Washington’s wrangling over an emergency coronavirus economic stimulus package, the largest in U.S. history, came to fruition last week with both Main Street and Wall Street getting some form of relief.
Following several days of back-and-forth debate, a bipartisan deal was finally reached, culminating in the 880-page “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act), signed into law by President Trump on Friday. The CARES Act, unprecedented in scope, authorizes $2 trillion in relief and includes $454 billion in Federal Reserve lending power, significantly dwarfing relief packages passed during the 2008 financial crisis.
To compare, the Emergency Economic Stabilization Act of 2008 —which authorized the Treasury Secretary to create the $700 billion Troubled Asset Relief Program (TARP)—and the $840 billion stimulus package under the American Recovery and Reinvestment Act of 2009 cost a combined roughly $1.5 trillion.
Many believe the relief package under the CARES Act isn’t nearly enough. “Expect at least two or three more,” says Cornell Law Professor Robert Hockett, who teaches international finance and financial regulation and is an adviser to the Federal Reserve of New York and several federal and state legislators.
The economic hardship caused by the coronavirus pandemic has little comparison to the 2008 financial crisis. “In 2008, it was more of a top-down problem, where the crisis manifested itself in the financial services industry, which then trickled down into the general economy,” says Scott Cammarn, a partner and co-chair of the Financial Services Group at law firm Cadwalader. “This is a bottom-up event … that originated at the Main Street level, not the Wall Street level.”
Main Street relief
The CARES Act in at least one big way mirrors bailout packages from the financial crisis—TARP, particularly—by affording “lots of discretion” to the Treasury Secretary as it concerns the disbursal of monies, Hockett says. For large companies, it allocates $500 billion to the U.S. Department of Treasury’s Exchange Stabilization Fund to go toward the hardest-hit industries.
For the struggling U.S. airline industry, for example, funds include $25 billion in grants and $25 billion in loans and loan guarantees to passenger air carriers; $4 billion to cargo air carriers; $3 billion to contractors; and up to $17 billion in loans and loan guarantees for businesses critical to maintaining national security, largely understood to be an effort to provide assistance for Boeing. Loans will not exceed five years and shall not be reduced through loan forgiveness.
On Monday, the Treasury Department released guidance on how it will provide payments and determine award amounts to passenger air carriers, cargo air carriers, and certain contractors affected by the coronavirus and is urging them to submit their applications by April 3 to receiving approval as soon as possible.
In the healthcare industry, the CARES Act provides for $100 billion to the “Public Health and Social Services Emergency Fund” to reimburse “eligible healthcare providers” for “healthcare-related expenses or lost revenues that are attributable to coronavirus.” These funds will remain available until expended.
How the funds will be distributed is the big unknown. “Eligible healthcare providers” are defined in the Act as “public entities, Medicare or Medicaid enrolled suppliers and providers, and such for-profit entities and not-for-profit entities … that provide diagnoses, testing, or care for individuals with possible or actual cases of COVID-19.” This covers a variety of healthcare providers, including hospitals, physician practices, and long-term care providers, for example.
Stricter oversight and restrictions
Taking lessons learned from criticisms of past bailout packages, the CARES Act puts into place a stricter oversight mechanism for who gets the funds. The first iterations of TARP conferred “virtually boundless discretion” on former Treasury Secretary Henry Paulson, which is “precisely why TARP did not pass until repaired,” Hockett says.
This time around, instead of giving current Treasury Secretary Steven Mnuchin sole discretion to oversee the lending program, an accountability committee has been put into place to oversee how money is spent, “with a better-defined oversight mandate that includes specific prohibitions on certain classes of recipients’ receiving the aid,” Hockett explains.
“Whether this will make any real difference, however, is a bit hard to say,” he says. After all, the effectiveness of that oversight is only as strong as its watchdog, and President Trump in a controversial move indicated in a signing statement accompanying the CARES Act his intent not to enforce the oversight provision, arguing that it interferes with executive branch prerogatives. “My administration will treat this provision as hortatory but not mandatory,” President Trump wrote.
Another difference to bailouts of the past: When TARP was enacted, there was a lot of criticism that banks got off too easy with the bailouts they received, that not enough strings had been attached. While this situation is much different—having not been caused by Wall Street—the CARES Act, nonetheless, puts less friendly business terms into place.
