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It seems notable that even in Toomey's original, drastic legislation to claim for Congress a substantial amount of the Fed's emergency lending authority, there was no language preventing the ESF from taking equity stakes in 13(3) facilities.
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The Treasury's ESF equity investments are much closer to Congress's fiscal authority than Fed lending.
And Powell has said repeatedly: "Congress's passage of the CARES Act was critical in enabling the [Fed] and the Treasury Department to establish many of the lending programs."
And Powell has said repeatedly: "Congress's passage of the CARES Act was critical in enabling the [Fed] and the Treasury Department to establish many of the lending programs."
Plus: historically speaking, when the Fed (via SPV) is lending un-collateralized to an end borrower, as opposed to lending to a bank against such securities as collateral, the Fed looks for some kind of equity cushion.
All the facilities that the Consolidated Appropriations Act (the December legislation) explicitly closed and sought to prevent in the future were of this form. The MSLP, MLF, and PMCCF/SMCCF all left the Fed with un-collateralized securities of private firms.
Further, the Congressional Research Service noted in April that using the ESF as a means to protect taxpayers in these facilities, while valid (the statute refers to Fed lending, not Treasury's resources), is a bit circuitous from a bird's eye view:
https://crsreports.congress.gov/product/pdf/IF/IF11474
https://crsreports.congress.gov/product/pdf/IF/IF11474
One possible explanation is that Toomey et al. wanted to leave the ESF available to support the 13(3) facilities that support the money markets (as opposed to Main Street, munis, etc.).
This is a reasonable assumption, but need not have precluded shutting off the ESF tap. The Section 13(3) facilities that are directed at Wall Street can more easily avoid Treasury equity:
They all operated without Treasury support in 2008, the PDCF did again this time, and, as currently designed, the leverage allowed by the CPFF and MMLF (which have some ESF support) is functionally unlimited anyways.
i.e., there is no fixed, say, "10 to 1" leverage maximum.
i.e., there is no fixed, say, "10 to 1" leverage maximum.
It seems rather peculiar, then, that this became an incredibly dangerous fight over 13(3) (which, to be sure, may have been a negotiating tactic) that resulted instead in vague language on the Treasury's ESF.
That is, as opposed to what presumably would've been an easier political battle: preventing the ESF from being used for Fed 13(3) facilities, and leaving the Fed authorities untouched.
^This was done in 2008 two weeks after the ESF was used to guarantee MMFs, when legislation passed forbidding Treasury from doing precisely that with the ESF in the future.
(To be clear, I'm not advocating that. The ESF deserves *more* flexibility. But also, the Fed doesn't need the ESF as much as it thinks it does.)
All told, this whole saga seems to have institutionalized such ESF-supported 13(3) setups. At least until after the next crisis.
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