Fed’s Power to Pump Corporate Debts Curbed by New Law

(Bloomberg) — When Congress gave the Federal Reserve $750 billion of emergency firepower to backstop the country’s biggest companies, some lawmakers insisted on inserting a clause that now threatens to undermine the program — and could pose a major problem if markets go haywire again.

Under the stimulus bill passed last month to combat the coronavirus crisis, the central bank is wading into corporate credit markets for the first time since the 1950s. One Fed facility will lend directly to companies and another will buy bonds in the secondary market. Yet the legislation also imposed a key condition: Only a borrower with “significant operations in and a majority of its employees based in the United States” is eligible for Fed support.

That wording was left deliberately vague, according to people who participated in the congressional horse-trading, and may leave out hundreds of companies with far-flung operations, including Coca-Cola Co., General Electric Co. and Mastercard Inc. No one knows for sure.

“There is some confusion,” Ron O’Hanley, chief executive officer of State Street Corp., an administrator and custodian for several Fed credit facilities, said in an April 23 interview on Bloomberg Television. “These programs were stood up quite quickly.”

Future Borrowing

The situation is creating headaches for Fed officials at a time when the central bank is playing a critical role preventing the Covid-19 outbreak from crushing the economy, people familiar with the matter said. In practical terms, restricting what it can and can’t do means the Fed might not be to supply all the liquidity needed to prop up prices if there’s another meltdown in credit markets.

And while the worst of the strain on markets seems to be over, no economic forecaster can yet predict the shape of the recovery. Even the strongest of companies may struggle to borrow in the future.

Also hamstrung is BlackRock Inc., the investment firm retained to manage the corporate lending and bond-buying facilities. Fed officials and BlackRock executives are working out how to execute the program under the legislative constraints, the people said, declining to be identified because of the sensitivity of the issues.

Spokespeople for the Fed and BlackRock declined to comment.

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