The Federal Reserve’s Fight Against COVID-19: A Study of the Corporate Bond Intervention

Fordham Journal of Corporate & Financial Law Volume 30 Issue 1 Article 5 2025 The Federal Reserve’s Fight Against COVID-19: A Study of the Corporate Bond Intervention Noah Seilgson Fordham University School of Law Follow this and additional works at: https://ir.lawnet.fordham.edu/jcfl Part of the Administrative Law Commons, Agency Commons, Banking and Finance Law Commons, Business Administration, Management, and Operations Commons, Business Intelligence Commons, Business Law, Public Responsibility, and Ethics Commons, Corporate Finance Commons, and the Other Law Commons Recommended Citation 30 Fordham J. Corp. & Fin. L. 165 (2025). This Note is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Journal of Corporate & Financial Law by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact . THE FEDERAL RESERVE’S FIGHT AGAINST COVID-19: A STUDY OF THE CORPORATE BOND INTERVENTION Noah Seligson * ABSTRACT In response to the COVID-19 pandemic, the Federal Reserve (Fed) embarked on an unprecedented mission to stabilize the U.S. economy as businesses shut down. One emergency Fed facility, the Secondary Market Corporate Credit Facility (SMCCF), was used to purchase corporate bonds and corporate bond exchange-traded funds (ETFs) in the secondary market. This extraordinary measure, which injected liquidity into the corporate bond market, aimed to mitigate economic fallout for large companies. Purchasing corporate bonds marked a departure from previous Federal Reserve interventions, but the statutory authority was the same as had been used in past crises: Section 13(3) of the Federal Reserve Act (FRA). Additionally, the SMCCF was supported by the new Coronavirus Aid, Relief, and Economic Security Act (CARES). This Note examines the legal bases for the SMCCF, highlighting where the Federal Reserve exceeded its statutory authority. Specifically, this Note examines statutory provisions that require security, a liquidity purpose, a penalty rate, and that the borrower be a U.S.-centric business. This Note proceeds to propose alternative facilities for future crises that solve the same problem, but that are within statutory bounds. This Note also reevaluates the Federal Reserve’s emergency lending framework, suggesting an amendment to modernize Section 13(3). J.D. Candidate, Fordham University School of Law, 2025; B.B.A., University of Michigan, 2019. Thank you to Professor Richard Squire for his detailed edits and thoughtful feedback. Also, I want to thank my incredible support system—my family, friends, and loved ones—whose encouragement and support carried me through this journey. * 165 166 FORDHAM JOURNAL OF CORPORATE & FINANCIAL LAW [Vol. XXX INTRODUCTION...................................................................................... 167 I. CORPORATE FINANCE, COVID-19 DISRUPTION, AND THE FEDERAL RESERVE’S RESPONSE .................................................... 169 A. Capital-Raising Activities in Corporate Finance ................... 169 1. Corporate Bond Market Overview .................................. 170 2. The Bond Issuance Process ............................................. 171 B. Economic and Financial Impact of COVID-19 and the Federal Reserve’s Response .................................................. 172 1. Impact of COVID-19 on the Economy and Financial Markets ............................................................................ 172 2. The Federal Reserve’s Market Intervention Strategies.... 173 i. SMCCF’s Impact on the Market ............................... 175 ii. Case Study – Sysco Corporation ............................... 176 iii. Overview of SMCCF Eligibility and Structure ......... 177 iv. Public Scrutiny of the SMCCF .................................. 179 C. The Legal Foundation of the SMCCF: The Interplay Between Section 13(3) and the CARES Act.......................... 181 1. Development of Section 13(3) ......................................... 181 i. The Genesis of Federal Reserve Act Section 13(3)... 181 ii. Deploying Section 13(3) in the 2008 Crisis .............. 181 iii. Broad-Based Section 13(3) Facilities During the 2008 Crisis: The Commercial Paper Funding Facility ....................................................................... 183 iv. Revising Section 13(3): The Dodd-Frank Amendments .............................................................. 184 v. Enacting Dodd-Frank Amendments via Federal Reserve Rulemaking: Regulation A .......................... 185 2. Legislative Support for the SMCCF Through the CARES Act...................................................................... 186 3. Reconciling Section 13(3) with the CARES Act ............. 187 II. ANALYZING THE FEDERAL RESERVE’S AUTHORITY FOR THE SMCCF ........................................................................................ 189 A. Applying Section 13(3)’s Security Requirement to the SMCCF .................................................................................. 189 1. Interpreting the “Indorsed or Otherwise Secured” Provision in Section 13(3) ............................................... 190 2. Security Requirement During the Global Financial Crisis ................................................................................ 191 3. The SMCCF Lacked Any Security and Insufficiently Protected Taxpayers......................................................... 192 B. Applying Section 13(3)’s Liquidity Requirement to the SMCCF .................................................................................. 194 1. Legal and Economic Definitions of “Liquidity”.............. 194 2025] FEDERAL RESERVE'S FIGHT AGAINST COVID-19 167 2. COVID-19 was a Solvency Crisis, Not a Liquidity Crisis ................................................................................ 196 3. The Liquidity Crisis Had Ended by the Time the Federal Reserve Purchased Corporate Bonds .................. 197 C. Applying Regulation A’s Penalty Rate Requirement to the SMCCF .................................................................................. 198 1. Historical Basis and Rationale for Penalty Rates ............ 199 2. The SMCCF’s Omission of Penalty Rates ...................... 200 D. Applying CARES Act Eligibility Requirements to the SMCCF .................................................................................. 201 1. Statutory Analysis of U.S.-Centric Business Requirements for CARES Act Programs ....................... 202 2. Broad Market Index Eligibility Loophole in the SMCCF Term Sheets ....................................................... 203 3. A Loophole Permitting Bond Purchases of Companies Excluded by the U.S.-Centric Business Requirements Opposes Congressional Intent ......................................... 204 E. Effect of the Federal Reserve E (...truncated)