In March, when lawmakers and officials were considering how to help individuals and businesses get through the pandemic, they didn't know the extent of aid that was needed. Frankly, they still don't. But they did have the foresight to note that when sales dry up, credit often does too.
That's the impetus behind the Main Street Lending Program, a direct-lending scheme from the Federal Reserve aimed at small to midsize businesses that were in good financial standing before the pandemic. While the program just launched on June 15--and hasn't yet supported any business loans--some 200 lenders have already signed up. The Fed says it expects to support up to $600 billion in new loans through the program, which is being managed by the Federal Reserve Bank of Boston.
In a recent interview, Boston Fed president and CEO Eric Rosengren shared his reasons for optimism, along with a worrisome prediction of what's next. Here is an edited version of that discussion.
With many states undergoing varying levels of reopening--despite the continued spread of Covid-19--why does the Main Street Lending Program exist?
Conditions for many businesses were very difficult in March, April, and May. They had to finance expenses when they didn't have money coming in. As a result, many of them have drawn down a lot of their funding. If they don't get additional funding, they're in danger of closing. If they do get funding, they could very well make it and continue to pay their employees. So our goal is to make sure those businesses get the funding that they need.
Why can't they just get regular business loans?
Credit markets tightened dramatically in March. It was hard to even sell Treasury bonds or mortgage-backed securities.
Those markets came back as the Federal Reserve purchased large numbers of Treasury- and mortgage-backed securities. We have also opened up facilities at the New York Fed that help corporations that issue bonds either directly or indirectly. So that helps businesses that have access to capital markets.
What Main Street is designed to do is help businesses that depend on banks, which may be reluctant to lend if the economy doesn't perform as hoped. This facility helps those banks by sharing the risk with the Federal Reserve, where we take on 95 percent of the loan and they only have to take 5 percent.
Do you anticipate credit conditions worsening as the crisis continues, and if so, how?
While many individuals and businesses were helped by the Paycheck Protection Program--[the now $669 billion forgivable loan program offered by the U.S. Treasury Department and the Small Business Administration]--it was a one-time program. Further, enhanced unemployment benefits end as of the end of July, so quite likely businesses and individuals are going to be facing more difficulties as we get through the summer and into the fall. That's particularly true if we end up in a situation where the pandemic gets worse in the fall, which nobody knows. Already conditions are tight for those borrowers that have been hurt by the pandemic, and it might get even tighter as time goes on.
Back when policymakers were thinking about how to respond to the coronavirus crisis, was there a prior crisis you looked to specifically that helped? What was similar about this pandemic and what differed?
We did lending facilities during the Financial Crisis. That was primarily a problem with banks and it was a securitization issue. To some extent, it was also a residential housing price issue. What's different about this is it affects small to medium-size businesses disproportionately--particularly if you're a service-oriented business. Those businesses have been disrupted. The risk is if they are permanently disrupted and have to lay people off, a recession will be much worse: Businesses will fail and the unemployment rate will stay very elevated.
The reason we're doing something very nontraditional--which is to get involved directly with banks--is because we're so concerned the pandemic has created a problem that is very different from the problems that we've faced. We've faced downturns; we've faced the Financial Crisis; we have not faced a pandemic that potentially could destroy a large number of businesses and potentially banks.
Have you seen any models that show how bad it could get?
I don't think we can give a number because no one knows exactly how the pandemic will play out. If the economy were to snap back very quickly, it would be very helpful. My expectation is it will not snap back that quickly and that it's quite possible we'll have a second wave or at least problems in some sectors of the country that slow down the recovery. In that kind of environment, you have to be very worried that we would see many more bankruptcies.
To what degree do you anticipate smaller companies will participate in the Main Street Lending Program?
There's a minimum loan size of $250,000. So for the smallest small businesses this program probably doesn't work; that's what the PPP was designed to do. For medium-size businesses or larger small businesses the PPP wasn't enough money. So this is providing financing that those kinds of businesses need to bridge them given the economic problems.
The program is officially a week old. How do you foresee it changing if uptake isn't very good?
First of all, I expect the uptake to be pretty good. Second, many businesses like the idea that it's a low-cost, term loan of five years. We extended the term from four to five years. The cash flow of that works out much better. There's no payment of interest or principal for an entire year; and there's no payment of principal for a second year. The loan for a firm that has suffered some significant impact from the pandemic of Libor + 300 is actually a pretty attractive rate relative to what they probably would otherwise get. So I think that there are a lot of attractive features already and we made it more attractive based on some of the feedback we've gotten earlier. We're going to roll out the program; we'll see what happens with the pandemic. We'll make decisions about whether any adjustments need to be made.
Some members of the midsize-business community want to see the Main Street Lending Program last longer than the end date, which is in September. What are the chances of this becoming a regular facility for businesses?
I don't think it will become a regular facility. But it is possible if the pandemic and the economy indicate problems in the fall that this program will be extended beyond September. That's a decision that the Treasury and the Board of Governors have to make.