Fed Rebuked Over Loan Terms That Don’t Explicitly Bar Layoffs

(Bloomberg) -- The Federal Reserve is facing mounting questions from members of a key watchdog for not requiring mid-sized businesses to refrain from layoffs in exchange for accepting taxpayer-backed funds.

The Fed drew rebukes from two appointees from the Congressional oversight committee after it updated a term sheet for its Main Street Lending Facilities Thursday that included guidance on whether participants should make efforts to retain workers.

However lawmakers and the Trump administration did not impose restrictions related to job retention on aid to mid-sized businesses from the Fed when they created the $2.2 trillion rescue package that enabled the central bank to launch the Main Street program.

The Fed said participants “should make commercially reasonable efforts to maintain its payroll and retain its employees” while the loan is outstanding. The central bank said on Thursday that “commercially reasonable“ means companies should strive to maintain their payroll as long as doing so doesn't weaken operations or hamper their ability to reopen once states allow them to.

Representative Donna Shalala, part of a five-member Congressional board overseeing stimulus spending, said she will be carefully monitoring how the central bank helps American workers.

The Fed's term sheet language gives companies “the biggest hole in the world” to lay-off workers, the Florida Democrat said in an interview. “We will ask careful questions by what they mean by ‘commercially reasonable.'”

Another member of the panel, Bharat Ramamurti, also criticized the Fed for not requiring businesses keep workers.

“The only way to keep workers employed and generate a broad-based recovery is to attach strings to these loans,” he said on Twitter. Ramamurti is a former top staffer for Democratic Senator Elizabeth Warren.

Watchdog report

The commission will publish its first monthly report in mid-May on the Fed and Treasury's work during the pandemic. Senator Pat Toomey and Representative French Hill, both Republicans, also serve on the panel. It has no commissioner yet.

The Fed said it doesn't want to weaken companies that borrow from its Main Street facilities by placing strict payroll requirements on them. More restrictions placed on borrowers mean the loan facility is less likely to be used, according to the central bank.

Protests by members of Congress about the lack of payroll requirements in the facility arise from an unusual feature in the CARES Act.

Congress wrote the law in such a way that allowed them to symbolically point to their concern for American labor, while they also gave the Fed the power to be free of those same restrictions. “Nothing,” the CARES Act says, “shall limit the discretion of the Board of Governors of the Federal Reserve System” in the establishment of the Main Street Lending facility.

The exception is likely to create tension between lawmakers and the Fed for months to come, yet it was Congress who authored this binding, yet-non-binding, legislation.

The Fed is also under orders by Congress to not lose money, which is why it's difficult to press companies to hire beyond what would sustain their business.

Main Street

The Fed facility, which is expected to be operational soon, is one of the most ambitious emergency-lending facilities launched so far by the Fed to aid the U.S. as the economy shutters during the pandemic. The virus-induced shutdown has left more than 30 million Americans without jobs.

On Thursday, the Fed also increased the number of employees a business could have to qualify for the loan program to 15,000, an increase of 5,000, and doubled the revenue cap to $5 billion annually.

The move followed calls from U.S. lawmakers and the business community for the program to be widened after the Fed initially announced terms of who would qualify.

When lawmakers passed the aid legislation in March, they and Trump administration officials said the loan programs would help keep workers on the job.

“I hope businesses keep workers, and rehire, once they have the money,” Treasury Secretary Steven Mnuchin said days after the law was enacted.

U.S. job losses have continued, despite nearly $3 trillion from three federal rescue packages that pumped money into the economy, including directly into the bank accounts of American families, and forgivable loans to small businesses that retain workers.