Unsanitized: The Fed’s Emergency Lending Programs Are Killing the Planet

Also still no deal on a relief bill. This is The COVID-19 Daily Report for July 31, 2020.

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First Response

Second-quarter earnings are rolling in, and while the big winner is Big Tech, the big loser is Big Oil. Exxon Mobil suffered two straight quarterly losses for the first time in at least 22 years, and Chevron lost over $8 billion in the last quarter. Royal Dutch Shell, ConocoPhillips, and Total posted losses as well. All of these companies are trading at their lowest levels in decades.

This seems like an inopportune moment to be investing in oil and gas companies, or lending to them. But not if you’re the Federal Reserve and you’re easily influenced by petroleum lobbyists and oil-friendly politicians. We have told the story of the Fed changing the terms of the Main Street Lending Program, at the behest of these oil interests. But three researchers at the Center for American Progress put this all together today, in a report that expands on how the nation’s central bank is increasing climate risk and financial instability by bailing out the oil sector.

Not only is it morally unconscionable to facilitate the burning of the planet by catering to the oil industry, it’s financially stupid. The industry’s crash has been years in the making: oil and gas stocks have dropped 72 percent since 2014, while the S&P 500 has gone up 76 percent. Since that time, companies have sacked 50,000 workers, bringing down the workforce by one-quarter. Nearly every year in the last decade, energy firms have been the top issuers of junk-bond debt, with $72 billion outstanding as of March. There have been over 200 bankruptcies since 2016. There’s not much of an industry to save, and inducing private investment into the sector just magnifies the risk.

Read all of our Unsanitized reports

Compound that with the imperative to green the energy mix, and the Fed is directly and indirectly pouring money into dead companies that will become vestigial organs if we have any chance of maintaining habitable life on Earth. You don’t want banks holding mountains of soon-to-be stranded assets. The Fed is supposed to protect the stability of the financial system; nursing oil and gas firms to health is the exact opposite approach.

CAP’s Gregg Gelzinis made the case for the Fed to restrict fossil fuel investment last November, in a report that I covered. Now, Gelzinis, Michael Madowitz, and Divya Vijay explain how the Fed has bent over backwards to rescue the industry from crisis.

The oil industry lobby, oil-state Sen. Ted Cruz (R-TX), and Energy Secretary and former energy lobbyist Dan Brouilette asked for five changes in the Main Street Lending Program: Allowing more indebted companies to get loans, letting them using the loan funds to refinance existing debt, increasing the loan size above, no commitment to using the money for COVID-19 crisis measures, and no commitment to maintaining employee headcounts. The Fed gave them all five, three weeks after laying out the initial terms to the MSLP in April.

That help is for now theoretical, because the MSLP has only made one loan in total so far. But the Fed’s corporate bond-buying program is also disproportionately targeted to the energy sector. As of July 10, 8 percent of the Fed’s $9.5 billion in bond purchases are in energy. The industry is now pushing for changes to rules in the corporate bond facility that would make more junk-rated oil companies eligible for bond purchases. The Fed’s already breaking those rules by purchasing ETFs that have junk-bond debt embedded in them, another back-door bailout of oil and gas.

Certainly the Fed has benefited other types of businesses. (Cayman Islands hedge funds, for example.) But bailing out the oil industry is particularly egregious, and it should give pause to anyone cheerleading about the Fed’s interventions. Not only does this reward investor speculators and options-loaded oil executives, it “enables oil and gas companies to continue to fuel the climate crisis, which is a clear threat to financial stability,” the authors write.

The report includes five recommendations for the Fed, most prominently cutting off the oil industry from emergency lending and moving them through the bankruptcy process. Other activists are sounding this alarm. Several dozen groups have written to Fed chair Jerome Powell, urging them to offload this financial and climate risk from oil and gas. A separate group called Stop the Money Pipeline is asking for the same.

The Fed’s position is most certainly not neutral, and in this case it threatens planetary survival and financial catastrophe. It should at the least disclose its emissions portfolio and climate risk, and plan to immediately divest of them.

Odds and Sods

My book Monopolized was reviewed in the Christian Science Monitor alongside Zephyr Teachout’s excellent companion Break ’Em Up.

I was on Brad Friedman’s BradCast talking about the Big Tech hearings and the coronavirus relief bill, and Monopolized. Listen here.

I was on Background Briefing with Ian Masters talking about the Big Tech hearings and my book. Listen here.

You can find all of our coronavirus coverage at prospect.org/coronavirus. And reach out to me via email with tips, comments, and perspectives.

Whole Lotta Nothing

Today is the official expiration date of the $600/week unemployment boost, although functionally speaking it has already expired. Tomorrow is rent and mortgage day, although that eviction moratorium has already expired. And there is essentially nothing going on with negotiations on extending these and all the other necessary measures in a coronavirus response bill. We’ve heard some backchannel communications that the White House would drop the liability shield (though would Mitch McConnell put that bill on the floor?). McConnell isn’t even in the room negotiating with Democrats. The Senate left town after passing a procedural advance on a shell bill that literally has nothing in it, a fitting metaphor for this process.

This is not something observers of this democracy anticipate. They figure self-interest and political survival does motivate incumbents, especially in a time of crisis. But two things on that. First, the constituency, especially on the Republican side, has narrowed to stock market investors and large corporations; those two have already been showered with sufficient funds and aren’t suffering. And while the conventional wisdom argued that incumbents fight for incumbency, there’s no roadmap for when the incumbent believes they’ve already lost. Trump’s half-heartedly running on nullifying the election results, and Senate Republicans are largely positioning for the minority already.

Democrats have become the majority party in the minority, looking to save the economy from ruin, which would paradoxically help the president. But Trump doesn’t have interest in it. Improving his political position, in this case, would mean conceding an argument. And that can never happen.

Days Without a Bailout Oversight Chair

126. See “First Response!”

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