Paul Atkins, Patomak Global Partners CEO, and banking consultant Bert Ely will discuss the numerous programs Congress, in response to the COVID-19 pandemic, has directed the Federal Reserve to implement to provide financial support to America's financial institutions, state and local governments, and the broader economy. Much of this support will consist of the Fed purchasing bonds and other debt instruments, which could balloon the Fed's balance to a record size. Some of these support programs were undertaken after the 2008 financial crisis; others have never been tried before. Paul and Bert will also offer their views as to how these programs might play out, and their potential longer term impacts on the U.S. financial system and the broader economy – all of which is taking place in an election year. The latter portion of this one-hour teleforum will be open for comments and questions from participants.
Paul Atkins, CEO, Patomak Global Partners
Bert Ely, Principal, Ely & Company Inc.
Dean Reuter: Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group teleforum calls, become a Federalist Society member today at fedsoc.org.
Micah Wallen: Welcome to The Federalist Society’s teleforum conference call. This afternoon’s topic is on “COVID-19: Actions Taken by the Federal Reserve.” My name is Micah Wallen, and I’m the Assistant Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today’s call.
Today, we are fortunate to have with us Bert Ely who’s a financial institutions consultant. We also have Paul Atkins who’s CEO of Patomak Global Partners and former SEC commissioner. After our speakers have their opening remarks we will then open up the floor for an audience Q&A. Thank you both for sharing with us today and, Bert, the floor is yours.
Bert Ely: Okay. Thank you very much, Micah. And Paul, I’m glad to be doing this program with you. I’m going to start off by just trying to present some numbers here to give listeners a sense of the magnitude of what the Fed is doing, not only in terms of directly providing credit to the various sectors of the economy but also as buying Treasury debt that is financing the deficits that the federal government is running. Since the first of this year, the Fed’s assets—that is the securities and loans and so forth it’s bought—have increased by $1.8 trillion, just since the first of the year. That’s a 44 percent increase in where it was last year. And just in this last week, their assets increased $260 billion.
So this gives you some idea of how big it is when you consider that the total amount of economic activity in the fourth quarter of last year was 5.4 trillion. Put it another way, the Fed balance sheet now is equivalent to roughly what the size of the economy was in the fourth quarter of last year. So it’s really enormous and tremendous growth since the crisis developed.
Now, in addition to buying Treasury debt from the Fed, which essentially is being financed by the banking industry, it is also engaged in a number of lending programs that are there to not only backstop the private markets for credit but also to reactivate some various funding facilities that last were in operation in the aftermath of the 2008 financial crisis. And just to run through what some of these are, you have what are called the Main Street Lending Program, which is basically to lend to smaller size businesses. You have a liquidity facility for municipal bonds, which is another major market; something called the Term Asset-Backed Securities, which is basically buying asset-backed securities such as mortgage-backed securities; buying debt issued by state and local governments and corporate debt is -- and even junk bonds that the Fed stands ready to purchase.
One of the things to keep in mind about this is all of this is very much in motion. Changes are being made as we go along. And whatever exists today undoubtably will be changing in the coming weeks and months. One particular area where there’s a lot of uncertainty now as to what the Fed may do has to do with mortgage-backed securities. We’re going to have a lot of mortgage defaults, in part encouraged by the CARES Act.
And that is going to create very serious liquidity problems for mortgage servicers who are obligated to collect on the mortgages and forward payments to the owners of mortgaged backed securities. And they have to make those payments to the securities owners even if they haven’t collected on the mortgage, which creates very serious liquidity problems for mortgage servicers, many of whom are independent of banks, and they don’t have that much capital. So my expectation is that we will see yet another Federal Reserve/Treasury lending facility be put in place to deal with the debt problem so we don’t get widespread problems in the financing of home mortgages.
So that’s just a very quick overview. You could almost say that there’s almost no sector of the economy and the government that the Fed is either not lending to directly or indirectly is providing market support by buying securities that are issued in those sectors of the economy. So Paul, let me turn it over to you for your comments.
Paul S. Atkins: Well, thanks, Bert. That was a good brief overview. I also wanted to echo this and say, you know, this is obviously a huge growth of the Fed’s authority and influence in our economy. And some of it really mirrors what happened back in the financial crisis of a dozen years ago. And I have been a commissioner of the SEC and left office in an incredible feat of market timing six weeks before Lehman actually blew up.
