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Treasury Secretary: Time to End ‘No-Strings-Attached’ Bailouts

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Treasury Secretary Steve Mnuchin demands loan grantees to pay back a part of the grant money. This is in addition to the government receiving equity warrants in the companies equal to 10% of the grant value. This move sends a clear message that the government won’t allow “no-strings-attached” bailouts to the major airlines.

This approach stands in clear contrast to the corporate bailouts during the Great Recession. In those bailouts, Ben Bernanke, the Federal Reserve Chairman then, loaned trillions to Wall Street banks. He did so with absolutely no requirements attached to the money – they could do with it whatever they pleased – including using it to go out and buy other banks.

Airlines Express Concern

It should come as no surprise that some airlines don’t like the deal. They say they didn’t agree to it in the original aid package. Also voicing concerns are a handful of labor unions and lawmakers. They expressed their concern that paying back the grants could prove too difficult for the airlines. They say this will likely become the case if the demand for air travel is slow to return.

But many feel that Mnuchin is trying to avoid the stigma of “bailouts” altogether. Many also notice that he’s sending a strong message to all companies who may come looking for relief. He wants to emphasize that the government isn’t going to provide money unconditionally.

“It is our objective to make sure, as I have said, that this is not a bailout,” he said last week in a CNBC interview. He said that they aim to ensure airlines “have the liquidity to keep their workers in place” instead.

Alex Ginsberg, a partner at Pillsbury Winthrop Shaw Pittman, added: “I think Treasury seems to be responding strongly to the negative perceptions of government stimulus during the last financial crisis and they’re redoubling their efforts to make sure federal money is spent responsibly.”

David Leblang, a professor of politics and public policy at the University of Virginia, agrees.

“I would not undersell, especially in an election year the raw feelings associated with the bailouts that have come from TARP (the Troubled Asset Relief Program during the financial crisis). The optics are horrible if there are no strings attached.”

Drawing the Line on Bailouts

It’s understandable then, why Mnuchin is drawing a wide line in the sand at the beginning of what appears to be a long line of industries and companies looking for relief.

Mnuchin is clearly trying to dissuade companies from testing the waters. He does so by establishing from the onset that there will be no free rides. He also stands firm that the government expects grantees to pay back at least a portion of the grant. This is in addition to a potential equity stake in the companies via warrants.

What remains to be seen is if Mnuchin holds firm on his requirements if the economy begins to stumble and the line of companies looking for relief grows.

Already, the Democrats are starting to make noise about the process taking too long.

Leading Democrats, including House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer, urged Mnuchin on Sunday to drop any demands that could delay the deal and put jobs at risk.

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