At the 2004 Athens Olympics, the American air-rifle shooter Matt Emmons, the reigning world champion in the 50 meter three-position event, held a seemingly insurmountable lead.
Going into his final shot, Emmons was in first place and needed only a mediocre score to win gold. Emmons aimed, fired, and hit his target – the wrong target, one lane over. He received no score for that shot and finished in eighth place.
Emmons’ mistake illustrates the importance of aiming at the right target. In April 2020, amid the COVID-19 pandemic, the Federal Reserve and the Treasury Department announced the Main Street Loan Program, also known as the MSLP, which was designed to provide emergency liquidity to small and mid-sized businesses. Although well-intentioned, the MSLP, like Emmons, was aimed on the wrong target, and ultimately, missed the mark.
In March 2020, Congress passed The Coronavirus Aid, Relief, and Economic Security Act, the CARES Act, and granted the Board of Governors of the Federal Reserve System the authority to establish a “Main Street Lending Program” to support lending to small and mid-sized businesses on terms and conditions as the reserve system may set consistent with the relevant provisions of the Federal Reserve Act. After its initial introduction in April, the MSLP faced major criticism and the Federal Reserve received more than 2,200 comment letters from interested parties during the comment period. In response to the criticism, the Federal Reserve marginally revised the terms of the program and began issuing its guidance. Three months after its announcement, the MSLP finally became operational in July. The MSLP expired on December 31, 2020 and the Federal Reserve ceased purchasing loans on January 8, 2021.
In all, the MSLP extended more than $16.6 billion in emergency credit to more than 1,800 companies in 49 states and two U.S. territories. Although these figures may seem impressive at first glance, when viewed in the proper context, they show just how little of an effect the MSLP had.
Digging into the data, the Treasury Department was to initially make a $75 billion equity investment into the special-purpose vehicle set up by the Federal Reserve to purchase loan participations under the MSLP. In its April 9, 2020 press release, the Treasury Department touted that such investment “will enable up to $600 billion in new financing for businesses…” So, even after the revisions to the MSLP to relax eligibility requirements and add to the number of eligible borrowers, the MSLP did not even achieve 3% of its initial suggested benefit. By way of comparison, by Jan. 31 this year, the SBA had disbursed nearly $596 billion under the Paycheck Protection Program – over half a trillion more than the MSLP.
As for the MSLP’s effects locally, Wisconsin-based borrowers closed 14 Main Street loans totaling almost $85 million. Wisconsin-based banks closed 22 Main Street loans (four of which were with Wisconsin borrowers) totaling almost $308 million.
So, what exactly went wrong? In my experience, having closed numerous Main Street deals and having advised at the diligence phase of dozens of others, the primary downfall was that the terms of the MSLP were far too restrictive. From the convoluted eligibility requirements to the prohibition on paying dividends, the benefits provided from the emergency liquidity (namely, deferred principal and interest payments) did not outweigh the costs of the strings attached thereto.
Why was the program so restrictive? A July 12, 2020 article in the Wall Street Journal described the philosophical differences between the Treasury Department and the Federal Reserve with respect to the MSLP. On one hand, the Federal Reserve advocated for more adaptable terms while on the other the Treasury Department pushed for a more conservative approach. After “painstaking” negotiations and realizing that the program could not be delayed any further, the Treasury Department and Federal Reserve came to a compromise – the result of which was the purposely-restrictive MSLP. In doing so, the Treasury Department and the Federal Reserve signaled that their top priority was minimizing losses of taxpayer money rather than helping small and mid-sized businesses.
Now that the MSLP is over, what lessons were learned? First, policymakers need to be more adaptable and listen to industry experts. Many viable alternatives were proposed by financial professionals and those solutions could have been carried out in conjunction with the MSLP. For example, Congress could have authorized a loan-guarantee program or eliminated the prohibition on loan forgiveness contained in the CARES Act. Rather than a “one-size-fits-all” approach to the MSLP, the Federal Reserve and Treasury Department could have relied on lenders to adopt risk-based terms (e.g., establishing different loan structures, interest rates, maturity dates and documentation requirements depending on the borrower’s individual circumstances) that would have provided more access to the MSLP.
A broader lesson learned is that every challenge also presents an opportunity. Many national banks were initially not interested in participating in the MSLP because of their experience with the Paycheck Protection Program. In response, many regional lenders took up the slack and were able to secure deals that they might not otherwise have been able to get. As we’ve seen throughout the pandemic, forward thinking and opportunistic businesses have been quite successful.
We often hear the phrase “Main Street” used by politicians and political pundits to describe the hundreds of thousands of “mom-and-pop stores” and other small business that are so vital to our economic success. By aiming at the wrong target, the Main Street Loan Program failed to serve the exact people after which it was named. Fortunately, many of those Main Street businesses have the right target in their sights and have found other ways to survive.
Nathan Volz is a Milwaukee-based partner at Husch Blackwell specializing in corporate finance.