“Banks got bailed out, we got sold out” was one of the recurring chants at Occupy Wall Street, which began as an encampment in Zuccotti Park three years after the 2008 financial crisis. Who the government chose to rescue — and how easy or difficult it is to be rescued — is not an accident. Instead, it’s always been a policy choice.
When lawmakers advocated for emergency aid during the current pandemic to help states with their debts as their budgets get crushed, Senate Majority Leader Mitch McConnell said he’d fight to stop these so-called “blue state bailouts,” and that states should go bankrupt instead. When Senate Democrats proposed cancelling student debt for 43 million borrowers and a more people-focused economic stimulus to all, Republican Sen. Lindsey Graham said, “What the hell does that have to do with the virus?” But when the oil and gas companies face bankruptcy due to their staggering debts, Republicans are ready and eager to help. And this week, the Federal Reserve — which claims political independence and holds itself out as the epitome of technocratic excellence — obliged with precisely the changes that the energy sector, and its congressional apologists, requested.
The fossil fuel industry and the Senate GOP had been lobbying the Fed hard for changes to help big oil. One of the changes they sought was the ability to use emergency loans to pay down or refinance other debts. Heavily indebted fossil fuel companies are teetering on the edge of bankruptcy and under increasing pressure from their lenders, like the big banks to whom the sector owes $200 billion. In the case of one big bank, Wells Fargo’s portfolio of loans to energy companies is so distressed, it’s been described as a “bloodbath.” Two fossil fuel companies have already declared bankruptcy since April — Whiting Petroleum and Diamond Offshore. Desperate to prop up these failing firms, Sen. Ted Cruz complained to the Fed in an April 24 letter that oil and gas firms needed help, because the original Main Street Lending Program terms explicitly prevented companies from using the funds to “repay or refinance pre-existing loans,” and that made them vulnerable to bankruptcy. A trade group for big oil, the Independent Petroleum Association of America (IPAA), made the very same complaint.
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On April 30, the Fed gave the oil industry precisely what it asked for, expanding the lending programs to allow more debt, looser standards and bigger loan amounts to accommodate the oil industry. The changes allow companies to use taxpayer-backed emergency relief funds to refinance and pay down pre-existing debt. The very same day the Fed acted, Chesapeake Energy was about to go bankrupt. But these and other changes the Fed made benefited both Chesapeake and a host of other oil companies.
Previously, businesses with large amounts of debt were not able to get large loans, another thing Senator Cruz complained about. The senator got what he asked for when the Fed raised the threshold to allow more heavily indebted companies to participate. The Fed also gave the industry more flexibility to play accounting games to make their earnings look rosier for the purposes of that threshold, changes that benefited both the teetering Chesapeake Energy, but also Occidental Petroleum. Former Trump adviser and mega-donor Carl Icahn has a nearly 10 percent stake in Occidental. And this isn’t even the only change that benefitted Occidental. Previously, firms using the Main Street Lending Program could have no more than 10,000 employees. The Fed raised it to 15,000. Occidental Petroleum just so happens to have 14,400 employees. Yet another oil sector request the Fed granted was Energy Secretary Dan Brouillette’s ask to raise the cap on one of the loan programs from $150 million to $200 million.
Big oil isn’t just getting the supposedly independent Fed to change the rules to stay afloat despite a decade of bad bets. Taxpayer funds are now effectively being used to reduce debt costs for oil companies and bail out their Wall Street creditors. While some argue that the Fed’s Main Street Lending Program isn’t taxpayer money, this is inaccurate: the program uses $75 billion from the CARES Act to partially cover any losses these loans incur for the Fed. At the end of the day, taxpayer money is being used as a down payment for loans to big oil. Those who benefit the most are those who’ve loaned money to big oil — banks and bondholders. Those that justify these loans do so on the basis that they support jobs, but the connection to actual worker protections are minimal, as the Fed doesn’t explicitly bar firms who take these loans from laying off their employees.
One of the most appalling changes the Fed made was to delete its original language that said the coronavirus needed to be the source of a company’s financial distress. With the removal of that language, the Fed is now free to give emergency loans to a sector that’s been buried in debt since long before the pandemic. Oil and gas firms have been the largest issuers of the riskiest kind of corporate debt for a decade. In the third quarter of 2019, a staggering 91 percent of defaults on corporate debt were due to oil and gas companies. Over 200 fracking companies have gone bankrupt since 2015, with 32 declaring bankruptcy in 2019 alone. Even oil giants like Exxon and Chevron can only turn a profit at their U.S. drilling sites at $31/barrel (oil is currently less than $20/barrel). It’s unclear when — or if — they will return to profitability, as the fallout from overproduction means oil is still sitting on floating tankers waiting to fill up overfilled storage, as demand slumps to the lowest levels in 25 years.
The Trump administration is quite brazenly declaring that this was a rescue for oil and gas. Energy Secretary Dan Brouillette praised the action, tweeting, “Great news out of the Fed today in support of struggling U.S. energy companies.” Republican Sen. Kevin Cramer, who sent a different letter to the Fed and Treasury asking for favors for big oil, recorded a video of himself personally thanking the Fed. Meanwhile, climate groups slammed the action. Tara Houska, founder of Giniw Collective — a frontlines collective dedicated to land defense and cultural revitalization — called the bailout “unconscionable,” while Moira Birss of Amazon Watch said it “looks like the Fed acquiesced to pressure from the oil industry and some of its Republican champions.” Bharat Ramamurti of the Congressional Oversight Commission overseeing the CARES Act tweeted that the changes “mirror the top requests of the oil and gas industry.”
Routing this rescue of oil and gas through the Fed is essentially an end-run around Congress. Congress passed the CARES Act and abdicated fiscal policy decisions to the Fed to both obscure the choices being made and insulate themselves from political liability. This isn’t the first time the Fed has undertaken such a rescue. Congress also abdicated responsibility in the 2008 bailouts, providing broad authority to the Fed to pick winners and losers. The Fed used that authority to make Wall Street whole, but did a poor job of saving homeowners. But even Congress didn’t know the full extent of the Fed’s 2008 emergency lending until Bloomberg news sued all the way up to the Supreme Court to obtain data about the loans. Former Democratic Senator and former Joe Biden Chief of Staff Ted Kaufman has said that if Congress had known at the time the extent of the help the Fed was providing, he would have been able to line up more support for his proposal to break up the banks.
Today, the Fed is once again acting as the main vehicle for implementing rescues for politically unpopular, over-leveraged firms that Congress doesn’t want the blame for helping. Whether it is biasing rescues to the powerful, politically connected and the wealthy, or cowing to demands of an irresponsible sector, this crisis is looking similar to the last one. But instead of the banks, it’s big oil who’s getting bailed out as the rest of us are sold out.