Getting the Big Ideas Right | September 16, 2020September 16, 2020 Other
Over the past few weeks, I have returned to air travel. Whereas planes were nearly empty a month ago, now they are full. On the road, I have focused on three areas of emphasis. First, understanding history and what it can teach us about our own leadership and decision making. Second, public diplomacy that promotes stability amid revisions in international order. Third, I continue to support and promote Opportunity Zones.
This week, we will do a deep dive into the Federal Reserve’s Main Street Lending Program to better understand its capabilities and shortfalls. We will review updated policy statements on Opportunity Zones and what they mean for the health of the American economy. We will also review key events in international affairs, as well as domestic priorities. Finally, in a tribute to the anniversary of 9/11, we welcome an all-too-rare moment of national unity in America’s domestic political expressions.
For several weeks now, the Federal Reserve (Fed) Chairman and various governors have given public remarks to reassure markets. In a world where the choice point on negative interest rates looms highly possible, the Federal Reserve’s $600 billion Main Street Lending Program has suffered irrelevancy in regard to the market.
The program has underperformed and lacks coherent guidance from Capitol Hill. Oversight for the program is being led by my first boss in Washington: Senator Pat Toomey of Pennsylvania, as well as Bharat Ramamurti, who served as a top aide to Senator Elizabeth Warren of Massachusetts. The oversight panel held a hearing Aug. 7, which gave the market enough confidence to double the program’s participation in August. However, the oversight panel remains divided on fault-line partisan issues.
Only about $500 million in loans have been purchased to date, half of that figure in August, administered by 522 participating lenders, of which only 160 have reported actually completing a transaction through the program.
In an Aug. 24 FAQ from the Federal Reserve, the following points may be of interest to review:
Are loans that are originated or upsized in connection with the program forgivable?
No. Main Street loans are full-recourse loans and are not forgivable. Under section 4003(d)(3) of the CARES Act, the principal amount of a Main Street loan cannot be reduced through loan forgiveness.
What are the differences between the MSNLF, the MSPLF and the MSELF?
Main Street includes three facilities, each of which was authorized by the Board of Governors of the Federal Reserve System (Board) under section 13(3) of the Federal Reserve Act. All three facilities use the same Eligible Lender and Eligible Borrower criteria, and have many of the same features, including the same maturity, interest rate, deferral of principal for two years, deferral of interest for one year, and ability of the borrower to prepay without penalty.
Other features of the loans extended in connection with each facility differ. The loan types also differ in how they interact with the Eligible Borrower’s existing outstanding debt, including with respect to the level of pre-crisis indebtedness an Eligible Borrower may have incurred.
Main Street New Loan Facility (MSNLF): Eligible Lenders extend new five-year term loans to Eligible Borrowers ranging in size from $250,000 to $35 million. The maximum size of a loan made in connection with the MSNLF cannot, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, exceed four times the Eligible Borrower’s adjusted 2019 earnings before interest, taxes, depreciation and amortization (EBITDA). The loans must not be, at the time of origination or at any time during the term of the Eligible Loan, contractually subordinated in terms of priority to any of the Eligible Borrower’s other loans or debt instruments. The unique features of loans originated in connection with the MSNLF (MSNLF Loans) are provided in the MSNLF term sheet.
Main Street Priority Loan Facility (MSPLF): Eligible Lenders extend new five-year term loans to Eligible Borrowers ranging in size from $250,000 to $50 million. The maximum size of a loan made in connection with the MSPLF cannot, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, exceed six times the Eligible Borrower’s adjusted 2019 EBITDA. At the time of origination and at all times thereafter, the Eligible Loan must be senior to or pari passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt. Eligible Borrowers may, at the time of origination of the loan, refinance existing debt owed by the Eligible Borrower to a lender that is not the Eligible Lender. The unique features of loans originated in connection with the MSPLF (MSPLF Loans) are provided in the MSPLF term sheet.
Main Street Expanded Loan Facility (MSELF): Eligible Lenders increase (or “upsize”) an Eligible Borrower’s existing term loan or revolving credit facility. The upsized tranche is a five-year term loan ranging in size from $10 million to $300 million. The maximum size of a loan made in connection with the MSELF cannot, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, exceed six times the Eligible Borrower’s adjusted 2019 EBITDA. At the time of upsizing and at all times thereafter, the upsized tranche must be senior to or pari passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt. The features associated with tranches of loans that are upsized in connection with the MSELF (MSELF Upsized Tranches) are outlined in the MSELF term sheet.