“The most stringent requirements arise in the context of the lending program to larger businesses and the airline industry,” says Scott Lessne, counsel at Crowell & Moring. “Stock buyback, limits on dividends, [and] stock warrants are all the result of a political discussion to create both the appearance, and perhaps the reality, that the government is not bailing out businesses and that the taxpayer would be compensated adequately for the risks taken in making loans under this program. On the other hand, the SBA lending program, subject to ironing out a few wrinkles, is designed to put money in the hands of small businesses with few strings attached and with a generous debt forgiveness program.”
“These guardrails clearly reflect that leaders in Washington learned from their mistakes in 2008 where financial firm executives flew to Washington in private jets and paid out bonuses after receiving a lifeline from the U.S. government.”
Oliver Spurgeon, Senior Government Relations Director, Arent Fox
To receive CARES Act funds, borrowers must, among other things, agree to not buy back stock or pay dividends for a period extending one year beyond the term of the loan. Additionally, no officer or employee whose total compensation (including salary, bonuses, awards of stock) exceeded $425,000 in the 2019 calendar year (i) may receive total compensation during any 12-month period that exceeds the amount of compensation that employee received in 2019, or (ii) severance pay or other benefits upon termination cannot exceed twice the 2019 compensation amount. Officers or employees receiving whose total compensation exceeded $3 million in 2019 cannot receive total compensation during any consecutive 12-month period that exceeds $3 million, plus 50 percent of the excess over $3 million of total compensation received in 2019.
Air carriers or contractors receiving other financial relief under the “air carrier worker support” provisions of the CARES Act are subject to these compensation limits, with a two-year covered period from March 24, 2020, until March 24, 2022.
From a regulatory compliance standpoint, “there’s a stronger case now for enforcement actions, because the ‘regs’ are in fact conditions attaching to the aid,” Hockett says. “The baseline against which we measure restrictions accordingly shifts in favor of the regulator: ‘Meet the conditions or forgo the gift.’”
“These guardrails clearly reflect that leaders in Washington learned from their mistakes in 2008 where financial firm executives flew to Washington in private jets and paid out bonuses after receiving a lifeline from the U.S. government,” says Oliver Spurgeon, senior government relations director at Arent Fox.
“Aside from the airlines, and potentially Boeing, most other key industries including hotels, cruise lines, movie theaters, and other travel, tourism, and entertainment sectors that have been hurt financially due to the coronavirus epidemic weren’t specifically named in the legislation,” Spurgeon says. “Instead, they’ll be allowed to vie for assistance in the $454 billion pool of funds that was set aside for other industries except airlines.”
The CARES Act also leaves major cruise lines struggling to stay afloat, because many are not “organized” in the United States or have most of their employees based in the United States, conditions required for aid. Carnival Corp. is incorporated in Panama, England, and Wales, while Royal Caribbean Cruises is incorporated in Liberia, for example.
Wall Street relief
The CARES Act includes numerous provisions designed to support financial institutions during the pandemic. “The regulators are trying to do what they can to ensure that financial services firms will not be reluctant to lend,” Cammarn says.
For example, Section 1105 of the Dodd-Frank Act has been amended to authorize the Federal Deposit Insurance Corporation (FDIC) to temporarily establish a guarantee program for debt obligations of solvent insured depository institutions or depository institution holding companies, upon a joint determination by FDIC and the Federal Reserve that a “liquidity event” has occurred. Any such guarantee must terminate no later than Dec. 31, 2020. Additionally, the Office of the Comptroller of the Currency is temporarily authorized to exempt any transaction from its lending limits, if the exemption is in the public interest.
The CARES Act also provides temporary relief from the new current expected credit losses (CECL) accounting standard by permitting insured depository institution, bank holding companies, or any affiliate to temporarily delay measuring credit losses on financial instruments using CECL. The suspension of CECL requirements for financial institutions expires on the termination date of the COVID-19 emergency declaration or Dec. 31, 2020, whichever is sooner.
In addition, a financial institution can elect to suspend, during a covered period, requirements under U.S. GAAP for loan modifications related to the pandemic that would otherwise be categorized as a troubled debt restructuring. Federal banking agencies must defer to the financial institution’s determination.
While it’s unclear at this time “how funds are going to flow and when,” Lessne says, companies can still prepare. “They can, with their advisors, analyze the programs for which they might be eligible and gather up information that they can provide to the appropriate institution so that institutions can act as quickly as possible upon submission of an application.”