The Fed’s Toolbox: What’s Left to Pave the Way for Continued Construction?
Each day since the novel coronavirus (COVID-19) encapsulated the world, a myriad of government responses have permeated the United States depending on location, demographics and the severity of the crisis. One constant has remained: the Federal Reserve’s determination to “provide as much relief and stability as [possible] during this period of constrained economic activity … .” (Federal Reserve Board Chair Jerome H. Powell, quoted in the Fed’s April 9 announcement).
With much of development dependent on financing, a sudden disruption to financial markets can discourage lending. But stabilizing the financial markets is one thing; incentivizing banks to lend is another. COVID-19, however, threw financial markets into a tailspin. The threat to developers as the economy suddenly contracted was the willingness, or rather ability, of banks to loan funds while, simultaneously, the banks’ investors were accumulating cash and avoiding any assets that seemed risky.
In response, the Fed immediately lowered the Federal Funds rate, and implemented traditional measures that focused mainly on financial market functioning. For instance, the Fed purchased extensive amounts of long-term securities, offered low-interest rate short-term loans up to “primary dealers” (24 large financial institutions), and made loans to banks against collateral that they purchased from prime money market funds.
With the sudden economic contraction, something more than traditional measures was necessary. Thinking proactively, so as to promote more direct bank-borrowing to obtain liquidity, the Fed lowered the rate that it charges banks for loans from its discount window. Additionally, so as to obviate bailouts like those dispensed during the Great Recession, the Fed relaxed its regulatory requirement that banks to hold a certain amount of “loss-absorbing capital,” i.e., buffers.
Easing the path for lenders was only half of the equation, however. There still needed to be assets with value and functioning industry in order to tempt the lenders to part with money. As such, the Fed established two new facilities—the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility—enabling it to lend directly to highly rated U.S. corporations and keep them operational. The Fed also reinstated its Commercial Paper Funding Facility (CPFF). The CPFF, used during the Great Recession, accepts unsecured short-term debt in exchange for money that firms can use to repay investors, so as to encourage investors to engage in term lending in the commercial paper market.
Of course, major corporations comprise only a portion of the country’s business industry. Thus, in addition to the Paycheck Protection Program Liquidity Facility designed to facilitate the $350 billion in loans to small businesses of generally less than 500 employees made under the Small Business Administration’s Paycheck Protection Program (PPP), the Fed announced the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF) on April 9. These facilities will make available up to $600 billion in loans to businesses with up to 10,000 employees or annual revenues of less than $2.5 billion. The MSNLF and MSELF programs may have the effect of bridging the gap between the PPP designed for small businesses and the Federal Reserve’s credit facilities designed to support credit to large employers.
All of these steps taken are in tandem with the Fed’s support of households and consumers by restarting its Term Asset-Backed Securities Loan Facility (TALF). Through TALF, the Fed loans money to holders of asset-backed securities collateralized by new loans including student loans, auto loans, credit card loans, loans guaranteed by the SBA and, newly-added, existing commercial mortgage-backed securities and newly issued high-quality collateralized loan obligations. Initially, TALF will support up to $100 billion in new credit, which in turn should be directed to new loans for households, consumers and small businesses.
Not insignificantly, the Fed is also supporting of state and municipal borrowing by establishing the Municipal Liquidity Facility (to loan up to $500 billion in lending to states, including the District of Columbia, and large U.S. cities and counties), in addition to separate measures that it has taken to ensure liquidity for municipal bonds. It is further supporting international lending with the U.S. dollar by loaning money to banks that need them in exchange for foreign currencies and interest on the “swaps.”
Collectively, all of the Fed’s new actions and Facilities are designed to lower the cost of longer-term debt, promote liquidity and increase the flow of credit to American businesses and families. Companies can access this credit to meet current operational needs and invest in new capital spending. Companies’ operational needs and capital spending will be supported by other businesses, consumers, municipalities and international purchasers by virtue of making the credit available to them.
The Fed’s exclusive ability to alter the money supply and credit conditions, and willingness to do so, should spur the necessary institutional lending that can sustain development and its consumers through these troubled times. Many architecturally notable buildings have been completed in prior deep economic contractions such as Eleven Times Square (NY Times building); 550 Madison Avenue (Sony Tower) in New York; 1111 Lincoln Road (Herzog and de Meuron’s parking garage) in Miami; 200 Clarendon (Hancock Tower) in Boston; and of course, the Federal Reserve Bank Building in Boston.
In sum, the money is there. So long as the lenders, large and small, and their borrowers, large and small, follow the lead of the Fed, new architectural beauties will continue to unfold and prosper.
Reprinted with permission from Robinson+Cole, March 24, 2020.
Virginia K. Trunkes is a member of Robinson+Cole’s construction law group, where she advocates during negotiations or, alternatively, during dispute resolution, on behalf of developers; apartment building, brownstone and condominium unit owners; cooperative boards of directors; construction managers, contractors and subcontractors; and design services professionals with respect to their business contracts and adjacent-owner license access agreements.