And then after the SEC, I was on the Congressional Oversight Panel for TARP. So I lived through the TARP program at the time. So it’s sort of déjà vu all over again, as Yogi Berra said, where a lot of the programs that the Fed has rolled out this time is sort of a dusting off of that play book back from 2008.
And if you remember back in 2008, the Emergency Economic Stability Act was adopted by Congress on the 3rd of October. And that was -- and when President Bush signed it into law. But that was after the first round had failed in Congress. And then ultimately, that law that established the TARP program was adopted with bipartisan support.
And TARP, unlike what’s going on today, was only $700 billion. That was $250 billion to banks, $19 billion to credit market, $80 billion for the automobile sector, $68 billion to one company—and that was AIG—and then $33 billion to home mortgage modifications. And ultimately, out of that $700 billion, 250 was left unused. Obviously, that’s not the case today because we’re looking at literally trillions of dollars, and maybe even the price tag for the CARES Act might be almost at 3 trillion once all is said and done.
So here the Fed has responded, as Bert was just listing there, with a lot of the similar types of programs from the last time. They focused on lowering interest rates. They’re giving generous loans to banks and securities firms and facilities to extend create to blue chip companies and then now most recently to munies. And it’s been just a series of problems.
First of all, we had -- even going back to last year, there were issues in the repo market where there was really big anomalies in pricing there that you had everybody scratching their head and coming up with various suppositions as to why that was the case. So anyway, at the beginning of this back in mid-March we saw problems in the repo market. Then we had problems in the commercial paper market, both primary and secondary.
We had issues with respect to options market makers, then of course munis, and then, as Bert was mentioning, the real estate market, both residential and commercial mortgage backed securities and then REITs that are out there. That’s all the pressure being put on with economic activity coming to an immediate halt in both residents, homeowners, and commercial folks not being able to pay their rent and their mortgages on time, which, of course, has immediate effects -- problem with respect to all of these securitized types of things.
The Fed has been very good, I think, as far as stepping out and addressing these issues. They realized, I think, early on that a lot of the things from Dodd-Frank were impediments now for banks to act quickly. So going back even to the 17th of March, the Federal Reserve put out, I thought, a really good statement. And they’ve been reiterating this time and again that they’re encouraging -- here I’m quoting from this one on the 17th of March.
The Fed and the Office of Control of the Currency are encouraging banking organizations to use their capital and liquidity buffers as they respond to the challenges presented by the effects of the coronavirus and that “the agencies support banking organizations that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner.” And they want -- there was just a warning there at the end to act prudently. But those are all magic words to banks because, as I learned back in a dozen years ago in the TARP program, no good deed went unpunished.
And so those memories are logged in the financial sector as to the TARP program and what came after that with the political retribution and whatnot. So this time around bankers are leery of getting in, and they needed that green light from the regulators that they could go ahead and basically use those -- that those regulatory controls were going to be released a bit and allow banks to basically make markets like they should in some of these markets—commercial paper and others—and especially then lend to people who need those particular funds. So I thought that was very good.
And that’s had immediate effects, including there’s been -- Bert didn’t mention it, but the money market mutual fund industry, of course, had issues, not in the normal -- the government funds but similar to what went on back a dozen years ago in what’s called the prime institutional funds that invest in commercial paper, as well as government securities. So there was -- through the CARES Act, there was a money market guarantee fund that was set up. It hasn’t been used. It has been set up. It wasn’t used back a dozen years ago. I don’t think it was necessary, frankly, this time around.
I think the best thing that they did was signal to the banks that they could be active in the commercial paper market. So through another program that Bert mentioned called TALF, the Term Asset-Backed Securities Loan Facility, that has -- just setting up those and the noise of those being around I think has done a lot of good in the marketplace. So let me pause there Bert, and maybe you have something you want to add. If not --
Bert Ely: Well, a couple of things. One of the things we haven’t talked about yet -- and that is what is the impact of this going to be on the banking industry? There have been very few bank failures in recent years, again, reflective of the good economy. As one who’s followed this very closely for literally decades, I have an expectation that there will be an increase in failures, hopefully none that will shake the financial system. But I think we will see an increase there, particularly for banks that have heavy exposures to credit cards, car loans, commercial real estate, and the like. That’s just going to be inevitable consequence of what happens, and hopefully it will not be as severe as what happened following the 2008 financial crisis.
And just a note about no good deed goes unpunished, as one who’s done a lot of expert witness work in failed bank situations, I expect that there will be litigation brought by the FDIC in some of these failed bank situations. Hopefully this time around the courts will be, shall we say, more sympathetic to the defendants in those cases because the difference today with any issues that may arise in the banking industry versus what happened after the 2008 crisis is that, to the extent that banks fail today or take serious loses, they’re really innocent victims.
