Thursday, November 26, 2020

Mnuchin 'making it up' on stripping Fed of emergency loan funds: former TARP inspector

Brian Cheung
·Reporter
Wed, November 25, 2020

A former government official in charge of overseeing 2008 bailout funds said Treasury Secretary Steven Mnuchin is defying the law in locking away excess funds from the Federal Reserve’s emergency loan programs.

Neil Barofsky, a former special inspector general of the $700 billion Troubled Asset Relief Program (TARP), said that parking $455 billion in leftover money in the Treasury’s General Fund violates the Coronavirus Aid, Relief, and Economic Securi
ty (CARES) Act.

“[Mnuchin’s] making it up, this can’t be any more clear,” Barofsky told Yahoo Finance Live in an interview Wednesday.

Mnuchin last week ordered the Fed to close down nine of its 13 backstops to various financial markets and return about $429 billion in unused money appropriated by the CARES Act. The Treasury will also return about $26 billion in funds for it to directly loan to companies, for a total of $455 billion.

On Tuesday, Bloomberg reported that the Treasury was going to move the money into the General Fund as opposed to the Exchange Stabilization Fund (ESF), which means the money could not be redeployed under a Biden administration without Congressional action.

Mnuchin has argued that he is the interpreter of the CARES Act. But Barofsky counters that if that were the case, he would have no reason not to place the money in the ESF, where the Treasury would at least have the option to reuse the money for emergency purposes.

  
Treasury Secretary Steven Mnuchin talks with reporters about negotiations on another coronavirus stimulus package, outside the White House, Wednesday, Oct. 14, 2020, in Washington. (AP Photo/Evan Vucci)

“The only justification for taking what is a legally questionable act of moving these funds out of the reach of the Biden administration is to salt the Earth, to limit their options, and leave the country in a more dangerous place for political purposes,” said Barofsky, now a partner at the law firm of Jenner & Block. “Full stop. There is no legal justification for this.”
Flashbacks to TARP

Barofsky was appointed by President George W. Bush in 2008 to oversee TARP funds used to save banks, insurance companies, and automakers during the Great Financial Crisis.

He told Yahoo Finance that there is precedent to reallocating emergency funds, pointing to the Obama administration’s efforts to redirect $225 billion in TARP into the Treasury’s General Fund. Barofsky said an act of Congress was needed to move that money.

For the CARES Act money, Barofsky points to Sec. 4027 of the bill, which notes that on January 1, 2026, any remaining funds are to be transferred into the Treasury’s General Fund for deficit reduction.

“The statute doesn’t allow him to do this until 2026,” said Barofsky.

Ultimately, Barofsky said the Biden administration could choose to ignore Mnuchin’s move and shift the funds back into the ESF once the White House changes hands. But he said he does not expect the Biden administration to take such aggressive action, adding that he also would not bet on the Fed launching a legal challenge.

As Mnuchin has clarified, the ESF still has under $80 billion for the Treasury and the Fed to restart its liquidity facilities if needed. But the scale of those facilities would be far smaller than under the $455 billion originally committed.

Treasury Secretary Mnuchin is moving $455 billion of unspent stimulus money into a fund the incoming Biden administration can't deploy without Congress

Joseph Zeballos-Roig
Tue, November 24, 2020, 3:03 PM MST·3 min read

Treasury Secretary Steven Mnuchin is moving $455 billion in unspent stimulus money into a fund that the incoming Biden administration cannot deploy without Congress, Bloomberg reported on Tuesday.

It will leave Mnuchin's likely successor, Janet Yellen, with only $80 billion in relief funds at her discretion.

Experts say Mnuchin's move greatly limits the tools available to the Biden administration to manage the economic fallout of the pandemic.

Treasury Secretary Steven Mnuchin is moving $455 billion in unspent stimulus money into a fund that the incoming Biden administration cannot deploy without Congress, Bloomberg reported on Tuesday.

