Stevens: Federal Reserve Should Extend Credit to Auto Industry

WASHINGTON – Today, Congresswoman Haley Stevens (MI-11) sent a letter to Chairman of the Federal Reserve Jerome H. Powell and United States Secretary of the Treasury Steven Mnuchin, asking for the Federal Reserve to explore credit options for the domestic auto industry and its supply chain to mitigate the immediate economic impacts of the COVID-19 pandemic. Yesterday, major domestic automakers agreed to temporarily shut down all North American plants in an effort to stop the spread of COVID-19.

This week, the Federal Reserve announced measures to backstop the commercial paper market, making short-term cash available to eligible companies to help cover payroll and day-to-day operations. This action will not help the automotive industry manage COVID-19 related liquidity issues, because most automotive companies do not use or are not eligible for commercial paper programs.

“It is critical that the Federal Reserve extends credit via avenues that are more broadly available to auto industry borrowers with sensitive balance sheets […],” wrote Congresswoman Stevens. “While policymakers are working together to alleviate the public health crisis caused by the COVID-19 pandemic, we must also consider the urgent economic needs of the American workers and the families they support. Ensuring that critical industries such as the auto industry have the access to the liquidity they need to survive the impacts of this pandemic will go a long way towards the economic security of our workforce.”

The full text of the letter can be found below.

“I write to request urgent action from the Federal Reserve to provide necessary liquidity to the domestic auto industry and its supply chain in order to mitigate the immediate economic impacts from the COVID-19 pandemic. While I applaud the Federal Reserve for its recent actions to provide liquidity in commercial paper trading, these actions will not help the companies in the auto industry who do not access commercial paper borrowing programs.

The automotive industry is one of our country’s greatest economic drivers, contributing $545 billion into the U.S. gross domestic product in 2018. The economic impacts flow quickly through the value chain, from the sales and servicing of autos to parts suppliers to paychecks for assembly plant workers. Due to the capital-intensive nature of its business, the auto industry generally carries negative working capital. Original Equipment Manufacturers collect payments when they ship vehicles from the assembly plant and pay suppliers afterwards, creating a steady stream of cash when vehicle sales are healthy. However, automakers quickly burn through cash when vehicle sales decline or stop given high fixed costs from worker salaries, rent and dealer incentives.  

The Federal Reserve’s recent actions to help liquidity in short-term commercial paper trading will not help these companies with sensitive balance sheets and their supply chain to stay afloat as they manage liquidity issues caused by the current COVID-19 pandemic. Most companies within the auto industry do not use commercial paper programs either because they have focused on long-term borrowing or do not have the required excellent short-term credit ratings to utilize the program.

It is critical that the Federal Reserve extends credit via avenues that are more broadly available to auto industry borrowers with sensitive balance sheets.

Such action is not without precedent. In March 2008, the Federal Reserve Board invoked section 13(3) of the Federal Reserve Act, citing "unusual and exigent circumstances”, which allowed the Federal Reserve Board of New York to use emergency authority to mitigate impacts of the financial crisis. Use of such authority again could allow the Federal Reserve to take the necessary actions and lend to industries adversely impacted by COVID-19.

While policymakers are working together to alleviate the public health crisis caused by the COVID-19 pandemic, we must also consider the urgent economic needs of the American workers and the families they support. Ensuring that critical industries such as the auto industry have the access to the liquidity they need to survive the impacts of this pandemic will go a long way towards the economic security of our workforce.”

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