Is there a limit to the size of the program?
The Main Street special purpose vehicle (SPV) will purchase up to $600 billion of participations in eligible loans. The Federal Reserve and the Treasury Department have assessed this amount to be appropriate in light of the current financial strains facing Eligible Borrowers. The Federal Reserve and the Treasury Department will continue to assess the situation and needs of Eligible Borrowers and may adjust the program’s size in the future.
What are the differences between the program and the Payroll Protection Program and Primary Market Corporate Credit Facility?
Similar to the Payroll Protection Program (PPP) and the Primary Market Corporate Credit Facility (PMCCF), Main Street was created to assist companies that have been adversely affected by the COVID-19 pandemic. Each of these programs, however, was developed to provide liquidity to companies of different sizes:
PPP: The PPP was established by the CARES Act and implemented by the Small Business Administration (SBA) to support the payroll and operations of small businesses through the issuance of government-guaranteed loans that include a forgiveness feature for borrowers that satisfy the requirements of the PPP.
Main Street: The Federal Reserve designed Main Street to support small and medium-sized businesses that were unable to access the PPP or that require additional financial support after receiving a PPP loan. Main Street loans are not forgivable.
PMCCF: The Federal Reserve established the PMCCF to support large companies through the purchase of eligible corporate bonds from, and lending through syndicated loans to, large companies. PMCCF loans are not forgivable.
Virtua Partners and Hotel Equities have been national leaders in the development of Opportunity Zones. We helped formed the Opportunity Zone Funds Association to ensure that reporting standards are met.
Our policy work with Senator Tim Scott, Treasury Secretary Steve Mnuchin, HUD Secretary Ben Carson and bipartisan coalitions in Congress has helped make this program a success for the American economy. We have driven capital investment into projects and talent through public-private partnerships that have redefined and reduced the political risk calculus from government. We have also been a big reason why the labor market can say that it has lifted over 1 million of our fellow Americans out of poverty.
In our partnerships with universities and nonprofits, a success story has emerged for the American economy in a coronavirus world. Through this feedback, we have engaged with lawmakers and the Council of Economic Advisors at the White House to produce this Initial Assessment of the Opportunity Zone Program.
One data point to consider as readers compare the coronavirus recession with the 2007-2008 recession is long-term unemployment: Heading into the fall, we have 1.6 million Americans long-term unemployed; whereas in 2007-2008, there were 4.1 million Americans long-term unemployed.
It is remarkable that the American economy has added 10.6 million jobs since May settling at 8.4% unemployment. The Bureau of Labor Statistics reported the fourth straight month of major job growth. The August unemployment rate fell by nearly two points to 13.6 million unemployed. The pre-Coronavirus economy saw 7.8 million unemployed in February. Economists took notice when Goldman Sachs sent out a recent forecast which predicted that as many as 1:4 of jobs lost might not come back. The health of the travel and hospitality sector continues to surge back with 175,000 new jobs in August. Forbes gave a succinct analysis of what it means to also be experiencing record gains in the stock market and a return to pre-correction levels in the S&P 500.
Years ago, I joked with a colleague on Capitol Hill as we worked 16-hour days without a weekend in memory — that the only reprieve we could feel was wearing shorts to work. Today, in a world where face-to-face Zoom is the norm above in-person meetings, Morgan Stanley forecasts that while half of America’s workers are working from home currently, we could see 1/3 of those of jobs sustaining a work from home status.
The Federal Drug Administration (FDA) has approved the first real-time Coronavirus test, which provides results within 15-minute.
The Wall Street Journal has produced an in-depth issues guide of where the Democrat ticket for the White House stands on key issues.
Two fundamental shifts have occurred this month, ushering in renewed diplomatic stability to state relations in the Balkans and the Middle East. Newsweek has dubbed Special Assistant to the President Jared Kushner the Administration’s “utility player,” in a media blitz of statecraft and choreography that harkens significant historical achievement. Kushner and National Security Advisor Robert O’Brien broke-open a fundamental shift in more-normalized relations between Israel and the United Arab Emirates. Within 24 hours, Saudi Arabia moved to normalize its relations with the Jewish state. Days later, Serbia and Kosovo ended over two decades of conflict as they launched a historic economic agreement from the Oval Office at the White House. In doing so, Kosovo, a majority Muslim state formalized its diplomatic relationship with Israel. Asked what made this all come into play this week, Acting Director of National Intelligence Richard Grenell attributed the diplomatic achievements in the Balkans and the Middle East to the President’s focus on economics above politics. This was an “outsider’s perspective,” Grenell explained.