That amount includes money that Mnuchin is yanking from the Federal Reserve and unused loans for companies. The funds will be deposited into the Treasury's General Fund, which requires legislative approval to use the money elsewhere. The Treasury Department did not immediately respond to a request for comment.

The move, experts say, will likely undercut the ability of Mnuchin's likely successor, Janet Yellen, from restarting the Fed's lending programs at a similar scale early next year. Instead, she will have only $80 billion at her discretion.

Ernie Tedeschi, a policy economist at Evercore ISI, called Mnuchin's decision "a dangerous move" as the US economy faces a perilous moment in the pandemic.

"It's one more enormous risk we are piling onto the winter in the US atop of other risks already there," Tedeschi told Business Insider. "We may need that backstop again as cases have now blown through their prior peaks, state and local governments are making cuts, and we're about to kick off millions of people from unemployment insurance."

Bharat Ramamurti, a Democratic member of a congressional panel overseeing the funds, criticized the move.

"This is Treasury's latest ham-handed effort to undermine the Biden Administration," he wrote on Twitter. "The good news is that it's illegal and can be reversed next year."

The development came after Mnuchin recently announced he was not extending most of the Fed's emergency lending programs past December 31, including those supporting markets for corporate bonds and another providing loans to medium-size businesses and state governments.

The Treasury and central bank jointly operate the lending programs under the CARES Act, which Congress approved in March. The pandemic relief law doesn't mandate Mnuchin move the money into the Treasury's General Fund -- it could keep it within easy reach for President-elect Joe Biden in another pot of money until 2026.

Mnuchin also requested last week that Fed Chair Jerome Powell return unspent stimulus money. He objected and said the lending programs should continue, sparking a rare public clash between two figures that had collaborated closely to contain the economic devastation from the pandemic. The Fed later said in a letter it would return the funds.

Mnuchin then called on Congress to repurpose the unspent money, and he drew support from Republicans like Senate Majority Leader Mitch McConnell.

"We don't need this money to buy corporate bonds. We need this money to go help small businesses that are still closed or hurt, no fault of their own, or people who are going to be on unemployment that's running out," he told CNBC last week.

Congress has been fiercely divided on passing another coronavirus relief bill that most economists say is urgently needed. Nearly 12 million workers are at risk of losing all of their federal unemployment aid next month, according to an analysis from the progressive Century Foundation.

Read the original article on Business Insider

Fed will return unused funds after Treasury orders central bank to wind down emergency loan programs

Brian Cheung
·Reporter
Fri, November 20, 2020

The Federal Reserve says it will return the unused money allocated to it by the Treasury to set up its emergency support programs during the COVID-19 crisis.

On Friday, Fed Chairman Jay Powell said he “will work out arrangements... for returning the unused portions of the funds” appropriated to the central bank and the Treasury in March by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The announcement comes a day after U.S. Treasury Secretary Steven Mnuchin ordered the Fed to allow nine of its 13 liquidity facilities to close on December 31. Those closures would end backstops to corporate bond markets (Primary, Secondary Market Corporate Credit Facilities), small- and medium-sized businesses (Main Street Lending Program), and state and local government bond issuers (Municipal Liquidity Facility).

The Fed responded with an unusually barbed response Thursday, protesting that the central bank “prefer that the full suite of emergency facilities...continue to serve their important role.” Powell’s letter on Friday softened in tone and acknowledged the Treasury Secretary’s “sole authority to make certain investments” in the Fed facilities.

For its part, the Treasury argued that the programs’ low uptake warrant a return of $429 billion in unused money.

The fallout between the Fed and the Treasury raised a number of questions, first about what will happen to the various liquidity facilities, but secondly about the political consequences of not having the backstops.
What’s closing down on December 31?

