These remarks have been edited for length and are being published in four parts. The following post is Part I of Neil M. Barofsky’s prepared remarks, which were delivered on July 28, 2020.
As the former Special Inspector General of the Troubled Asset Relief Program (“SIGTARP”), I established and supervised the audit division that monitored the financial assistance provided to companies and individuals as part of the historic TARP program. I also provided real-time advice and oversight as the U.S. Department of Treasury (“Treasury”) developed and implemented the programs that are serving as the model for much of what it is using in response to the current crisis. I regularly reported to Congress on that work.
I believe that our agency played an important role in the last crisis, providing necessary transparency to Congress and the American people, and our recommendations helped preserve the integrity of the TARP program from fraud, waste, and abuse. I created and oversaw SIGTARP’s law enforcement division, which conducted criminal and civil fraud investigations. The very existence of that division deterred would-be criminals who might otherwise have sought to rip off the TARP, but those who nonetheless did attempt to defraud the program were brought to justice. SIGTARP’s investigative division has secured 384 convictions and recovered more than $11 billion to date,[1] leading to historically low losses for a program of its size and scope.
After my tenure at SIGTARP, I served as a Senior Fellow at New York University School of Law’s Center on the Administration of Criminal Law, and as an adjunct professor at the law school affiliated with the Mitchell Jacobson Leadership Program on Law and Business. Since 2013, I have been a partner at the law firm Jenner & Block LLP, where I currently serve as the head of the firm’s Monitorship Practice, and more recently, as the head of the firm’s COVID-19 Response Team. In that capacity, I have written and spoken extensively on the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
I have been asked by the Committee today to testify about how “the money appropriated for COVID-19 relief has been obligated or spent to date;” to provide my views on “what we know and do not know about the effectiveness of” the programs enacted in response to the crisis; and to describe “any oversight or other controls” that “Congress should consider as it debates authorizing additional programs or appropriating additional funding.” My testimony today reflects only my personal views, and does not reflect the views of Jenner & Block LLP, its partners, or its clients.
I have divided my prepared remarks into three sections. First, I summarize publicly available information on the relief allocated by the CARES Act and related legislation. Second, I state my views on the effectiveness of various government programs established by the CARES Act in response to the global pandemic and suggest some potential legislative improvements. Third, I provide my perspective on the current state of oversight and what additional measures this Committee may consider in improving its effectiveness.
Summary of Funding
On March 27, 2020, Congress passed the CARES Act, a historic more than $2 trillion stimulus package to address the economic fallout from the COVID-19 pandemic. The CARES Act was intended to provide a lifeline to the nation’s struggling workforce and provided relief mainly through direct payouts and loans to businesses and increased support for existing government programs. With an unprecedented outlay of funding to individuals and businesses of all sizes throughout the economy, the CARES Act has touched nearly everyone in this country.
As part of the CARES Act, Congress allocated funds for forgivable loans, grants, and other relief to small businesses whose ability to operate was jeopardized by the economic impact of COVID-19. The most active program for small businesses has been the Paycheck Protection Program (“PPP”), which, along with subsequent legislation, authorized $659 billion in forgivable loans to the nation’s small business community. The Small Business Administration (“SBA”) reports that over $519.6 billion of that had been distributed as of July 26, 2020.[2] Although there is nothing modest about the expenditure of more than a half trillion dollars, it is also important to note that lending through the program has dramatically slowed over the past two months, with just $9 billion being lent over the eight weeks since the SBA’s report on May 30, 2020.[3]
In addition to the PPP, Congress also authorized Treasury to extend up to $500 billion to help businesses maintain personnel and continue operations. Of that amount, $25 billion was allocated for loans to passenger air carriers, $4 billion for loans to cargo air carriers, and $17 billion for loans to businesses critical to maintaining national security.[4] The remaining $454 billion was allocated for programs designed to take advantage of the Federal Reserve’s emergency lending authority, which was used extensively during the last financial crisis. With the help of those funds, the Federal Reserve has created various special purpose vehicles (“SPVs”) to support several lending programs to different segments of the economy. Under the design of those programs (which are based on similarly constructed TARP programs that I helped oversee), Treasury has used a portion of these CARES Act funds to provide equity capital investments in the SPVs in order to absorb possible losses on the Federal Reserve loans. The Federal Reserve has committed to leverage those funds to greatly increase the size of those lending facilities (by an average of 10 times Treasury’s investment), with the understanding that, to the extent borrowers cannot repay the Federal Reserve’s loans, Treasury’s funds will bear the first losses, up to the $454 billion allocated by the CARES Act.
