Pennsylvania Republican senator Pat Toomey’s effort to wind down emergency low-interest lending programs for small businesses and state and local governments removes a major long-term business threat to his largest campaign contributors as he looks ahead to a career outside the US Senate, according to campaign finance data reviewed by the Daily Poster.
On Thursday, Toomey threatened to blow up coronavirus stimulus legislation by demanding that the bill remove authorization for the Federal Reserve programs designed to provide low-interest loans to small businesses and governments. Toomey criticized the programs for moving the central bank from a lender of “last resort” to a lender of “first resort” — and he is pushing for proposed language in the final bill that would compel the Fed to wind down programs designed to help struggling small businesses, states, and municipalities.
That is a big win for Toomey’s Wall Street donors, because it curtails lending programs that could offer those small businesses and local governments lower interest rates and fees than the private financial industry currently offers. Those fees are big business: currently, local governments pay $2.7 billion each year in such fees, according to the Internal Revenue Service.
To be sure, the Fed’s emergency lending programs have so far been underutilized, but if they were reformed — rather than eliminated, as Toomey wants — they could threaten profits for a financial industry that has bankrolled Toomey’s political career.
In all, Toomey has raked in more than $4 million from the securities and investment sector during his career, according to data compiled by OpenSecrets. Donors from large banks that do bond business comprise nine of Toomey’s top twenty contributors. They include Goldman Sachs, Bank of America, JPMorgan Chase, and Wells Fargo.
Those financial institutions are among the top ten underwriters of municipal bonds, according to Bond Buyer. They are also represented on key committees of the Structured Finance Association — a corporate advocacy group that has been lobbying on issues related to the Federal Reserve’s municipal and small business lending programs, according to Senate disclosure records.
Toomey, a former Wall Street executive, has announced plans to retire from the Senate in 2022, meaning he may be looking for a new job as he writes policy that affects prospective private employers.
“Toomey and his donors both stand to profit from curbing the central bank’s emergency loan programs,” said Craig Holman, an ethics lobbyist with Public Citizen. “Financial services business interests are anxious to own these loan markets without interference from the Fed, and Toomey reaps a share of their new profits in the form of substantial campaign contributions. It’s a win-win situation for Wall Street and Toomey, though not for the nation.”
Democrats have accused Toomey of trying to prevent the incoming Biden administration from having the necessary tools to combat the economic crisis. Toomey has said the Fed programs could be restarted with future congressional action, but he reiterated that he is trying to shut the programs down right now.
“If they thought they need these specific programs again, I think that’s quite unlikely, but it could possibly happen,” he said, according to American Banker. “Goal No. 1 was to sweep the funds, the unused funds, out of the accounts, and repurpose that money for other purposes. Goal No. 2 was to shut down the three facilities that needed to be shut down. No. 3 was to forbid the reopening of those facilities, make it clear that the shutdown was permanent and cannot be reversed without coming to Congress. And No. 4 would be to ban a clone.”
“A Signal To Bankers That We’re in Your Corner”
Earlier this year, a study from the Municipal Securities Rulemaking Board found that when there are more lenders bidding on state and local bonding business, that competition can drive down interest rates and fees to save borrowers money. Toomey’s legislation aims to restrict the Federal Reserve from participating in that competition.
The prospect of the Fed helping small businesses and local governments avoid higher Wall Street interest rates and fees has generated criticism from the beginning.
Amid questions about why corporations were being granted lower Fed interest rates than state governments, Kent Hiteshew, the former Bear Stearns executive now running the Fed programs, promised Toomey’s oversight committee that Fed lending to states is designed “not as a first stop that replaces private capital.”
In April, the Fed issued a special guidance aiming to make sure the central bank does not interfere with Wall Street banks’ ability to win state and local government business with big fees and higher interest rates. The guidance requires state and local governments to seek loans from private banks before seeking assistance from the Fed.
“The Federal Reserve is trying to ensure that states, cities and counties knock on Wall Street’s door first,” reported Bloomberg News, which quoted one Wall Street analyst saying the guidance “guarantees capital markets or commercial lenders an opportunity to provide a loan before the Fed ultimately funds it.”
The Fed programs could be reformed under a Biden administration to help small businesses and local governments avoid exorbitant Wall Street fees and interest rates — but that is where Toomey’s legislative language comes in. It is specifically designed to prevent that from happening in 2021 and beyond.
“The Federal Reserve banks shall not make any loan, purchase any obligation, asset, security, or other interest, or make any extension of credit through any program or facility established” during the pandemic, says the relevant provision in the stimulus legislation released on Monday.
The actions by Toomey and Senate Republicans “send a signal to bankers that we’re in your corner, we’re fighting for you,” said Robert Hockett, a professor at Cornell Law who has led efforts to urge the Fed to do more to support state and local governments. “[Banks] have had a huge role in constraining both the Municipal Lending and the Main Street Lending Program.”
Hockett said the Fed programs threaten the revenues and profits of the handful of banks that control the municipal lending market and that also happen to be Toomey’s major campaign contributors.
“It’s a surprisingly small number of financiers,” he told the Daily Poster. “The fact that it’s a club makes it really good for them. A small market is advantageous to that small number of buyers. They can charge what they want if there is not a lot of competition when it comes to funding cities and states. The last thing they want is a public option nonprofit like the Fed that they have to compete with.”
Under existing law, the Fed could still try to directly lend to small businesses and local governments — but Toomey’s language could create the political pretext for the central bank to avoid such lending in the future.
“It’s no surprise that Toomey’s priority is corporations, banks, and the financial industry instead of working-class people,” said Maurice BP-Weeks, the co-director of the Action Center on Race and the Economy, which is among a coalition of groups urging the Fed to expand its lending to state and local governments. “Toomey’s been a particular standout in that regard during his tenure in office. We need to be using all of the Fed’s tools that are at its disposal, not curtailing them and handcuffing them in the ways that Toomey and other GOP legislators are pushing for.”