On 4/9/20, Carl Jarvis <carjar82@xxxxxxxxx> wrote:
Why are our American Corporations so firm in their resistance to
Socialism? The simple answer is that they already have it. Oh sure,
they call it by other names, like "Privilege", but it is all the same,
slopping at the public troth. It might be socialism, except the
Ruling Class has figured out that if the majority of Americans are
excluded, and are only used to pump money into the Public Trough, then
they, the Ruling Class, can slop forever.
Carl Jarvis
On 4/8/20, miriamvieni@xxxxxxxxxxxxx <miriamvieni@xxxxxxxxxxxxx> wrote:
Resetting the Bomb
By Matt Taibbi, Matt Taibbi's Substack
08 April 20
Another era of debt-fueled profiteering is ending with a bailout. How
we're
institutionalizing the unfairness economy
Neil Barofsky, the Special Inspector General for the last bailout,
guesses
that whoever has his job this time around is going to have a lot of work.
"There will be S&L-type frauds, absolutely ostentatious frauds," he says,
spitballing a list of potential problems in the $2 trillion Covid-19
rescue
package. "I'd be looking for tens of billions of loss to fraud."
This is unavoidable. If the rescue package signed into law by Donald
Trump
on March 27 had more regulatory controls - "nothing, nada, zero,"
oversight
is how another economist explains the existing structure - it might
defeat
the purpose of getting money out into the economy quickly. It seems
possible
the rescue was designed with such surreal logic in mind. "Fraudsters
spend
money, too," is how Barofsky puts it.
A second issue has to do with the structure of the Covid-19 relief plan.
It
features two main components: rescues of Main Street and Wall Street.
The headline-grabbing frauds will be found in the Main Street side, where
crooks will scheme to get their hands on (among other things) $377
billion
in relief intended for desperate restaurants, hardware stores, nail
salons
and other real-world employers.
These will be scams the public can understand, "straight rips," as
Barofsky
puts it: insiders creating dummy companies and submitting for loans,
employers taking money for payroll and hiding layoffs, con artists
Googling
their way to successful SBA loan applications, etc.
Nigerian-letter-type scams, in which crooks impersonate bailout agencies
asking for bank info before sending relief, are already being reported
across the country. Stories range from mass-texts from "CostCo" offering
$110 stimulus checks, to a woman who said she was offered a six-figure
Covid-19 grant from "Bill Barr" by phone.
Those stories are bad, but the exponentially more serious potential for
mischief in this new rescue is on the Wall Street side. "With the [Main
Street] relief, you might see $50,000 frauds, $100,000, $4 million," says
Barofsky. "It'll be billions on the other side."
There are worries from analysts about the use of bailout funds to
manipulate
financial markets, finance takeovers and buybacks, subsidize executive
bonuses. The crisis will surely be used as a pretext to con the public
into
taking tens or hundreds of billions in bad investments off the books of
dumb
companies, in the name of "guaranteeing liquidity."
A larger issue is conceptual. What's the consequence of making the
maintenance of prices in financial markets a "systemically important" end
in
itself?
America's executive class in the last few decades has settled into a
Ponzi-like pattern: borrow, inflate, strip assets, crash, get bailed out,
start over. Both the profits and the size of the bag the rest of the
country
is left holding get bigger with each cycle.
In the last ten years buybacks, takeovers and other schemes made
executives
rich, but left companies cash-poor and leveraged to the hilt. When
Covid-19
hit, corporate America could with sincerity claim it needed immediate aid
to
keep doors open and financial markets afloat.
But the scope of the rescue is as massive as it is in significant part
because private-sector cash that might otherwise have buffered the damage
had already been stripped out of the economy. As Marcus Stanley of
Americans
for Financial Reform puts it, "We're starting to routinize the process of
privatizing gains and socializing losses."
A week of calls to anxious analysts in quarantine identified a series of
related issues hanging over the rescue:
"Debt bomb." The 2008 mess was triggered in part when companies like
Goldman, Sachs issued collateral calls against billions in credit default
swap contracts it held with insurance giant AIG. When the latter was
unable
to come up with the money, mayhem ensued, creating wide-scale losses and
necessitating an AIG bailout - through which Goldman ended up being paid
$12.9 billion.
The pre-2008 economy was built on a combustible pile of mortgage debt,
and
bets on mortgage debt, that exploded once banks got nervous and started
to
call in their money. Some cleaning up of the mortgage markets was done,
but
Wall Street simply moved elsewhere to build new credit sandcastles,
leading
to an explosion of corporate debt, securitized commercial loans (CLOs),
takeovers, etc.
One new development involved "subscription lines," a type of financing of
private equity deals, the cheery name we use today for leveraged buyouts.
