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  • Writer's pictureRyan Lipton

Main street lending program has handed out 1/100 of available money during pandemic

The main street lending program, built to provide money to medium sized businesses, has handed out less than 1 out every 100 dollars allotted to the program during the coronavirus pandemic, per Bloomberg.

The lending program could have handed out $600 billion in loans but has provided less than $6 billion with the program set to expire on December 31. The Paycheck Protection Program, made to help smaller businesses, handed out $525 billion.

Large companies (like Apple) can sell bonds to investors in order to raise cash. Big companies are seen as safe (relatively) so people will line up to buy their debt. Big companies can then raise cash quickly and cheaply. Small businesses who don't have the ability to raise capital at a moments notice by selling bonds were able to get money through the Paycheck Protection Program. Companies would receive a loan that would be forgiven assuming the company kept paying their employees.

Companies that stand in the middle, about 40 percent of the American economy according to Bloomberg, were not able to easily access either type of financing leaving them without much-needed money amid the pandemic and lockdowns.

If the program worked correctly, a midsize business would be able to get a loan from a bank and the federal government would back 95 percent of the loan. The government backstop was meant to limit the risk and entice banks to hand out loans to struggling midsized companies. But it didn't work.

Lending out money to any medium-sized business is a risky proposition during the coronavirus pandemic, one that banks do not want to touch even if the government backs 95 percent of the loan.

For instance, a risky $100 million loan, backed by the government in this case, would still be seen as a risky $5 million loan for the banks. The dollar amount of a loan doesn't impact the riskiness of the loan. The chances that the borrower can't pay his payments remain the same regardless of how much money is backed by the government.

Banks have a bottom line and handing out risky loans is not how banks become succesful. As such, less than one percent of the allotted money has been handed out and the main street lending program has utterly failed American businesses.

Even after the main street lending program fell short, Treasury Secretary Steven Mnuchin is doing all he can to make it even harder for businesses to get cash moving forward. He has decided to move $455 billion in unspent Cares Act funds into an account that former Federal Reserve Chair Janet Yellen needs authorization from Congress to use.

"Most of it had gone to support Federal Reserve emergency-lending facilities, and Mnuchin’s clawback would make it impossible for Yellen as Treasury secretary to restore for that purpose without lawmakers’ blessing," said Bloomberg's Saleha Mohsin.

If the Senate is in the Republican's control after the Georgia runoff and Congress remains divided, it will be hard to imagine Congress making a collective decision and allocating funds in a timely manner.

Essentially, the valuable money that companies need now to stay in business has basically been made untouchable by Mnuchin so Republicans can now use the unspent money as a future bargaining chip when Democrats try to pass legislation in Congress.


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About Ryan Lipton:

Ryan is a student at the University of North Carolina at Chapel Hill majoring in Business Journalism. He has written in the past for SB Nation's Silver and Black Pride, USA Today Sports Media Group, North Carolina Business News Wire, the Daily Tar Heel, and has worked with Ice Cube's BIG3 basketball league.

For more of Ryan Lipton's articles click here.

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