The Oversight Playbook From 2008 Returns as Bailout Swells

The original Senate legislation set out $500 billion in funding to be used in support of companies and local governments, with $75 billion earmarked for airlines and national security companies at the Treasury secretary’s discretion. The remaining $425 billion was meant to be used to support Federal Reserve programs.

An ambiguity in the bill’s text could have allowed Mr. Mnuchin to use that money with considerable discretion, said Peter Conti-Brown, a lawyer and Fed historian at The Wharton School at the University of Pennsylvania. He added that the ambiguity seemed like sloppy drafting rather than the intent.

The Republican bill alternately said the funds should be used “in support of” or “as part of” Fed programs; the latter would be much more limiting from the Treasury’s standpoint.

The compromise bill updated that language, so now the funds are specifically dedicated “to” Fed liquidity programs or facilities. “They’re trying to do this as a Fed-Treasury partnership,” Mr. Conti-Brown said, though he added that the new language went “sprinting in the other direction” of the earlier loophole and now left the Fed in charge.

Assuming that $425 billion is used purely to back Fed emergency lending programs, Mr. Mnuchin would have some — but not absolute — say over how the money is used.

The Treasury secretary legally must sign off on the Fed’s emergency lending programs. And in practice, the department has been financially backing the programs, agreeing to take the first round of losses if the interventions sour. As a result, Mr. Mnuchin will probably consult on program design, but the Fed does most of the legwork in setting up emergency lending facilities and administering them, according to lawyers who study the programs.

There are rules governing the Fed’s emergency lending. After the 2008 crisis, Congress insisted that the Fed must set up the programs to benefit broad groups of counterparties and not individual companies, for instance. That has been interpreted to mean that there must be five eligible participants.

Article source: https://www.nytimes.com/2020/03/24/us/politics/coronavirus-economic-package-oversight.html