When a Wall Street takeover artist wants to raise cash to buy up a
company,
it goes to big-dollar players - often an institutional investor like a
pension fund - and elicits commitments to invest. The private equity fund
then goes to a bank, which issues "subscription lines" of financing
against
the promise of those investors (a.k.a. the "limited partners").
Subscription lines have existed for decades, but their use was
traditionally
limited and short-term, with investors coughing up capital within 30
days.
In recent years and especially since 2008, though, the scope of
subscription
line financing has increased, and the time to repay has also been
expanding,
to up to five years.
Making takeovers easier andmore profitable for executives of the Bain
Capitals of the world inspired what Barron's in 2018 described as a
"rage"
for subscription line financing. This was one of many post-bailout
factors
inspiring the recent boom in leveraged buyouts: the years 2013-2018 saw
the
most private equity deals over any five year-period in American history.
The rub is that capital on those "lines" can be called in at any time,
and
might be, as the Covid-19 crisis progresses. The funds themselves are
also
demanding that investors fulfill commitments. In California, the $17.8
billion Orange County Employees Retirement Fund said they received three
capital calls over two weeks.
"Investors are terrified that banks are going to start calling the
leverage
on the leverage," noted one former private equity firm executive last
week.
"After 2008, they didn't defuse the debt bomb. They reset it."
A March 19 piece by William Cohan in Vanity Fair quoted industry insiders
worrying about the "scourge of interconnectivity" returning, with
particular
concern about debt amassed in the private equity world. A trade
publication,
Buyouts Insider, likewise quoted private equity investors worrying about
a
"nightmare scenario" in which nervous banks calling in their lines would
cause a "flurry of cash going out the door."
That situation bears watching. Private equity funds were at the center of
another controversy animating Washington last week:
"Equity investors" target the bailout. After the CARES Act was signed by
Trump on March 27, it looked like takeover artists might be frozen out.
The
problem was the "affiliation rule," which barred businesses from
receiving
emergency money if they were backed by a sponsor firm controlling
companies
that collectively employ over 500 people.
Thousands of businesses are controlled by leveraged buyout firms,
employing
as many as nine million Americans overall. The number of employed would
be
higher, of course, if not for the layoffs that often ensue after a
private
equity fund acquires a firm and begins squeezing it dry. 1.3 million
Americans in the retail sector alone were laid off in this way in the
last
decade, according to one report.
Companies controlled by private equity often face bigger cash crunches
than
non-affiliated firms, because in addition to having to make rent,
payroll,
and other ordinary expenses, they also owe an array of special
"dividends"
and fees to Wall Street masters. In times like the Covid-19 disaster,
these
revenue streams ostensibly dry up. But what if financiers could use
bailout
funds to get their vig paid?
Last Tuesday, Steve Nelson of the Institutional Limited Partners
Association, a private equity group whose members include titans like
Apollo
and Blackstone, sent a letter to Steve Mnuchin (how do we always manage
to
have a Goldman-trained Treasury Secretary during these crises?).
"We see no reason why being owned in a fund structure should result in
these
businesses having less access to the capital needed to keep their
employees
on the payroll," Nelson wrote.
This overture was apparently rebuffed at first, but no worry: there was
always congress to lobby! By late Tuesday, Nancy Pelosi was writing
Mnuchin
a letter explaining that "startups are the engine of America's innovation
economy" and that the thousands of firms backed by "equity investors" in
the
Bay Area and Silicon Valley shouldn't be frozen out by the affiliation
rule.
The next day, Maxine Waters sent Mnuchin a different note, demanding that
any aid to "equity investors" go to workers, not a "government handout
for
well-funded private funds."
Waters added, "any funds granted through this program must not be used to
pay any debts or obligations to private funds, including management or
consulting fees" - right on the money in terms of what one watchdog
agency
analyst feared these "avaricious fuckers" were after.
By the next day, House Minority Leader Kevin McCarthy was announcing that
startups backed by venture capital would be eligible for bailout cash.
Venture capital, which owns a stake in the growth of companies, is not
the
same as private equity, which controls these firms and often saddles them
with fees and obligations. McCarthy said there might be future efforts to
"address" private equity-owned businesses, but for now they would use
"control" as a determining eligibility factor.
How this all plays out is unclear, but bet on the private equity lobby
continuing to hack away until it somehow gets to the bailout money.
Loopholes. The Main Street provision of the bill is simple in principle.
If
you run a small or medium-sized business, and you do your banking with an
SBA-approved lender, ask your bank for money and you're basically
supposed
to get it, up to $10 million. If you don't lay off any employees, the
loan
is supposed to be forgiven.
When the gates opened on the program Friday, a "frenzy" of applications
led
to about $3.2 billion in loans going out the door in a day, to roughly
10,000 businesses. However, there were widespread reports of problems,
with
some banks asking for more time - JP Morgan Chase warned customers they
wouldn't be ready - a situation that led some to wonder if banks were
stalling for better conditions.
