The Main Street program has been widely criticized as too slow to launch and as having such onerous terms that borrowers and lenders don’t want to take part. Meanwhile, the program has become a litmus test for how effectively the Fed can reach small and midsize companies. Many of the Fed’s programs work through the markets, buy up corporate debt and help support a stock market that had been climbing higher while much of the economy falls behind. (Stocks have been weighed down by weakness in the tech industry but are still up since the pandemic began.)
Relaxing the rules of the Main Street program so that banks are willing to issue riskier loans could be one solution — but not one without controversy. The Fed can only lend, not give grants, and some companies cannot afford to go into more debt. There will be Main Street loans that take losses, Rosengren said, which would ultimately be covered by taxpayer dollars.
“It’s important for Congress to make clear how much risk they want,” Rosengren told The Post. “Right now, it’s easy to say, ‘We want lots of loans.’ But a year and a half from now, people are going to want to know why those loans went bad.”
Rosengren said it was “completely appropriate” to want to limit the amount of risk to protect taxpayer money, but any number of rules on the terms sheet could be relaxed to expand the program’s reach.
“If Congress thinks that there should be more attention given to lending, and less attention given to losses, they have the ability to make that clear,” Rosengren said in the interview.
At the same time, a number of Fed leaders, including Chair Jerome H. Powell, have called for more help from Congress to blunt the immediate and long-term economic damage. On Tuesday, Senate Majority Leader Mitch McConnell (R-Ky.) announced plans to vote on a slimmed-down coronavirus relief bill later this week, though that legislation is not expected to advance. Congress has been stalled for weeks on a stimulus effort.
“We shouldn’t let Congress and the executive branch off the hook,” Rosengren said. “Many of the problems that are being faced are by low-income individuals and by very small businesses where it may be more appropriate to do grants than loans. For those types of programs, it requires fiscal policy.”
The Main Street lending program is expected to be one of several of the Fed’s emergency facilities to be discussed at a Senate Banking Committee hearing Wednesday.
According to a Fed report released Tuesday, the largest Main Street loan — for about $71 million — was issued to Clair Global Corp., which offers production support for tours, broadcasting and corporate events. Of the 118 loans bought by the Fed as of Aug. 31, half had been facilitated through City National Bank of Florida. Rosengren said that as of Friday, 575 lenders had registered to take part in the loan program.
Rosengren said he expects to see “steady uptake” for the program over the next three or four months. But it’s unclear how many banks are interested in issuing loans or how many businesses can afford to go into further debt.
The destruction wrought by this recession is piling up, and the novel coronavirus is still spreading, with outbreaks in new places.
At a Congressional Oversight Commission hearing last month, the Fed faced questions over whether changing the program’s rules would lead to more loans or whether an entirely new approach is needed. Lauren Anderson, senior vice president and associate general counsel of the Bank Policy Institute, said at the hearing that she wasn’t “sure that loosening the criteria is necessarily the right answer.” Gwen Mills, secretary-treasurer of Unite Here, a North American hospitality union, testified that “Congress needs to come up with a new approach” to ensure that companies don’t lay off workers when the money comes in.
Another hurdle for the Main Street program is that many of the country’s biggest banks — including those with more than $50 billion in assets — aren’t taking part. Smaller-scale or community banks might have closer relationships with borrowers, know their value in the community and therefore be willing to take more risk, Rosengren said.
“The fact that [larger banks] are not participating is definitely a limitation to seeing widespread availability of these loans,” he said.
Of the country’s banks with at least $1 trillion in assets, Bank of America and JPMorgan Chase are enrolled in the program and are issuing loans to new customers. Citigroup is also registered but is working with existing clients only, a spokeswoman said. Wells Fargo is also registered.
Established jointly with the Treasury Department, the Main Street lending program is meant to reach companies that might have been too large to receive a grant under the Paycheck Protection Program and too small to be helped by the Fed’s corporate credit facilities. Businesses with fewer than 15,000 employees or less than $5 billion in annual revenue can apply for a loan from a participating bank. The Fed can then buy 95 percent of that loan, leaving the bank with some skin the game.
But the program clearly hasn’t reached everyone.
Tim Skoog has worked in the travel industry for 50 years and has run his company, Centrav, for more than 30. The Minnesota-based business gives travel agents access to millions of discounted airfares.
The company got a PPP grant earlier in the recession and then looked to Main Street once it was clear that the pandemic would not be over in a matter of months.
“We said, this will give us breathing room for a year, maybe longer, for business to start to develop,” Skoog said.
Skoog went into negotiations with three banks, seeking a loan of more than $5 million. But he said he came away convinced that “the program was designed to fail.” Skoog was told the loan would be completed only if his company could offer personal guarantees for every dollar. Skoog said his company invested millions of dollars in software development, but the banks weren’t interested in taking that software as collateral.
Ultimately, Skoog said the whole experience “was an easy way of saying, you’re in the travel industry. Thank you very much. Have a nice day.”
Centrav managed to raise some private financing but has still been forced to turn furloughs into permanent layoffs. Skoog had roughly 100 employees before the pandemic and is now down to 40.
“I can’t fathom cutting any more,” he said.
Jeff Stein contributed to this report.