There were arguably lots of abusive and sloppy lending practices by the banks prior to the last crisis, but it’s very different this time. And I would hope that, politically, that is recognized when we eventually get past the current crisis.
Paul S. Atkins: Some of -- as you’re talking about there, the effect on the banking industry -- I mean, some of the -- I think once the dust settles after all of this there’s going to have to be a relook at the Dodd-Frank rules. Again, that was a 2,319-page statute that was adopted very hastily without a lot of subject -- substantive hearings. And so I think during this crisis now, from what I’ve heard from people at the Fed and elsewhere is that there are a lot of different dials and whatnot that the regulators have at their disposal in this machine -- the contraption that Dodd-Frank has put together. But they’ve found that not all the dials are really connected to anything that effects anything and that there are sort of anomalous results as they twist some and turn others.
So I think there will be a move to try to rationalize some of this and especially the complexity of it and how it has -- with the Volcker Rule and others has really decreased the ability of banks to act as market makers in various markets where they should be active. So one example of that is just the amount of concentration in some areas. Like the repo market is one and also, for example, even something esoteric about, for example, options market makers. And options are a very useful means for people to lay off risk and hedge things.
But there’re really only two big banks that participate in that marketplace. And the current capital rules force banks to look at the total exposure—it’s called the current exposure method—and not look at the effect of hedges and other ways that they offset their exposures. So the Fed and FDIC and the other regulators, OCC, adopted a change for that, to move away from this current exposure method to what’s called SA-CCR, the standardized approach for counterparty credit risk. But that’s not slated to come into effect for another year and a half.
And so, in the meantime, there is a lot of exposure to basically the stopping of credit flowing out, in this case to options market makers, but the same for other markets as well. So the rules that came out of the financial crisis are creating much more volatility and much more risk in this system than otherwise would be the case through the normal prudential regulatory standards that the bank regulators could take.
Bert Ely: Paul, let me ask you a question on a somewhat different topic. A lot of concern has been expressed, particularly in recent weeks, that the Fed is, by becoming so active and financing the economy and getting way from its traditional monetary policy activities, is losing its independence and getting swept up too much in the political issues of the day. What are your thoughts about that, and how might that play out over the next few years, particularly once we get past the crisis?
Paul S. Atkins: Well, I think that’s a good point. And I think that’s not lost on the members of the board of governors either. So they -- but there’s not a lot of alternative right now for them to step in and help with because, again, you have this regulatory overhang. And there’s not a lot of natural movement out there because of the heavy burden that’s been placed on these institutions coming out of 2010.
So if you look at the balance sheet of the Fed, if it’s going to surpass as some people are predicting $9 trillion by the end of this year, that’s more than 40 percent of GDP, at least GDP the way it was. Who knows? If this lockdown continues, that may be even a bigger percentage. But if you look at what happened back in -- after the financial crisis, the Fed was never able to unwind its balance sheet to less than $3.8 trillion. And so now it’s more than doubling that.
So that creates, as you’re saying, Bert, a political headache, I think, for the future actions of the Fed and will really limit their ambit of operability to take on more things. So the pent up between that deficit, that would be, what, $24 trillion people are saying? That’s clearly never going to be paid back. So is that just a structural deficit we’ll always have? And then as long as we meet our current obligations then that’s okay. But think of what that means for the future and potential inflation types of pressures. Right now, we have to worry about deflationary pressures, of course. So it’s a very complex mix.
Micah Wallen: We have an immediate question in the queue, so we’ll go ahead and move to that first caller.
Wayne Abernathy: Good afternoon, gentleman. Wayne Abernathy here calling. I really appreciate your presentation, very timely, and really appreciate your focus on the facts as well as the analysis that you’re giving. I’m going to give you two real quick questions, but you can pick whichever one you want to answer. But they’re kind of related.
The first one is, so far from what is being provided in terms of assistance targeted at banks, is that assistance designed to be helping banks or to be using the banks as conduits to provide assistance to others?
Then the other question is -- it is really one I appreciated from Paul. Talk a little bit more, if you would, about the assistance that has been provided for the money market funds, or at least that has been put on the table to be used by money market funds. Your point was it probably wasn’t needed ten years ago and may not be needed now. So whichever one of those questions you want to answer I’d be thrilled. Thank you.