Banks are scheduled to earn 1% to 5% to underwrite these loans, which are
100% backed by the government, a nice chunk of essentially risk-free
money.
If the loans are not forgiven after two months, the compensation becomes
1%.
That number was 0.5% originally, but banks had the government over a
barrel
as the start date approached, and the rate was doubled on Thursday, just
before the program opened.
There are other battles. Wells Fargo is using the crisis to ask for
relief
from regulatory caps imposed after a string of scandals. Other banks are
asking for a relaxation of anti-money laundering controls, higher
interest
rates, freedom from liability in case of fraudulent applications, and a
host
of other requests, many of them reasonable given the situation, but which
may also have longer-term implications.
All these issues, in conjunction with the logistical problem posed by a
huge
rescue program being administered by the notoriously slow and overwhelmed
SBA, add up to worry that money will not get to employers quickly enough,
or
at all. A program with similar conception after 2008, the HAMP mortgage
relief plan, closed up shop after providing very limited real-world aid.
That shouldn't happen this time, but there are a lot of steps between the
pile of government cash and the millions of non-finance-sector human
beings
who need it.
Meanwhile, money has been pouring almost unabated into the financial
markets. The CARES bill included a $454 billion appropriation to
Treasury,
which insures a vast program of Federal Reserve asset purchases and
direct
loans. These, too, ostensibly have conditions, but loopholes were baked
in
that could accelerate pre-Covid problems.
A major issue in the post-crash era, and especially in the last few
years,
has been the orgy of stock buybacks and redemptions. According to
Americans
for Financial Reform, the biggest banks in the country have returned an
obscene $265 billion to shareholders just in 2018 and 2019, which
represents
110% of net income. This is another way of saying bank shareholders
heading
into this crisis had hovered up all of their recent cash flow and a
little
bit more of reserves to boot, leaving little for the very rainy day we're
now experiencing.
It wasn't just banks. Companies overall spent $7 trillion on buybacks
between 2004 and 2014, and nearly $2.5 trillion in the years 2018 and
2019
alone. A 2018 study by the Roosevelt Institute found that Lowe's, CVS,
and
Home Depot could each have given workers $18,000 raises across the board
with money that was instead spent on buybacks. The restaurant industry
outdid banks by spending 140% of its profits on buybacks during the same
period, 2015-2017.And so on.
In recent weeks, there's been a lot of self-congratulation among members
about rules imposed in the CARES Act to prevent stock buybacks. "We
ensured
in the bill that any taxpayer dollars given to industry goes first and
foremost to worker paychecks and benefits, not CEO bonuses, stock
buybacks
or dividends," is how Pelosi put it.
However, the rule only speaks to direct loans. There are countless other
ways for companies to get money in this rescue. It appears a corporation
that issued bonds and sold them into the Fed's giganto-buying programs
could
take the proceeds of those sales and buy its own stock, for instance.
Marcus Stanley of Americans for Financial Reform points out that buybacks
are actually mentioned in the terms for the Fed's new Primary Corporate
Credit Facility. The Fed program offers an arrangement where certain
companies (likely, the ones in serious trouble) can issue bonds without
having to pay interest for a year. "A borrower that makes this election
may
not pay dividends or make stock buybacks during the period it is not
paying
interest," the rules state.
Presumably, that means a company that issues bonds in normal fashion and
sells them into the facility may pay dividends and make buybacks. "That's
how I read this, that they considered that," says Stanley.
There are other worries about the financial rescue. For instance, the
world's largest asset manager, BlackRock, will oversee the Fed's new
corporate bond-buying program, an arrangement that inspires gallows
laughter
among analysts. BlackRock sells corporate bonds under the brand name
iShares, and it has some of the biggest bond-backed ETFs (exchange-traded
funds), including a major one that trades under the name LQD that was in
freefall in March, but rallied since BlackRock's appointment.
"'Conflict of interest' is kind of a quaint 20th-century term to describe
the BlackRock arrangement," says Stanley.
Firms like BlackRock will guide hundreds of billions in Federal Reserve
purchases, effectively setting prices as massive buyers in the very
markets
in which they operate. "The big asset managers are the choke points,"
agrees
another economist.
The difference between the Trump rescue and the Bush-Obama bailouts of
2008
is that this time, we're at least not rescuing the direct culprits behind
the crash. Coronavirus isn't the fault of Bain Capital or Citigroup or
Home
Depot.
What's the same is that instead of fixing glaring structural problems,
we're
once again throwing trillions at the unfairness economy, essentially
guaranteeing that we'll be right back in this same spot again soon,
bailing
out the next era of "record profits." We're resetting the bomb again.