Retired General Ben Hodges, former European theater commander, spoke with the German Defense Ministry this past week to review the implications and challenges of America’s military reorganization in Europe. Hodges emphasized that Germany is America’s “top strategic ally,” emphasizing that a pre-mortem to American leadership in the 21st century will require a coalition through Berlin.
The President used a word that has not been previously stressed from the Oval Office in America’s relationship with China: “Decoupling.” Amidst the backdrop of supply chain disruptions and election interference, the Federal Bureau of Investigations (FBI) Director has reported that China’s theft of intellectual property represents the “greatest transfer of wealth in the history of the world.” Harvard professor Graham Allison calls this the distinction between concept of “trade” and “raid” in his work Destined for War: Can America and China Escape Thucydides’ Trap. American intelligence officials are also under increasing strain in the area of American election interference citing that both China and Russia are turning up the pressure on disinformation campaigns targeting American voters and cultural organizations.
Tesla is preparing a fleet of driverless cars to hit the market in the near term. As other automakers will predictably follow suit, we might imagine the social and economic disruption that a driverless car will present to everyday life: A multi-car household may soon need only one car to accomplish all the moving pieces in a day. Driverless technology means that former-drivers get more time back, while the car is off doing errands.
The “Tesla Effect” can also be felt in a more substantial manner as its new Austin, TX facility will be located just 6 miles from a Virtua Partners’ office building, potentially driving up leasing rates and activity in the area.
This past week we saw the anniversary of the 9/11 attacks on the United States. It has been nineteen years. An entire generation has been born in the post-9/11 world. The events at the World Trade Center site in New York brought a rare glimpse of unity and civility, as former Vice President Joe Biden and current Vice President Mike Pence gave each-other an elbow-bump for the cameras and history.
Somber tributes to the fallen bring to mind the words of Civil War commander, Colonel Joshua Lawrence Chamberlain who some may know find familiarly from Jeff Daniels portrayal of his character in the film Gettysburg. In 1889, nearly 30 years after the war’s termination, this is what Chamberlain had to say about the conflict which historian Shelby Foote called “the crossroads of our being.” It was “America’s Iliad.” Here were Chamberlain’s remarks for history:
“In great deeds, something abides. On great fields, something stays. Forms change and pass; bodies disappear, but spirits linger, to consecrate ground for the vision-place of souls… Reverent men and women from afar, and generations that know us not and that we know not of… shall come to this [field]… to ponder and dream. And lo! The shadow of a mighty presence shall wrap them in its bosom, and the power of the vision pass into their souls.”
Oliver Schwab is executive vice president of government affairs at Virtua Partners. Oliver supports and provides strategic guidance to the Virtua team, investors and owners with an active voice, shaping and understanding government policy.
In additional to Oliver’s work with Virtua, he leads a family office that he co-founded. Oliver is also trustee and treasurer of a private foundation. He served as a chief of staff in the United States Congress from 2011-2018. Oliver has experience as a principal in tax, trade, financial services and national security policy. He continues to support public diplomacy as a national security scholar.
Oliver is a visiting lecturer at the European Business School in Germany and the University of Warsaw in Poland. He is also a graduate student in strategic studies at the United States Naval War College, China scholar at the Center for Strategic and International Studies, and has been a fellow at the Woodrow Wilson Center for International Scholars and the Council on Foreign Relations. Oliver focuses his research on the relationship between policy, strategy and decision making. He and his wife Ana are the incoming cabinet co-chairs at the Thomas Jefferson Foundation.
Next week, I will be delivering remarks with a former colleague from Capitol Hill to a group of Japanese businesses. This bipartisan conversation, hosted by the Association of Former Members of Congress in partnership with the Japanese embassy, will explore America’s trade and security interests in the theater and areas where bilateral and multilateral frameworks have opened new possibilities.
Finally, I have begun reading “The Empress of China,” which is about the first American trade mission to China after the Revolutionary War. The expedition was composed of five members of the Society of Cincinnati who had been officers to General George Washington. I intend to publish a review of the book for the Society of Cincinnati and hold a talk in the future with fellow society member and great strategic thinker, Michael Pillsbury, author of “The Hundred-Year Marathon.” In evaluating our current trade and security relationships in the Pacific, many lessons can be learned and insights drawn from those first impressions.