Bert Ely: Let me take your first question, Wayne, with regard to assistance to the banks. The banks play a vital intermediary role between basically the economy and the Fed by being the retail lenders, if you will. And it’s very important to keep the banks functioning as credit monitors and serving as an intermediary with the Fed.
So the Fed is assuming some credit risk, but it is very dependent upon the banking industry to do what it traditionally does. And in effect, the banks are discounting their paper back to the Fed, and the Fed is serving in the traditional lender of last resort that has been the typical or the traditional role for central banks. So that’s a very important linkage between the thousands of banks we have in this country and other credit intermediaries too and the Fed. And I think that the thing the Fed certainly appreciates -- and that is to keep as much of that mechanism in place as possible and to keep the banks involved from the standpoint of retaining some credit risk on the loans that are getting laid off on the Fed. Paul, want to add to that?
Paul S. Atkins: So Wayne, you probably see this at the ABA. But because this is at least to date a liquidity and not a credit crisis, I think the banks—at least what I understand—the banks are holding up well so far, as far as their strength. And a lot of this was, you know, as I was saying before, trying to unleash them and let them do their job as intermediaries in the marketplace rather than sit on the sidelines scared to death about what their bank examiner might tell them or raise an eyebrow about, “Oh, well, I’m not sure that’s so prudent.”
They’ve been through that before. Every recession in the past has always had the equal and opposite reaction from the bank oversight folks. So anyway. So I think people have been concerned about that, and that’s why it was so important and so timely and welcome for the regulators to come out back in mid-March and emphasize that they want the banks to play their needed role in the marketplace. And I think that had almost immediate effect, as I was saying before.
So then that goes -- so I think the assistance right now is not really to help the banks. So that’s why it’s, I think, different from a dozen years ago. But it’s really to have them go out there and then, as intermediaries, as conduits -- and as we were seeing with the CARES Act and the various programs that are being put forward like the Paycheck Protection Program and those sorts of thing, to have the banks be that -- fulfill that intermediary role.
So with respect to money market mutual funds, I think that’s -- there was a tremendous innovation that came back in the 1970s to provide a lot more openness in the system. We would still have, maybe, interest rate controls by the Fed and others but for the opening it up and disintermediation of the money market mutual funds back in those days. So this time around I don’t think that these various facilities are needed, the Money Market Mutual Fund Liquidity Facility and the facility that was aimed for commercial paper, the Secondary Market Corporate Credit Facility.
Both of those were aimed, you know, to sort of help support the money market mutual fund area. But that was at a time going back into last month where even treasuries had a liquidity crisis. People didn’t want them, and they were fleeing to cash. So if you have that, I mean, nothing -- no -- something like a money market mutual fund is going to have problems with meeting its obligations for redemption. So because the regulators stepped in, that restored liquidity to the marketplace. So there have been no problems so far in that area.
So those, you know, as we go forward with -- as we were talking about, with the real estate market, there, if things -- if this is a prolonged shutdown and companies and individuals cannot meet their obligations under their rent or their mortgage, then you might have detrimental effects, you know, with respect to financial institutions that have loans out there that we don’t want to see that happen. So that’s why the scramble to try to get a band aid here on the economy until we can get back up and functioning full time.
Micah Wallen: Well, we actually just did have a question come in, so we’ll move to that caller.
Bert Ely: Oh, okay. Take the question then.
Steve Dewey: Yes, hi. My name’s Steve Dewey, and I very much appreciate this teleforum. It’s been very interesting. So a question I have to both of you, do you have any sense of what we might be seeing in the coming months in terms of bank failures and whether you think any SIFIs might be at risk of failing.
Bert Ely: This is Bert. I’ve been in the bank failure prediction business for several decades now, so it’s something I worry about a lot. And I’ve been taking a look at the situation in just the last couple weeks. The banking industry is strong and in good shape coming into this crisis. But the tide is going out, and we’ll soon see which banks maybe haven’t been quite as good in their credit risk management as they should have been.
And there are areas of bank credit risk that the regulators are concerned about. Consumer loans, auto loans, energy loans, commercial real estate mortgages are just some areas of concern. So we undoubtedly are going to not only see some failures, but we’re probably going to see some shotgun mergers too where a bank that’s weakened by losses gets acquired by another bank. So much is going to depend on how quickly and how effectively the regulators are able to move in dealing with problems that do emerge.
But while I see certainly an expected uptick in mergers -- or failures, we’ve had very few in recent years. If the regulators move in a timely fashion, then I don’t think it will create serious problems for the FDIC. I certainly do not -- would not expect a need for a taxpayer bailout of the Deposit Insurance Fund as occurred with the S&Ls back in the ‘80s.
