Amid Small Business Carnage, Fed Expands Eligibility Of Main Street Lending Program

With stocks recovering all 2020 losses, one would think that the economy is firing on all cylinders. Unfortunately, based on the message just sent out by the Fed, nothing could be further from the truth.

While the market still waits for the Fed to officially start making loans on its Main Street Lending Program, today at 330pm, the Fed announced that it expanded the eligibility criteria for this facility “to allow more small and medium-sized businesses to be able to receive support.” The facility will be open for eligible lenders “soon,” while the burden on banks that create the loans would be lessened.

Changes to the eligibility criteria include:

• Lowering the minimum loan size for certain loans to $250,000 from $500,000;
• Increasing the maximum loan size for all facilities;
• Increasing the term of each loan option to five years, from four years;
• Extending the repayment period for all loans by delaying principal payments for two years, rather than one; and
• Raising the Reserve Bank’s participation to 95% for all loans.

Recommended VideosFed’s Powell to unemployed: We’re here for youVideo Player is loading.

NOW PLAYINGFed’s Powell to unemployed: We’re here for youGoldman’s Swell Sees ‘Very Significant Bifurcation’ in Credit MarketWhich Equity Sectors Benefit as We Emerge From Lockdown?Economic burden ‘has not been evenly spread’ -Fed ChairElizabeth Warren grills Mnuchin on terms of bailout moneyFed’s Kaplan Expects ‘Slow, Steady Recovery’ in Second HalfTrump Flexes With The FedsLook for stocks to get range-bound: analyst

In short: America’s small businesses – and we mean really small business, those which desperately need as little as 250K to survive yet can’t find willing bank lenders – are in such dire shape that only the Fed has the willingness to step in and bail them out as banks refuse to take on the credit risk.

To juice bank interest in participating, going forward they will be required to hold only 5% of the loans on their balance sheet for all three facilities, far less than the 15% they had to hold previously.

“Supporting small and mid-sized businesses so they are ready to reopen and rehire workers will help foster a broad-based economic recovery,” Powell said in the statement explaining the expansion. “I am confident the changes we are making will improve the ability of the Main Street Lending Program to support employment during this difficult period.”

And here is the Fed again confusing solvency with liquidity, and assuming that just because business incur billions more in debt they will somehow become more viable or retain workers. Unfortunately, as we discussed on Friday, this simply won’t happen because whereas US corporations have already issued over $1.1 trillion in IG debt, the bulk of its has been retainer (or is being used to fund dividends and buybacks), even as millions of workers are being let go.

The Fed also unveiled that The Main Street program will be open for lender registration soon, and the central bank will start buying loans “shortly afterward.” The three facilities are backed by a $75 billion investment from the Treasury Department that’s part of the $454 billion allocated by Congress in the CARES Act for the Fed’s emergency-lending programs during the coronavirus pandemic. Expect the entire investment to be wiped out over the next few years as all the companies that take out the Fed-guaranteed loans file for bankruptcy anyway.

Click here for reuse options!
Copyright 2020 Hiram's 1555 Blog