In just a few short weeks, we have seen severe shocks to the economy and capital markets. The Federal Reserve, the Department of the Treasury and Congress have undertaken unprecedented actions to buy financial assets, unclog the pipes of the financial system and increase its capacity. Congress has also taken swift action, passing three phases of stimulus packages as of the time of this discussion. SmartBrief sat down with SIFMA President and CEO Kenneth E. Bentsen, Jr., to examine the actions thus far, what matters most for the financial markets, and what might lie ahead.
Markets have been volatile, to say the least. What happened?
In mid-March, as people started to see the virus spread, we started to see pressures in the markets. The first signs emerged in repo markets, then Treasury markets, then securitized product, muni and corporate markets. There were enormous one-way flows from risk to safe assets, and the ability to absorb flows was beyond the capacity of the financial system. We saw tremendous stress liquidity constraints spill over into all fixed income markets.
The market turmoil has also been evidenced by sharp price declines – yet spikes in volumes – in equities markets. U.S. equities closed the first quarter with their worst performance since the financial crisis:
- The S&P 500 closed at 2,584.59 (-21%), the DJIA at 21,917.16 (-24%), the Nasdaq at 7,700.10 (-15%) and the Russell 2000 at 1,153.10 (-31%)
- Meanwhile, the CBOE Volatility Index (VIX1) jumped more than three-fold to 53.54 from just 12.47 to start the year (+329%), peaking at 82.69 (+563%)
Throughout this period of extreme volatility, markets remained open and functioning. This creates liquidity which will ultimately help us blunt the impact of further damage to the economy.
And that’s when we saw the Fed, Treasury and Congress step in?
In mid-March, in an attempt to rectify the situation, the Fed began to undertake unprecedented, extraordinary and comprehensive actions to buy financial assets, unclog the pipes of the financial system and increase its capacity. This included robust purchases of Treasury securities, agency MBS and agency CMBS. In all, the Fed has announced more than a dozen actions on a truly massive scale.
The Fed’s actions were followed by multiple phases of fiscal stimulus, enacted by Congress and the U.S. Treasury to support the economy.
Can you outline the high points of the fiscal stimulus that came out of Congress?
The first $8.3 billion package provided emergency funding with the goal of preventing widespread transmission and effects of the COVID-19 virus. It also provided funding to make COVID-19 testing more widely available, to support treatment of the virus and to provide $20 billion to the Small Business Administration for disaster loans. Phase 2, the Families First Coronavirus Response Act, had two major provisions: first it provided for paid sick leave and to give agencies funding to implement free coronavirus testing, and second it expanded unemployment benefits and food assistance.
Next came the Coronavirus Aid Relief and Economic Security Act, or the CARES Act, which has many provisions that matter to the markets. This third phase of stimulus is a bipartisan $2 trillion package, possibly the largest federal expenditure ever. It is aimed at getting cash into the economy, individuals and employers. The bill calls for an immediate cash payment to individuals, small business program relief through the Paycheck Protection Program (PPP), and emergency public health appropriations to support the finances of local hospitals and front line responders. There’s also a lending facility to the Federal Reserve to support middle-sized companies.
That’s quite the whirlwind. What’s next? Where do we go from here?
At SIFMA, we’re working with our members on several fronts. We are providing clarifying questions to the Fed so that they can consider technical market feedback when standing up their programs and also consider opportunities for expansion in order to get liquidity right where it is needed. One thing to note is the banking industry’s role in implementing this $2 trillion package. Given the banks’ leverage constraints, there are some concerns about the ability of the banking industry to mediate programs of such size. The good news is the industry was on a strong footing going into this crisis, being well capitalized with high quality capital.
Meanwhile, Congress continues to look at all the facets of the economy that they believe are in need of federal legislation. Their first concern is implementation of the CARES Act which is a significant undertaking in and of itself. Next up, Congress is in the early stages of writing a fourth phase of legislation.
We’re also active in the business continuity planning (BCP) space and are working with our regulators on technical issues related to market operations and compliance - the nuts and bolts of operations settlement, infrastructure and deadlines that are impacted by the pandemic. This is our number one priority at SIFMA: working with our members, regulators and market participants to keep the markets operational, efficient and functional until we get to the other side of COVID-19.
In short, the market and government are in this together to get the financial stability agenda rolled out and implemented in a way that reduces the impact to the U.S., our people and our economy.
For more on these issues, I encourage you to listen to our podcasts, Explaining the COVID-19 Stimulus Packages and Extraordinary Actions - The Fed, Treasury and Congress vs. COVID-19.