But there are going to be stresses in the banking industry. And hopefully the regulators will move quickly to identify and deal with the problems that develop. And again, I don’t think it will be a problem in the city. I think where the problems will be will be in smaller banks, at community banks, regional banks, and institutions of that size.
Paul S. Atkins: Yeah. I agree with that as far as I think we’re still hopefully at a point where if we can get the economy opened up again and economic activity starting that we won’t have huge problems. If this lasts much longer, you know, a month or two, then I think there will be a lot of businesses that will not open up again. And that would be, you know, creating a big havoc. So we’ll see how it goes.
But I think the -- and I agree with Bert. I don’t think as far as the SIFI banks go I doubt that there’re problems there. But again, it just depends on the individual bank and how it’s exposed and then how these various programs will be able to act as a bridge for them to -- for those industries to continue.
So I think as far as the way that the money is being pumped out of the Small Business Administration through these various programs is focused on banks and at least the institutions that are part of their 7(a) program. And so there are a lot of other non-bank lenders that service a lot of small businesses, say, hairdressers or barbershops or whatever, where they don’t necessarily have a real banking relationship other than the proprietor’s checking account.
So it’s going to be interesting to see how this develops. Obviously, the PPP program just ran out of money, which is no surprise I guess. But is that going to be reupped, whether the political winds are going to effect that, and then are there going to be other channels through which the money’s going to go to reach some businesses that, again, may not be able to reopen but for that kind of lifeline.
Bert Ely: You know, one sector that I have concern about it—as do many others—and that’s the energy sector, given the very low level of oil prices today and the likely continuation of fencing this market-share battle going on between Saudi Arabia and Russia. And we may see some -- that may be one sector of the economy that creates some credit problems for the banking industry that might even lead to a few failures. Again, I don’t expect anything like what we saw in the ‘80s down in Texas with the massive wave of failures we saw there. But we could see some stress in that sector of the economy that spills over into the banking industry.
Micah Wallen: We’ll go ahead and move to our next caller.
Caller 3: Yes, the last questioner covered the lion’s share of my question, but I’ll supplement it a bit. What about banks that, in order to shore up their own strength, rather than calling in the Fed are cutting back on existing lines of credit? A lot of small businesses operate by lines of credit. Let’s say a small business has got a half million dollar line of credit, and he’s used $100,000 of it. And the bank calls him up next month and says, “You know, we can make available the remaining $400,000.” That’s one aspect.
And what about banks simply failing to extend credit to banks -- to companies that walk in today and normally would qualify for a loan? The bank’s saying, “Well, times being what they are, we simply can’t -- we can’t loan you the money.”
Bert Ely: Well, I think that that’s -- on both points, I think that’s a legitimate concern. I’ve seen a number of news reports in just the recent weeks about banks not only cutting back on lines of credit but also discouraging companies from drawing down a preestablish line. And again, I think this is where banks are looking at the economic situation. We’re on the verge of -- maybe even in a recession, potentially a long and serious one. And they’re basically hedging on their credit risk by tightening up. And frankly, that’s what bankers should be doing in a situation like this.
And I think that particularly as long as we’re on the downside of whatever we’re going to be entering into that bankers are going to be understandably cautious. And that is not necessarily positive for the economy. That’s bankers doing what bankers should do when you’re sliding into a recession and there’s just a lot of uncertainty as to the depth or duration of it.
And I think it’s particularly unfortunate for those who need the credit at this time. But the reaction of the bankers is not surprising. The other thing to keep in mind is that they’ve always got the regulators looking over their shoulder, too. I don’t know whether you want to add to that, Paul.
Paul S. Atkins: Yeah. So I agree. I think right now, well, I know personal experience from a contractor, a builder, whom I was talking to the other day. That actually happened to him with his long-term LLC that he had with a bank in a long-term relationship and the bank just completely cut him off. So I think -- I imagine in the building industry that’s an issue and other industries under pressure, including oil and gas and things like that.
So like Bert said, we’ve seen that in the past going all the way back to the saving and loan crisis and the aftermath of that and in the other sorts of recessions we’ve had. That’s how bankers react. But again, that’s why the Fed and the OCC came out, I think, very strongly a month ago where they said we want banks to use -- this is a time when they need to put their capital to work in events like this. So we want them to use their leverage and their liquidity buffer so that they will help the economy and help homeowners in doing this. So that’s the jawboning. That only goes so far. So obviously, other things then take over, both the fear of oversight and then also just wanting to have a strong banking business.
