CARES Act Title IV Financial Assistance Ends

INSIGHTi
CARES Act Title IV Financial Assistance Ends
January 8, 2021
Under Title IV of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, P.L. 116-136),
the U.S. Department of the Treasury made loans to specified industries and investments in Federal
Reserve programs, authorized until the end of 2020. While Coronavirus Disease 2019 (COVID-19)
confirmed cases and deaths continue to reach new highs, financial conditions stabilized shortly after
enactment of the CARES Act. This raised the question of whether assistance should be extended at least
until the pandemic ended or al owed to expire because financial stability had been restored. The
December COVID-19-related relief package (specifical y, Division N, Title X, of P.L. 116-260) did not
change the year-end expiration date and permanently closed down al but one of the Fed programs backed
by CARES funding. In effect, those programs may be revived only by a future act of Congress and not at
the Federal Reserve and Treasury Secretary’s discretion.
This Insight provides some preliminary observations on Title IV assistance. For more information, see
CRS Report R46329, Treasury and Federal Reserve Financial Assistance in Title IV of the CARES Act
(P.L. 116-136).
Size. The amount of assistance pledged under Title IV (almost $22 bil ion in loans to industry and $195
bil ion to Fed programs) turned out to be significantly less than the $500 bil ion that was authorized. It
also turned out to be more than was needed, because the Fed provided only $41 bil ion to recipients in
programs backed by the $195 bil ion, which wil be used only if those programs experience losses. As a
result, a fraction of the Title IV funds pledged were needed, and P.L. 116-260 rescinded the unobligated
funds.
There are at least two possible explanations for the lack of uptake. First, financial conditions, which were
highly unstable early in the pandemic, normalized shortly after the CARES Act was enacted and the Fed
programs were announced. Programs that might have been highly subscribed if financial instability
persisted were less needed or desired once financial conditions normalized. Second, the terms and
conditions of the Fed’s programs were not as attractive as comparable sources of private credit despite
repeated modifications by the Fed to make them more attractive. These explanations are not mutual y
exclusive, because those private sources of credit might not have been available (at least on similar terms)
if financial conditions had not normalized.
Cost. The final cost to the government of Title IV assistance wil not be known until loans are repaid and
securities mature, which wil take years. At this point, it is certain to be lower than $500 bil ion, because
only $63 bil ion of assistance is outstanding, most if not al of which wil be repaid with interest. Stil ,
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Treasury currently estimates that the assistance was subsidized, meaning that the $500 bil ion wil not be
fully recouped in present discounted value terms.
Speed. One policy goal was to make this assistance available quickly to help stabilize a rapidly
deteriorating economy. The practical limitations of setting up new and complex programs from scratch
worked against this goal. In addition, because of capacity constraints, Treasury chose to prioritize
implementation of several of the other urgent CARES Act programs. Similarly, the Fed had several other
emergency programs not backed by the CARES Act that it rolled out first. As a result, the overal
economy was recovering by the time assistance was received. The first direct Treasury loan was made in
July, and the remaining loans were made between September 25 and November 13. Likewise, the various
Fed programs became fully operational between May 12 and September 4.
Loans to industry. Congress chose to make these loans available to three industries. For two industries,
passenger and cargo air, Congress was specific about which businesses would qualify. For the other
industry, businesses critical to national security, Congress left it to the Treasury Secretary’s discretion to
determine which businesses qualify. The businesses that were ultimately granted loans (e.g., a trucking
company) were general y not the businesses that Congress reportedly intended to receive loans (e.g.,
major airline manufacturers). The latter group reportedly chose not to apply for loans because they could
get better terms from private creditors once financial conditions had stabilized.
Terms and conditions. The CARES Act required conditions such as restrictions on executive
compensation, warrants, and restrictions on share buybacks and dividends that may have been attractive
only to borrowers with no private sector alternative available. Although Congress may have envisioned
that the program would serve financial y healthy borrowers facing a frozen private credit market, those
borrowers instead could borrow in relatively normal y functioning credit markets (particularly bond
markets). That potential y left a program that was primarily attractive to financial y unhealthy borrowers
that could not secure private credit even in normal y functioning markets, which increases the risk that the
program would experience future losses or would have kept inefficient producers in the marketplace.
Preserving jobs. Preserving jobs was one major goal of Title IV, but only the direct loans and one Fed
program had employee retention conditions. In the case of the Fed program, the condition was not
binding—borrowers needed to “make commercial y reasonable efforts to maintain its payroll and retain
its employees during the time the Eligible Loan is outstanding,” and the Fed is reportedly not monitoring
whether borrowers retain payroll. Further, several of the loans had, at most, a minimal impact on overal
industry employment. For example, eight of the borrowers employed fewer than 100 employees overal .
Federal Reserve facilities. Once financial conditions stabilized, policymakers faced several questions
about the Fed’s role. First, how could Congress ensure that the Fed’s new role did not become permanent
or routine? Second, how quickly should its new role be removed: once financial conditions had stabilized
or once the pandemic had ended? Final y, what if a new bout of financial instability emerged? The
changes in P.L. 116-260 may help avoid the potential for an inappropriate expansion of the Fed’s role
after the pandemic is over at the expense of limiting the Fed’s ability to respond to any new crisis before
or after the pandemic has ended.

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Author Information

Marc Labonte
Andrew P. Scott
Specialist in Macroeconomic Policy
Analyst in Financial Economics





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