20 / 10 / 2020 the federal reserve ’ s corporate credit facilities : why, how, and for whom - federal reserve bank of new york speech the federal reserve ’ s corporate credit facilities : why, how, and for whom october 20, 2020 daleep singh, executive vice president remarks at the u. s. chamber of commerce ’ s center for capital markets competitiveness ( delivered via videoconference ) as prepared for delivery thank you, tom, for the invitation to join this event. as all of you know, in march the federal reserve — with backing from the u. s. treasury — created a set of facilities to purchase corporate credit for the first time in its history. many observers have credited the facilities with repairing market functioning in the corporate bond market and restoring the ability of many businesses to finance themselves through the pandemic. but my focus today is not the corporate bond market, credit spreads, or wall street. rather, i ’ d like to connect the dots by explaining why these facilities were necessary to support jobs and the economic recovery on main street, and why transparency, access, and accountability were so critical to their implementation. before i review the initial success of these programs, i want to acknowledge the painful realities that many firms, employees, and households continue to face. for millions of americans, it ’ s a long road back to normal. i should also make it clear that these remarks are my personal views and not necessarily those of the new york fed or the federal reserve system. 1 the shock to u. s. businesses and employees let ’ s start with some context and recall why unprecedented action was necessary in march. amid a synchronized global demand shock of uncertain length and severity, access to credit takes on outsized importance. companies that issue public bonds and commercial paper depend on financing to make investments and meet their obligations, including payrolls, and together likely account for nearly one - fourth of all u. s. private sector employment and just under 50 percent of u. s. output. 2 even companies that do not themselves have public bonds are closely linked through the supply chain, as they receive trade credit from or sell to large corporate bond issuers. research suggests that shocks impacting large businesses spill over to smaller firms, perhaps accounting for 10 percent of the reduction in employment at small firms during the last recession. 3 the unusually high level of uncertainty about the pandemic shock was reflected in the functioning of markets that finance large u. s. employers. market liquidity

engaged in the meticulous work of finalizing the legal structure of the lending arrangement that had been agreed to in principle, including defining the precise pool of collateral and related hedges that would secure the $ 30 billion loan. at the same time, several infirmities became evident in the agreement between jpmorgan and bear during the week of march 17th that needed to be cured. negotiations between the two sets of counterparties proceeded almost immediately between the new york fed and jpmorgan chase on the one hand, and between jpmorgan chase and bear stearns on the other. the new york fed and jpmorgan discussed the details for the secured financing. bear stearns and jpmorgan continued to negotiate changes to the merger agreement that would tighten the guarantee and provide the necessary certainty that the merger would be consummated. all the parties shared an overriding common interest : to move toward a successful merger and avoid the situation in which they found themselves on march 14. the extended easter weekend saw intense sets of bilateral negotiations among the three parties. the deal, finally struck in the early morning hours on march 24, held benefits for all parties. that deal included a new, more precise guaranty from jpmorgan, which lifted the cloud of default risk that had been hanging over the transaction. bear stockholders were to receive a higher share price. in addition to fixing the guaranty, jpmorgan gained assurance that its merger with bear would take place. and the new york fed obtained significant downside protection on the loan and a tighter guaranty on its exposure. the new fed financing facility will be in place for a maximum of ten years, though it could be repaid earlier, at the discretion of the fed. this is an important feature : the assets that are being pledged as collateral can be managed on a long - term basis so as to minimize the risks to the market and the risk of loss. they can be held or disposed of at any time over the next decade. a summary of terms and conditions is attached as annex iii. in keeping with the traditional role of a lender of last resort, the extensions of credit to bear stearns that the fed made to facilitate the merger were secured by collateral. the $ 29 billion loan will be extended only when and if jpmorgan chase and bear merge. we will be protected from loss by three different risk mitigants : first, a substantial pool of professionallymanaged collateral that, as of march 14