The first CARES Act report to Congress came out yesterday and this morning at 10:00am Eastern, Fed Chair Jerome Powell and Secretary Steven Mnuchin will be presenting to the Senate Banking Committee. (Or you can watch a live stream here from CBSN.) Judd at Popular information published a summary of some of the problems with the lending program. To wit:
- The program hasn’t actually lent much of its $500 billion in seven weeks.
- The committee has no leader yet.
- The rules keep changing, seemingly to increase flexibility, but maybe just to make the program usable?
- The Municipal Liquidity Facility has yet to be set up.
- The structure would require the larger eligible states and local governments to set up their own programs to get funds to smaller, struggling communities. This is not legislatively possible in many states (where they are not permitted to borrow to lend working capital to municipalities) which would require legislative changes and set-up of administrative structure to manage the program.
- Plus, the risk of lending to smaller, troubled municipalities falls squarely on the state or county that sets up the program and not on the Federal Reserve – for which a “first loss” amount was appropriated by Congress.
- Finally, the penalty pricing on the program makes it uninteresting for the larger, more market liquid entities to consider using.
- Meanwhile, state and local governments laid off and furloughed nearly one million employees in April.
- Meanwhile II, FactSet shows the 30-year municipal, tax-exempt AAA yield as 40bps above the 30-year Treasury (128 ratio) from yesterday. The ICE/BAML municipal composite vs. ICE/BAML Treasury spread as reported by FactSet was 228bps yesterday. Granted, this is down from a peak of 323.8bps on March 20 – but not what one would consider “normal” municipal bond market.
- The main benefit of this program cited so far is a “salutary” increase in the stock market.
