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Shortcomings of the Main Street Lending Program

Public Citizen News / July-August 2021

By Sara Kate Baudhuin

This article appeared in the July/August 2021 edition of Public Citizen News. Download the full edition here.

Public Citizen recently examined the impact of the Federal Reserve’s Main Street Lending Program (MSLP) and found a wide array of shortcomings, calling into question the efficacy of this initiative. Specifically, the analysis revealed that large sums of this program’s resources went to companies that laid off workers during the pandemic and firms that had already received support from other government lending programs, undermining the original intent of the MSLP and strengthening corporate power.

Miriam Li, research and accountability advocacy associate in Public Citizen’s Congress Watch Division, explains that the “MSLP had the potential to provide significant support to struggling businesses and their workers. The idea was great, but the program ultimately failed to reach the neediest companies, failed to adequately support workers, and ended up providing loans to companies that already had access to other sources of credit.”

In spring of 2020, when the economic effects of COVID-19 began to affect large numbers of U.S. companies, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to support the economy and mitigate financial hardship for citizens. Within the CARES Act, Congress allocated $454 billion to the U.S. Federal Reserve’s emergency lending facilities. These facilities included the MSLP, an initiative aimed at supporting cash flow at small and mid-sized businesses. The MSLP was intended to save jobs and keep companies afloat during temporary financial hardships caused by the pandemic. Additionally, the program was designed to fill a gap in federal lending programs that left certain businesses unable to access government support.

The Paycheck Protection Program (PPP) supported businesses with fewer than 500 employees while the Secondary Market Corporate Credit Facility targeted large corporations with access to the bond market, leaving mid-sized businesses too large for PPP but too small to issue bonds unable to benefit from either program. Given that mid-sized businesses employ 44.5 million people and comprise approximately one-third of the U.S. private sector’s GDP, lawmakers recognized a clear need to address this policy gap.

The MSLP parameters outlined in the CARES Act stated that “mid-sized” companies would be defined as businesses with fewer than 15,000 employees or a 2019 annual revenue of $5 billion or less. Additionally, lawmakers specified that MSLP loan documents should require certain “good faith” certifications by borrowers, including guarantees that the loans would be used to “retain at least 90% of a recipient’s workforce” and “restore not less than 90% of the workforce of the recipient that existed as of Feb. 1, 2020.” Using these original guidelines to examine the impact and rollout of MSLP assistance, Public Citizen found key failures in three central areas:

First, the analysis concluded that MSLP failed to prioritize job retention as originally intended. More than $1.8 billion in loans went to companies that laid off employees before September 30, 2020, and companies with fewer than 10 employees received some of the program’s largest multi-million-dollar loans. In fact, loan-to-employee ratios frequently exceeded $20 million per employee, likely diluting the intended effect of providing widespread employee support and saving jobs.

Second, the report concluded that the MSLP loan rollout failed to prioritize the neediest companies. Over 20% of recipient companies were also approved for PPP loans, cumulatively collecting at least $1.1 billion in PPP funding in addition to the support they received through MSLP loans. Further, the MSLP was extremely underutilized—only serving 1,830 borrowers and using a fraction of the funds available through the program. The majority of these funds went to a small group of companies that received the largest loans. About 60% of total MSLP loan dollars went to just 264 companies that received loans of $20 million or more, including several private equity-backed oil companies, two for-profit colleges, and multiple financial services firms.

Third, and perhaps most concerningly, the analysis concluded that the influence of oil and gas lobbyists likely magnified the program’s failures and redirected loans to recipients that did not fit the program’s initial intent. After the Federal Reserve released the initial iteration of the MSLP term sheet, fossil fuel industry lobbyists and their political allies set out to modify program requirements in order to benefit oil and gas companies.

Specifically, the Independent Petroleum Association of America and U.S. Sen. Ted Cruz (R-Texas) wrote letters urging loosened restrictions on loan use and increases in MSLP loan maximums. Following these efforts, the Federal Reserve made several modifications to the MSLP term sheet which strongly resembled exact requests from lobbyists. These changes included weakened language about employee retention standards, loosened requirements for borrowers’ financial need, and increased maximum loan size. These changes directly benefited fossil fuel companies who—by the end of November 2020—received $828 million in MSLP loans. According to BailoutWatch, this figure had more than doubled by the end of 2020 after a surge in MSLP loan applications, bringing the fossil fuel industry’s cumulative benefit from the program to $2.2 billion.

The MSLP ended its loan distribution in 2021, yet its shortcomings and failures remain salient and provide examples of necessary changes for future emergency lending programs. Public Citizen urges lawmakers to implement firmer boundaries around borrower certifications for future lending initiatives. Further, the report argues that loosening certain credit requirements and taking on greater risk will ensure that lending programs target businesses most severely impacted by the pandemic. Ultimately, a more targeted approach that prioritizes the neediest companies as well as firmer boundaries that direct spending towards program goals will be key in rectifying the failures and shortcomings of the MSLP for any future relief-related lending program.