The Wages Of Sin
My wife and I finally received our Economic Impact Payment mandated by the CARES Act as a debit card. We actually threw it in the bin for shredding and recycling when we first received it because it looked so much like just another credit card offer but a kind neighbor let us know that it was actually our pandemic payment. I have to say I was bitterly disappointed to receive a debit card because I was really waiting for the check with a message from Trump on it. Instead, a day or so later, I received what I had long been waiting for in the form of a letter from the White House telling me about the “fast and direct economic assistance” I was receiving that was signed by President Donald J. Trump. I can’t describe the joy of receiving Trump propaganda that was paid for with my tax dollars from a President that wants to sic the US military on me for protesting police brutality.
Having retrieved the debit card from the shredding bin, activated it, and established our PIN, my wife and I decided we would take our payment and deposit it into our savings account. Being unclear how this could be done, we decided to go to a branch with an actual teller in order to work it out. Once there, the teller had no clue how to help us, only mentioning that a lot of people were coming in with the same question, and suggesting that we try to use the ATM machine to make the deposit. Imagine my surprise when I put the debit card in the ATM and look at the balance. Just doing that had cost me $0.25 in fees off the balance.
In April, NPR reported that banks had booked more than $10 billion in fees in a two week period solely related to processing loans from the $350 billion first tranche of the PPP program. Yes, $10 billion in just two weeks. That amount nearly matches the over $11 billion that banks made from overdraft fees in all of 2019. Nearly 85% of those overdraft fees came from just 9% of account holders, primarily those with small average balances of under $350.00.
Beyond ripping off their own customers with fees and profiting from being the middlemen between the government and tax dollars that were actually meant to be distributed to American taxpayers, banks have also benefited in other, direct and indirect ways from the various federal programs associated with the pandemic bailout. The primary indirect benefit is that the Federal Reserve’s promise to spend $4.5 trillion to support the securities markets and the PPP’s carve-outs for large hotel and restaurant chains means that investment firms’ US portfolios are largely protected.
For the first time ever, the Federal Reserve is intervening directly in the corporate and municipal bond markets. The Fed didn’t have to spend any of the $4.5 trillion it was promising in order to have an efficacious effect on stabilizing those credit markets; merely announcing their plan was sufficient. For corporations, even those whose credit ratings were considered high-yield, or more accurately junk, the Fed bailout saved them untold millions in borrowing costs. As David Dayen details, “Dozens of companies, from troubled aircraft maker Boeing to airline Delta, from Exxon Mobil to T-Mobile, have been tapping credit markets they might never have been able to access, at lower rates than previously offered. The American Prospect and The Intercept have identified at least 49 large companies that have issued corporate bonds since the Federal Reserve announced that it would purchase them. For some, the benefit of cheaper borrowing was worth hundreds of millions of dollars”. The Fed’s backstop led to record investment grade corporate bond issuance in both March and April and even a resurgence in the issuance of junk bonds. Those issuances again provided big fees for the Wall Street firms managing those offerings. And the stabilization of the credit markets is largely responsible for the recent (until this week) enormous rally in the stock market, which is now seemingly untethered from actual economic reality.
While the Fed was keeping the markets artificially supported, it was also hiring a major Wall Street firm to implement its bailout. The Fed chose BlackRock, a major player in the corporate bond market and in bond exchange-traded funds (ETFs). Under the agreement, BlackRock can even purchase some of its own ETFs, essentially propping up the value of its own funds as well as earning a 2% commission on all purchases.
The Fed’s decision to backstop the junk bond market is especially troubling. Many of these companies were facing potential bankruptcy with the prospect of higher borrowing costs. According to the Finanical Times, “One in six US companies does not earn enough cash flow to cover interest payments on its debt. Such ‘zombie’ borrowers could keep putting off the crunch as long as debt markets kept letting them refinance”. The Fed’s decision helped put off that day of reckoning, leaving these “zombies” alive for the time being. The delayed reckoning is therefore also a boon to high-yield investors, primarily hedge funds and private equity investors, who were facing big losses. For example, ProPublica reports that the junk bond holdings of Muzinich & Co. reversed significant losses after the Fed’s backstop was announced and 28 out of 29 of the company’s funds saw an increase in value. Muzinich & Co. is basically owned by Deputy Treasury Secretary Justin Muzinich who has essentially parked the asset with his father for his tenure at Treasury and who is actively implemeting the Treasury’s part of the bailout.
Private equity investors were barred from receiving PPP loans and direct Fed assistance, but were able to access $1.5 billion in loans for their healthcare portfolios from the Department of Health and Human Services. More importantly, the Labor Department announced that 401(k) plans would now be able to invest in private equity firms, basing its decision on Trump’s directive to “remove barriers” to economic recovery from the pandemic. That long-desired decision will give private equity firms access to an enormous pool of capital, putting them in an even stronger position to benefit from the pandemic fallout.
Yesterday, Treasury Secretary Mnuchin announced that the recipients of the PPP loans would not be named. According to Mnuchin, “We believe that that’s proprietary information, and in many cases for sole proprietors and small businesses, it is confidential information”. There seems to be no basis for considering the names of those firms that received taxpayer-funded loans as “confidential” other than “unconscionable, jaw-dropping corruption” typical of the Trump administration. Apparently, we will never know whether small hedge funds, smaller firms owned by hedge funds and private equity, or Trump businesses were able to access the PPP program. In other words, we will never know whether the program was properly implemented.
After 2008 and 2020, one thing we now know for sure: every crisis is a boon for Wall Street, whether they create the crisis or not. The Fed seems to have crossed a Rubicon, not only backstopping the big Wall Street banks as too big too fail but now treating the large investments of those banks and the associated shadow banking system similarly. Ironically, the Fed’s action today will leave the hedge funds and private equity firms in an even better position to sweep up successful firms that failed to survive the pandemic at bargain prices in the future, making the Fed even more beholden to them in the next crisis. For Wall Street, every crisis is heads they win, tails we lose.