Unlike the PPP, the Federal Reserve programs seeded by CARES Act funds were late to launch and so far, have had very limited uptake. They break down as follows:
- A “Main Street” lending program, which is intended to provide loans to small- and medium-sized entities in order to ease the economic dislocation caused by the COVID-19 pandemic. Treasury has committed $75 billion of CARES Act funding to this program, which would enable up to $600 billion in Federal Reserve lending. This program was not fully operational until July 6, 2020, and as of July 22, 2020, only $14 million had been disbursed.[5]
- A Municipal Liquidity Facility, which is intended to provide short-term loans to all 50 states, and certain municipalities facing financial distress dueto COVID-19. Treasury has committed $35 billion in CARES Act funding to this program, which would enable up to $500 billion in Federal Reserve lending. As of July 22, 2020, only $1.2 billion had been disbursed with just a single loan approval.[6]
- “Primary” and “Secondary” Corporate Credit Facilities, which is intended to purchase new and already issued corporate bonds to help large U.S. businesses access credit and otherwise increase liquidity in the corporate debt markets. Treasury has committed $75 billion to these programs, which would enable up to $750 billion in purchases by the Federal Reserve of new and existing corporate debt. As of July 22, 2020, the Federal Reserve had yet to made bond purchases as part of the “Primary” program, and had purchased a total of $12.1 billion in corporate bonds and in bond exchange-traded funds on the secondary market.[7]
- The Term Asset-Backed Securities Loan Facility (“TALF”), based on a similar program rolled out in 2008, which is intended to make loans to companies in exchange for a pledge of certain recently-issued, highly-rated asset-backed securities (“ABS”). As of July 22, 2020, the Federal Reserve had lent just $937 million of the $100 billion committed to lending (seeded by a $10 billion equity investment by Treasury).[8]
The “announcement effect” of these programs has been significant, stabilizing the capital and debt markets simply as a result of their announcement. To date, Treasury has committed just $195 billion of the total available funds (43%) to seed up to $1.95 trillion for these four programs, with just $14.25 billion spent (approximately 0.7%). Treasury has not yet announced whether it intends to use the remaining $259 billion at its disposal.
In addition, the Federal Reserve has stepped in with various other aid programs. In order to support the PPP, it initiated a program to supply liquidity to financial institutions participating in the program. As of July 22, 2020, $68.5 billion had been disbursed.[9] No Treasury funds are at risk for this program, because the underlying loans have already been guaranteed by the SBA. The Federal Reserve also has expanded and initiated additional programs aimed at supporting the economy, many of which are reboots of the programs it initiated in response to the 2008 financial crisis. In addition to TALF, whose inception I helped oversee, the Federal Reserve has resurrected the Commercial Paper Funding Facility (“CPFF”) (roughly $1.5 billion lent with no announced cap[10]), and established a Money Market Mutual Fund Liquidity Facility (“MMLF”) (roughly $17.5 billion lent with no announced cap[11]). These programs have entailed commitments of potentially hundreds of billions of dollars, but thus far have also seen only modest uptake from market participants, undoubtedly due in part to the announcement effect noted above.
Footnotes
[1] See SIGTARP, Semiannual Report to Congress, Apr. 30, 2020, available at https://www.sigtarp.gov/Quarterly%20Reports/April_30_2020_Report_to_Congress.pdf (PDF: 4.97 MB)
[2] See SBA, Paycheck Protection Program, Additional Program Information, available at https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program (“PPP Additional Program Information”).
[3] See SBA, Paycheck Protection Program Report, Approvals through May 30, 2020, available at https://www.sba.gov/sites/default/files/2020-06/PPP_Report_200530-508.pdf (PDF: 581.24 KB) (showing approvals of approximately $510 billion).
[4] The CARES Act also included $29 billion in direct grants to passenger carriers and cargo operators for payroll support.
[5] Federal Reserve, Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks (July 23, 2020), available at https://www.federalreserve.gov/releases/h41/current/ (“Factors Affecting Reserve Balances”).
[6] See id.; Federal Reserve, Periodic Report; Updated on Outstanding Lending Facilities Authorized by the Board under Section 13(3) of the Federal Reserve Act at 6–7 (July 9, 2020), available at https://www.federalreserve.gov/publications/files/mlf-ppplf-pdcf-mmlf-cpff-pmccf-smccf-talf-7-10-20.pdf (PDF: 165.01 KB) (“Periodic Report”) (transaction-specific disclosures shows $1.2 billion was for a single loan).
[7] See Federal Reserve, Periodic Report, supra note 6.
[8] See Federal Reserve, Factors Affecting Reserve Balances, supra note 5.
[9] Id.
[10] Id.
[11] Id.
Neil M. Barofsky is a partner, chair of the Monitorship Practice, and head of the COVID-19 Response Team at Jenner & Block. He previously served as a federal prosecutor and the first special inspector general of the Troubled Asset Relief Program (TARP).
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