WASHINGTON–A Federal Reserve program expected to begin within weeks will provide hundreds of billions in emergency aid to large American corporations without requiring them to save jobs or limit payments to executives and shareholders, according to a new analysis.
Under the program, which the Fed recently said it would be expanding, the central bank will buy up to $500 billion in bonds issued by large companies. The companies will use the influx of cash as a financial lifeline but are required to pay it back with interest, according to the Washington Post.
“Unlike other portions of the relief for American businesses, however, this aid will be exempt from rules passed by Congress requiring recipients to limit dividends, executive compensation and stock buybacks and does not direct the companies to maintain certain employment levels,” the Post reported.
Critics told the Post the program could allow large companies that take the federal help to reward shareholders and executives without saving any jobs. The program was set up jointly by the Federal Reserve and the Treasury Department.
‘No Clear Path to Get it Back’
“I am struck that the administration is relying on the goodwill of the companies receiving this assistance,” said Eswar Prasad, a former official at the International Monetary Fund and economist at Cornell University, told the Washington Post. “A few months down the road, after the government purchases its debt, the company can turn around and issue a bunch of dividends to shareholders or fire its workers, and there’s no clear path to get it back.”
Treasury Secretary Steven Mnuchin defended the corporate aid program, telling the Post that the lack of restrictions on recipients had been discussed and agreed to by Congress. “This was highly discussed on a bipartisan basis. This was thought through carefully,” he said. “What we agreed upon was direct loans would carry the restrictions, and the capital markets transactions would not carry the restrictions.”
Democrats had earlier asked for restrictions on how companies can use the money from the central bank’s bond purchases but were rebuffed by the administration during negotiations about the CARES Act, the Post reported.
Main Street Program
The “Main Street” program offering up to $600 billion to “midsize” businesses — with 500 to 10,000 employees — forbids companies from issuing dividends and places limits on executive compensation, according to a term sheet issued by the Fed. Those restrictions are in effect until 12 months after the loan is no longer outstanding. The companies must also “make reasonable efforts” to maintain payroll and retain employees.
Likewise, the Post reported the $46 billion program for airlines, air cargo companies and national security forbids dividends and limits executive pay. Its requirement on retaining employment is more rigorous, however. Companies are supposed retain at least 90% of their employees.
The Fed has altered the design of the program to exclude direct corporate lending.
“The Fed program will still essentially lend money to large companies — by buying their bonds — but the Fed will not be compelled by the Cares Act to ensure that companies abide by the divided and CEO pay rules,” the Post reported.
“The change to the term sheet between March and April is the smoking gun on the Fed’s own culpability here,” Gregg Gelzinis, a senior policy analyst at the Center for American Progress, told the Post. “The basic principle of the Cares Act was that if we’re going to provide taxpayer funding to private industry, we need conditions to make sure it is in the public interest. This violates that principle.”