Fed Had a Loan Plan for Midsize Firms Hurt by Covid. It Found Few Takers.

The Main Street Lending Program let banks sell the government 95% of every credit extended, but some balked because would-be borrowers had lost so much business 

By Nick Timiraos of The WSJ. Excerpts:

"In the depths of the financial panic from Covid-19 last year, the Federal Reserve offered to lend to a wide swath of businesses—something it had never done before. Yet it struggled to find takers.

The Main Street Lending Program aimed to help pandemic-hit businesses that were too small to borrow in the bond market but might need more help than a small-business loan from the popular Paycheck Protection Program.

“There was a program here that looked nice on paper, but in practicality, it has not worked,” said Mike Cazaz, chief executive of Werner Aero Services, a New Jersey supplier of aircraft engines and parts that couldn’t get a loan under the program.

Washington was happy to rely on the Fed because it had the chops to get a program for medium-size businesses up and running fast. Its apolitical reputation reduced concern about loans being steered to big donors. The Treasury Department became a Fed partner to absorb any loan losses.

But the experience revealed the limitations of running a relief program through the Fed and exposed gaps in the government’s ability to deliver aid to companies that can’t raise money on Wall Street. For months, many banks weren’t interested in participating. Demand picked up only in recent weeks after word came that the program would be ending.

“There is a cost if, whenever we have [financial panics], we do programs that only help large institutions, because in the long run that makes it much riskier to be a small or medium-size firm,” said Eric Rosengren, president of the Federal Reserve Bank of Boston, which has administered the Main Street program. Many such businesses could fall through the cracks, he said, accelerating a long-running consolidation in which larger companies with access to low-cost credit increase market share."

"The root failure, say banks and borrowers, was that if the loan a borrower wanted was attractive to a bank, the lender didn’t want to sell most of it to the Fed. But if a loan looked to be a dud, the bank was reluctant to hold any of it.

Some current and former officials also said loan terms were too strict because the Treasury was concerned about not losing the money Congress authorized. It would have been better if lawmakers had been explicit about how much of that money they were willing to let the Treasury lose, in Mr. Rosengren’s view."

"He said banks told him they passed on the program because they worried about the “government coming back two or three years down the road and saying, ‘This loan was bad. You’re liable for the entire 100%.’ ”" [Mike Cazaz, chief executive of Werner Aero Services]

"Reese Ryan, chairman of R Bank in Round Rock, Texas, said his bank decided not to participate because many businesses with little revenue amid the pandemic were too risky"

"Fed and Treasury officials said Main Street was designed to address a grim scenario that never materialized: one where companies unable to borrow in capital markets drew down their credit lines and overwhelmed the banking sector’s capacity to lend.

Another reason the program wasn’t used more widely, they said, was that the Treasury’s Paycheck Protection Program ended up reaching more businesses that otherwise might have been candidates for a Main Street loan. The PPP provided loans of up to $10 million that can be forgiven if they’re used mainly to pay employees. The PPP has made $525 billion in loans."

"PPP loans, with forgiveness that depends on their being used mostly for payroll, were useless for companies such as his because it didn’t have business to hire people to do."