Earlier this year, Congress passed the “CARES” Act, which stands for the Coronavirus Aid, Relief, and Economic Security Act. In the legislation, it also created an oversight commission to monitor actions taken by the government, including the Federal Reserve, in implementing the Act. This commission issued its fourth report on August 20, which included a disclosure that the commission will be holding hearings about the Federal Reserve’s new “Municipal Liquidity Facility” (MLF) in the coming weeks.
To date, two borrowers have surfaced for the Fed’s MLF – the State of Illinois, and New York’s Metropolitan Transit Authority. Hopefully, the commission hearings will take a close look at both of these transactions, including whether they comply with Section 13(3) of the Federal Reserve Act, as well as the Federal Reserve’s “Regulation A.”
The State of Illinois is arguably not an “individual, partnership or corporation,” so how can it be the object of loans asserted to be authorized by a statute titled “Discounts for individuals, partnerships and corporations?” The State of Illinois has a $5.7 billion bill backlog, yet the Federal Reserve seemingly did not find Illinois “is generally not paying its undisputed debts as they become due.” The Fed apparently did not “otherwise determine that the person or entity is insolvent,” even as the State of Illinois’ latest annual balance sheet reported $267 billion in liabilities, “backed” by only $85 billion in assets – leading to a reported unrestricted net position of (negative) $214 billion. And the interest rate on the loan closed last Friday assertably lies well below what the market would have charged Illinois, despite the fact that Regulation A calls for a "penalty rate" for emergency loans.