The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that President Trump signed into law on March 27th provides $454 billion (the Emergency Fund) for the Secretary of the Treasury to make direct loans or to guarantee loans made by the Federal Reserve to assist business, states, and municipalities dealing with the pandemic. The Fed may do this through (i) purchasing obligations or other interests directly from issuers or other interests; (ii) purchasing obligations or other interests in secondary markets or otherwise; or (ii) making loans, including loans or other advances secured by collateral.
By providing the ability for the Treasury to guarantee or backstop Fed loans, the provisions create the possibility that the impact of the fund can be leveraged up significantly as stated by Secretary Mnuchin—“We can lever up to $4 trillion to help everything from small businesses to big businesses.” Fed Chairman Powell has echoed the Secretary—"Effectively, $1 of loss-absorption is worth $10 worth of loans." Therefore the Emergency Fund could result in trillions of dollars being made available to the public. See this YPFS blog post for further discussion on the Treasury backstop.
The legislation creates great possibilities but also raises questions about limitations on the Fed’s authority. Section 4003(C)(3)(B)) of the CARES Act explicitly provides “for the avoidance of doubt” that the requirements of Section13(3) of the Federal Reserve Act would apply to any Fed program or facility relying on such funds “including requirements relating to loan collateralization, taxpayer protection, and borrower solvency.” We discuss herein the intersection of the Emergency Fund with Section 13(3).
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