Caller 3: It’s a bit of a herd instinct. It’s like hoarding toilet paper. And the government can tell you just to buy two rolls. But when you get to the store and see ten, you’re going to buy ten. If you think the economy’s going to go down, that means you’re not going to be able to get the money in the future. It seems to me there could be a herd instinct set in with the smaller banks in particular.
Bert Ely: I think the concern is people are basically all reading the economy the same way right now -- that we’re undoubtedly in a recession and huge uncertainty about how it’s all going to play out or how quickly. So I think bankers are supposed to be conservative in their lending. They have a relatively little amount of capital, given their asset size, and they need to be conservative. So this is not to say that bankers won’t overact to it.
But the thing to keep in mind from their perspective is just a huge uncertainty that exists right now -- so where the economy is going. So it’s reasonable to expect the bankers to be cautious in an environment like this. Hopefully, we’ll get to the bottom of this, and then they can start loosening up.
Micah Wallen: All right. We’ll now move to our next caller in the queue.
Warren Belmar: Hi, this is Warren Belmar with a human resources question. The Treasury and the bank regulatory agencies are faced with enormous tasks in front of them. How is the staffing levels? Are you comfortable? I know with the problems on confirmation process a lot of people have chosen to not enter into government service. But now we need to best and the brightest on board. Are there obstacles to that, or could we feel comfortable that we have the right people in place already?
Bert Ely: I’ll defer to Paul on that one since he’s been in the government and I haven’t been.
Paul S. Atkins: Well, we have -- so I know that the folks at Treasury, SBA, and then at the bank regulatory agencies are working night and day. Same with SEC, CFTC, although they’re not so -- those last two are not so central to all of this. But anyway, there are people working hard, of course. And we do have a shortage -- there are a lot of places that are -- positions that are unfilled or being filled by acting folks. So that puts a lot of pressure on the people who are actual confirmed and in place.
So unfortunately, the politics that’s being played over the last three years with respect to confirmations where Senator McConnell has done, I think, a very good job in keeping going to try to get people confirmed. But as we all know, there’ve been games played that has slowed the whole process down. So in times of crisis, that’s where you really notice that there are shortages. When you call every person on deck, there’s still -- you could still use more.
But anyway, I think we have good folks who are smart and hardworking and creative. So they are -- they’ve been responsive. Obviously, I’m sure that they’re making mistakes here and there, but I haven’t really seen that many. And they’re working to correct them and be responsive.
Bert Ely: Warren, if I could add something to that, this crisis is so different than, shall we say, the typical financial crisis such as we had in ’08 in that the roots of it lie totally outside the banking system. We’ve never had anything quite like this before. Even though we talk about this potentially being almost as bad as the Depression, this is still a different type of crisis for which there’s no roadmap. And I think that’s what makes this whole environment so challenging for everybody, including bankers and the bank regulators and other financial regulators.
Paul S. Atkins: Yeah. I think we should -- to that point, I think it’s important to reiterate that this is not a financial crisis yet. And at it’s heart, it’s a -- whatever. It’s --
Bert Ely: A health crisis.
Paul S. Atkins: And then we’ve had different reactions by various parts of the government. But essentially if the government tells you that thou shalt not conduct business and stay at home, then that’s pretty detrimental to economic activity. So again, I think the sooner that ends -- but then people are going to have to accept risk, and that’s the thing that’s going to be telling afterwards where what are attitudes going to be as far as individuals being comfortable with the risk going to work or not or going to the factory and working in the plant to turn out products. And we see now closures of different types of plants around the country because of outbreaks of the virus.
So how’s that going to work when things are reopened? That was my problem really from the beginning. To tell people to shut down is one thing, but who’s going to blow the whistle and say it’s okay to come out of your cave now? And then how will people react to that?
So a lot of this is yet to be seen, obviously, and that will have an effect on economic activity. But just as long as we -- people have been talking about keeping the number of folks, the crush at hospitals and for ICUs manageable. So that seems to have been working. But obviously, we can’t continue this forever.
Micah Wallen: All right. We’ll now move to our next caller in the queue.
Jim Gagel: Thank you. Thank you very much for this great conference. My name is Jim Gagel. I’m an attorney here in Miami. My question really comes from us little guys. I have a law firm of seven people. We’ve been with Bank of America for 30 years. We have great credit with them. And our application for the PPP has been ignored, really. We’ve gotten no response. Of ten or so people I know who have applied for money, two or three have received it. Seven or eight have not.