Since the beginning of the pandemic, the Fed opened up 13 liquidity facilities (details on each facility are detailed here), 12 of which were set up to expire on December 31. The Treasury letter from Thursday orders the Fed to allow nine of them to close:

-Primary Market Corporate Credit Facility (PMCCF)

-Secondary Market Corporate Credit Facility (SMCCF)

-Term Asset-Backed Lending Facility (TALF)

-Main Street New Loan Facility (MSNLF)

-Main Street Priority Loan Facility (MSPLF)

-Main Street Expanded Loan Facility (MSELF)

-Nonprofit Organization New Loan Facility (NONLF)

-Nonprofit Organization Expanded Loan Facility (NOELF)

-Municipal Liquidity Facility (MLF)

Mnuchin authorized a 90-day extension for the four remaining facilities:

-Commercial Paper Funding Facility (CPFF)

-Primary Dealer Credit Facility (PDCF)

-Money Market Mutual Fund Liquidity Facility (MMLF)

-Paycheck Protection Program Liquidity Facility (PPPLF)
How much will the Fed have to return?

The CARES Act appropriated $454 billion to the Fed and the Treasury to set up these facilities. The Fed has used only $25 billion of that money through its emergency facilities.

Mnuchin’s letter asks the Fed to return the remainder: $429 billion. Powell’s letter on Friday did not clarify exactly how much it will return.
Federal Reserve Chair Jerome Powell, left, and Treasury Secretary Steve Mnuchin leave after a House Financial Services Committee hearing about the government’s emergency aid to the economy in response to the coronavirus on Capitol Hill in Washington on Tuesday, Sept. 22, 2020. (Caroline Brehman/Pool via AP)

Both Mnuchin and Powell insist that the Fed and Treasury could re-open some of those facilities with money from the Treasury’s Exchange Stabilization Fund (ESF). Mnuchin told CNBC Friday that combined with the Fed’s existing loans, the ESF could support over $750 billion in loans to the economy (compared to $2 trillion of potential capacity using the CARES Act funds).

What does this all mean for the markets?


Markets traded down slightly on Friday as investors digested the news, with the Dow having fallen over 200 points at the closing bell.

Markets directly backstopped by the Fed’s facilities did not appear disrupted by the news. Bloomberg reported Friday that Carnival Corp. was able to drum up $11 billion in orders for corporate bonds despite the news that the Fed’s corporate credit facility would not be operating past December 31.

Still, some worry that with rising COVID-19 cases, the lack of fiscal support and now, Fed support to financial markets, may create trouble.

Evercore ISI wrote in a note November 19 that “US credit markets will have to get through the winter months in which the surging new wave of the virus and exhaustion of savings from prior fiscal stimulus threaten a loss of economic momentum.”
Does this increase the onus on Congress to pass fiscal stimulus?

Mnuchin argued in his letter that returning the unused money will allow the government to redirect funds toward a new Paycheck Protection Program “that won’t cost taxpayers any more money.”

But Isaac Boltansky, analyst at Compass Point, wrote Friday that the Fed and Treasury development doesn’t change the fact that the White House and Congress have not appeared close to a stimulus deal for weeks.

“There is no sign whatsoever that Congress is close to a stimulus deal and [Mnuchin’s] ‘hope’ for a legislative agreement is distinct from the decision to sunset existing Fed facilities,” Boltansky said.

On the claim of redirecting money at no cost to taxpayers, the nonpartisan Congressional Budget Office did not attribute any deficit to the Fed and Treasury funds because the lent money would have to be paid back at some point. That means that reallocating the money doesn’t save the government money from an accounting standpoint.
Does this increase the onus on the Fed to do more?

Evercore wrote that this could tilt the Federal Open Market Committee toward taking action in its final policy-setting meeting of 2020 on December 15 and 16. The Fed had already been teeing up the possibility of leaning more heavily on its asset purchases, or quantitative easing, in that meeting.

The concern: with the lack of backstops and COVID-19 cases rising, the Fed may have to do more than originally planned.

“One side effect is that it increases the likelihood that the FOMC will strengthen QE in December, with additional duration and guidance, and if things get bad enough, a faster pace of purchases too,” Evercore wrote. “However, QE is a very imperfect substitute for a credit market backstop.”

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