FOR IMMEDIATE RELEASE
July 28, 2020
Bad Underwriting Standards in Fed Lending Programs Could Support Insolvent Firms
Fossil fuel companies, private equity firms may benefit from high-risk lending
Washington, DC – The Federal Reserve is indirectly financing insolvent or bankrupt firms through its emergency lending programs, an act that may be banned under federal law, according to a letter to the central bank from Americans for Financial Reform Education Fund.
The fossil fuel industry in particular could benefit because these poor underwriting standards permit companies to base applications on 2019 earnings, which obscure these companies’ bleak prospects of recovery from the current slump in energy prices, and allow misleading characterizations of their financial health leading up to the crisis. Companies owned by private equity firms, which are likely to carry heavy debt loads, may also benefit disproportionately.
“These practices subsidize financial engineering and the destruction of the climate, and divert resources away from other efforts to ease suffering during the pandemic,” said Andrew Park, senior policy analyst at Americans for Financial Reform Education Fund. “And since there are no meaningful employment requirements attached to assistance, these loans do not benefit workers. The failure to effectively control underwriting standards is one more example of ‘heads they win, tails we lose’ support for Wall Street.”
The Fed is indirectly supporting insolvent companies, despite the intent of Congress to prohibit such lending via Section 13(3) of the Federal Reserve Act through purchases of exchange traded funds. One such fund, BlackRock’s iShares iBoxx High Yield Corporate Bond ETF, holds the corporate bonds of Chesapeake Energy, Hertz Companies, Neiman Marcus, and Whiting Petroleum which have all declared bankruptcy.
The letter can be downloaded in its entirety here.