Introduction and summary
The coronavirus pandemic and the necessary public health response have significantly decreased U.S. economic activity, placing a severe financial strain on businesses and households. More than 30 million people were receiving unemployment assistance at the end of June, and gross domestic product (GDP) may have declined by more than 30 percent in the second quarter of 2020. To help ease the economic impact of the COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security (CARES) Act appropriated $454 billion to the Treasury Department to support the Federal Reserve Board’s emergency lending facilities.
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The oil and gas sector, which was already facing serious financial difficulties unrelated to the coronavirus crisis, could be a key beneficiary of this relief. One of the Fed’s emergency lending facilities, the Main Street Lending Program (MSLP), was established to provide emergency support to small and midsized businesses. Yet after extensive pressure from the oil and gas industry, its allies in Congress, and the Trump administration, the program was changed to scope in heavily indebted oil and gas companies that were struggling well before the current crisis. These changes throw good money after bad and put the public on the hook for the failed bets of fossil fuel speculators.
These changes to the MSLP are only part of the problem. The Fed has also established corporate credit facilities that can purchase bonds from individual companies directly or in the secondary market, as well as exchange-traded funds (ETFs) and customized financial products that hold or reference debt from multiple companies. Despite a long-standing practice that the Fed buy only high-quality debt, it has nevertheless permitted itself to buy junk-rated debt and junk bond ETFs—which may disproportionately include debt from troubled or bankrupt oil and gas companies. Importantly, none of these large corporate bailout facilities include any conditions for the companies receiving government support, such as restrictions on share buybacks and dividends, limits on executive compensation, or payroll maintenance requirements.
By propping up an industry that is intensifying climate change, which poses serious risks to financial institutions and markets, the Fed is refusing to align its emergency lending actions with its statutory mandate to promote the stability of the financial system. Moreover, the programs’ downside risk to public funds and financial stability is not mitigated in any way by strong benefits to workers, as these programs have either weak or nonexistent payroll maintenance requirements.
This report outlines the financial state of the oil and gas industry before the coronavirus crisis, explains the structure of the Fed’s emergency lending facilities and the changes to the facilities that benefit oil and gas companies, and provides clear steps the Fed should take to align its emergency lending programs with its other mandates.