaining funds to modify existing investments
beyond that date.
The lending programs themselves won't close. After all, Mr.
Mnuchin is leaving $25 billion with them to cover losses. Whether a
new Treasury secretary and a new Treasury general counsel would
agree that the Fed facilities could be extended and given more
funding is an open question, said Scott Alvarez, who was the Fed's
general counsel from 2004 to 2017. "There is a pretty decent legal
argument there" that they can, he said.
"A new Treasury could say that it can modify the existing
investments in the Fed facilities," said Mr. Alvarez. "If the
Treasury agrees to modify the existing investments after Dec. 31,
it could reinvest some of the Cares Act money in the
facilities."
The ultimate answer could be a political one more than a legal
one. With Senate Republicans likely to object to reopening the
programs, a new administration and the Fed would have to weigh the
costs of any political fight versus the benefits of restarting the
programs.
Any decision by Ms. Yellen to restart the lending programs
"would more than poison the well with this administration," said
Mr. Toomey on Monday. He said Congress provided tremendous
discretion to the Fed and Treasury to engage in lending and he
believes Congress never intended for the programs to extend beyond
2020.
If the Fed and Treasury restarted the lending programs next
year, "it could be a very, very long time before a future Congress
decides we ought to give any new discretion to a Treasury-Fed
combination," Mr. Toomey said.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
December 01, 2020 05:44 ET (10:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.