So is $350 billion really going to have an impact. Is another $250 billion going to have an impact? Does any of that really matter given the fact that the banks have these kinds of -- this culture and conservative culture with respect to credit? We represent 60 percent of the economy, and I don’t see anybody around me who has really benefited from this particular program. So my question is what’s the point? Where are we really going with all of this?
Bert Ely: This is Bert. Just to toss out my opinion for whatever it’s worth is I would say it’s still in the early days. The money has just started to flow. And I don’t think it’s had its full impact yet. And it’s also clear that, first of all, the SBA has had problems, computer problems, technical problems in processing the applications. And I think it’s clear that additional money needs to be appropriated for it, which presumably Congress will do.
So this is one of those things where it’s not like turning on the ignition switch on the car. It takes a while to get it going. And I think that’s just the practicality of what we’re dealing with today, unfortunately. Paul, do you have any thoughts about that?
Paul S. Atkins: So I appreciate the question, and I think it’s a factor, from what I understand anyway, of the huge flood of applications that the banks have gotten. And again, as I mentioned before, because they decided to do this through the 7(a) program, not every bank is participating in that. It sounds like yours is. But it probably comes down to how swamped they were because the one thing that’s troubling for me is that apparently the word on the street is you’re a chump if you don’t apply for this free money.
So it sounds like your firm -- you know, you really need it because you’re small. I don’t know what your situation is. But there are others that I know out there that have -- like not for profits, for example, that have money sitting in the bank. And they have a buffer for things. And some of them are applying anyway, even though they don’t really necessarily need it. But they’re doing it, quote/unquote, just in case we do. So that, I think, is part of the problem.
And what I point people to is, if you look at the PPP loan application, one of the first couple of representations is that something like “under current economic conditions, the applicant certifies that this loan,” or however it’s termed there, “is necessary for continued current operations,” or something like that, “of the firm.” So I think that’s really important. And if somebody can’t certify that, if it’s not -- you’re not going to close your doors or whatever without that loan, then I think there may well be investigations to come. I think -- wherever you have limited amount of money and then it gets scarfed up, and then who knows what’s going to have in the fall or thereafter.
We have part of the CARES Act institutes a thing that was similar to what I served on under the whole TARP thing, the congressional oversight panel for TARP. This one sets up a congressional oversight commission for pandemic relief and then also sets up a special inspector general similar to what was under the TARP program. But here’s a special inspector general for pandemic relief who’s going to look into, you know, waste, fraud, and abuse.
So that’s the inevitable thing. So I think people should be cognizant that the pendulum always swings. So I think you need to be sure that you can make those representations because there is a criminal penalty of 18 U.S.C. § 1001 that applies on those particular applications.
Micah Wallen: Bert, I will toss it back over to you.
Bert Ely: Well, I’ve got a couple questions I want to put on the table here I’m sure Paul has some thoughts about. Number one is the Federal Reserve’s unwind challenge once we get past the crisis. They have this huge balance sheet now. As of a couple days ago, it was $6.4 trillion in size and will undoubtedly continue to grow. And then kind of related to it is my sense that the Fed may end up taking some credit losses on some of its multitude of programs.
And Paul, I guess a question I have for you along that line, and that is, if there are credit losses, as I fear may be the case, what kind of a political blowback is the Fed going to get or might the Fed get because of that?
Paul S. Atkins: Well, I think that’s a great point to bring up because, as I was saying before, the never really were able to unwind the whole QE programs that they had and the Maiden Lane 1 and 2 and that sort of thing. They got it down to three and a half billion, 3.8, something like that. And is that because of the quality of assets? They didn’t want to move the markets or -- whatever the impediments were for them to not be able to unwind that balance sheet is now going to be piled higher and deeper with respect to, if they get up to $9 billion on their balance sheet, that’s, I think, a worrisome thing, just that overhang on the market.
And they probably will have credit losses in this because they are now -- in some of these facilities, they’re agreeing to take lesser credit quality. Back in the TARP program it was only investment grade, and now they’ve gone below that in the name of kind of servicing industries that may be in trouble and that sort of thing. So I think we’ll have to watch out.
And then the political blowback for that I think may be less than it might otherwise be just because of the crisis situation that we have now and the really broad impact this is having. Again, people are fickle. Politics is fickle, so who knows what sort of retribution there will be if it turns out that there are big credit losses.
Bert Ely: I will not be surprised. I would be surprised if there weren’t losses somewhere along the line and finger pointing because of it. But I think it just comes with the territory. I think if they try too hard to avoid losses and don’t take any at all, then arguably the Fed programs will have been too conservative and have possibly impaired the recovery from the crisis.
Paul S. Atkins: I agree with that.
Micah Wallen: All right. We did have a question come in the queue, so let’s go ahead and try to fit in that caller.
Steve Dewey: Hi, this is Steve Dewey again. I actually had a follow up question on my previous question about potential, possible bank failures. Assuming a worst-case scenario with a SIFI failing—let’s say a bank over $150 billion in assets—do you see that being resolved with the Orderly Liquidation Authority that’s currently on the books with the Dodd-Frank Act? Or do you think the Fed would simple just bail them out?
Bert Ely: I’ll take that one. I don’t think we will see a bank of that size actually liquidated. And the reason why is bank liquidations are very destructive from an economic standpoint because of all of the business relationships, particularly on the lending side, that would be disrupted from it. I think what you would see would be a merger that would, shall we say, be engineered in such a fashion that there would be -- that would keep the banking entity in place. Maybe it becomes a subsidiary of another bank. But its business operations would continue. And then the question is how much, if anything, would that cost the government?
And let me cite an example where you had a large failure that didn’t cost the deposit insurance fund a penny, and that’s Washington Mutual. And I think that what becomes important in these situations -- if there’s a large bank, a SIFI, if you will that is in serious trouble, what we have to hope for is that the regulators—and especially the Fed because there’ll be a holding company. The Fed will be the regulator of the holding company—that they’re on top of it enough that they can move quickly enough to find a marriage partner, as happened in the WAMU situation, so that the institution is merged into a stronger institution before there is any actual loss to the deposit insurance fund or otherwise to the federal government. And again, there’s some hope in there. But also, I think it’s not an unreasonable expectation.
Paul S. Atkins: Yeah. Well, one thing that strikes me here is -- well, I think Title II of Dodd-Frank is so bad it needs to be scraped and done again. So it would be -- in a way, it would be interesting to see how, if it were actually necessary to try to put it into action, then it would be shown to be so ineffectual and problematic that it would be very ironic. But I think one thing, we’re very kind of U.S. focused on all of this. I think at least our banks before and leading up into this whole crisis were pretty solid by all accounts.
But if you look around the world -- remember this is not just a U.S. problem. This is a worldwide issue. So especially in Europe and whatnot where the banks were not necessarily doing so well, we could have -- when people talk about black swan events. It could come from not domestically but sort of events abroad that then has reverberations through our markets here. So that’s one thing that we have to keep a watch out for.
Bert Ely: I would really reinforce that too because I have some very serious concerns about some of the banks in Europe, particularly countries like Italy. But also, there’s some weak banks in Egypt too that we don’t want to overlook.
Micah Wallen: I guess, with about a minute left, Bert, Paul, do either of you have any closing remarks for us today?
Bert Ely: Paul, you go.
Paul S. Atkins: Since we’re talking to a group of lawyers here, I just wanted to bring up the whole issue of litigation. And again, having lived through the last round, I think there’re going to be -- as far as when things pick back up, as companies try to decide “Do I open back my factory? Do I open up my trading floor?” or whatever, when you think about what people’s attitudes are going to be as far as risk aversion or risk taking, personally, I think all that’s going to come into play. There are lots of plaintiffs lawyers out there, obviously, who will be looking for ways to bring actions.
So I think as we get through this crisis, we have to then look to the future as far as what might happen in that regard, leaving aside any government investigations or whatever, as I mentioned, with respect to Congress will have its own committee that they’re setting up. And then we also have that special inspector general. So as far as lawyers go, I think there is a lot of work that’s going to have to be done counseling your clients up front as to what it means, what risks they’re going to bear, how worker’s comp helps or it doesn’t help or what other sorts of things might come out from employees, from other entities as well. So that’s one thing to keep in mind also.
Bert Ely: And I would just add that I would hope—and this may be naïve on my part—that when we get past this that there aren’t strong political sense of retribution, that someone has to pay. There was a lot of that that came out of the last crisis, and I would hope that that will not occur as we come out of the current one. That may be wishful thinking on my part, but that’s my wish.
Micah Wallen: All right. Well, on behalf of The Federalist Society, I’d like to thank both of our experts for the benefit of their valuable time and expertise today. And we welcome listener feedback by email at firstname.lastname@example.org. Thank you all for joining us. We are adjourned.
Dean Reuter: Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.