The finance industry will be a central cog in the machine Washington is assembling on the fly to distribute emergency economic relief to contain coronavirus fallout. The sector is also poised to achieve some long-sought policy wins in that $2 trillion package the Senate passed late Wednesday.
Several of the changes trace a straight line from the last economic crisis, when the industry — rather than a rogue pathogen — was the source of the problem threatening an economy-wide meltdown. More than a decade later, financiers are working to make the most of the fact that they are no longer on defense.
And the bill, now facing a Friday morning vote in the House, both eases some of the post-crisis rules imposed on them and restores some federal help they haven’t enjoyed since the throes of that downturn. (See the final text of the 880-page bill here.) Among the industry’s wins:
1. A delay in tough new accounting rules.
The relief package puts off until the end of the year a set of accounting standards aimed at forcing financial firms to more accurately report on losses they could incur over the life of a loan — and keep extra capital on their books as a cushion against it. It is shaping up to be “one of the most challenging accounting standards change in decades,” according to State Street, an investment management firm.
Industry lobbyists argued it would disincentivize lending at precisely the moment banks need to do more of it to help businesses weather the crisis. Some banking analysts expect the temporary pause will become a permanent one.
2. Lower capital requirements for community banks.
Smaller banks won a reduction in the amount of capital they are forced to hold in reserve to ensure they stay solvent in the event of a downturn. These institutions, defined as having less than $10 billion in assets, had been pushing for the change before the coronavirus struck. The provision in the relief package trimming the requirement lasts until the end of the year, or once the emergency lifts, if it lasts longer. Again, though, analysts expect it to stay on the books. “The odds would favor the [new] threshold being maintained,” Compass Point’s Isaac Boltansky writes in a note.
And lobbyists for the small banks are working to make it so. “It’s only going to be marginally effective if it’s there for a few months and then you have a whipsaw effect on your capital,” Paul Merski, a lobbyist for the Independent Community Bankers of America, tells me. “Businesses will still need credit after the emergency is taken off.”
3. The FDIC will once again backstop bank debt.
The bill revives a move the Federal Deposit Insurance Commission made during the last crisis to guarantee bank debt — not just customer deposits. “The idea is that big banks may find it tougher to raise wholesale funding,” Cowen Research analyst Jaret Seiberg writes in a note. ”This would permit them to tap that market with a product that is backed by the FDIC.” Gregg Gelzinis of the Center for American Progress calls it a “major windfall” for Wall Street banks. “It essentially provides them unlimited deposit insurance,” he says.
The bill offers other goodies for the industry on top of the regulatory rollbacks. Banks will be originating loans to small and medium-sized businesses through a $349 billion program the Small Business Administration will be setting up. Credit card giants like Visa and MasterCard could benefit if the Treasury Department looks to them as a “turnkey” option for issuing debit cards to unbanked Americans who need fast access to $1,200 rescue payments, Boltansky notes.
The Federal Reserve has tapped BlackRock, the world’s largest asset manager, to advise it “on the purchase of billions of dollars in commercial mortgage-backed securities and investment-grade corporate bonds” in what “promises to be a lucrative venture for the firm,” per the New York Times’s Matthew Goldstein. And Treasury Secretary Steven Mnuchin likely will turn to a Wall Street bank for help distributing roughly a half-trillion dollars in corporate rescue funds, as my colleague Heather Long points out:
Here’s the part of the final bill that could make Goldman Sachs (or another Wall Street firm) a lot of $$$
-Sec. Mnuchin can pick the firm to help w/corporate loans
-Mnuchin has up to $100 million for “admin costs”
(from page 528) pic.twitter.com/WqJzfooRl3
— Heather Long (@byHeatherLong) March 26, 2020
The bill is also notable for what it doesn’t include. Several Democratic priorities to provide consumer relief during the crisis — ideas the industry opposes — didn’t make it into the text. Per Seiberg, those include a proposal to scrap bank overdraft fees; another to impose a 36 percent cap on consumer interest rates; and one to offer free bank accounts, accessible at a bank or the Post Office. “We expect these issues will resurface in the phase 4 bill, which is expectedly to be the next congressional response” to the crisis, he writes.
Meanwhile, the eight largest U.S. banks — a group that includes Bank of America, Citigroup, Goldman Sachs, and JPMorgan Chase — announced last week they are voluntarily halting any stock buybacks through the end of the second quarter. They said the decision will free them to do more lending to help country through the emergency.
The move is “too little, too late,” argues former FDIC chair Sheila Bair. “It only applies to share buybacks, not dividends or executive bonuses,” she notes in a Financial Times commentary. “Moreover, it only lasts for a few short months, with each bank free to reinstate buybacks at any time. We should be wary of such voluntary measures given the relentless (and successful) lobbying by big banks in recent years to chip away at capital rules. A longer, comprehensive and co-ordinated central bank-directed suspension of capital distributions is necessary.”
— Boeing won its own carve-out. The Post’s Aaron Gregg, Jeff Stein, and Josh Dawsey report: “Lawmakers have inserted in the Senate’s $2 trillion stimulus package a little-noticed provision aimed at providing billions of dollars in emergency assistance to Boeing, the aerospace giant already under fire for deadly safety lapses in its commercial jets, three people with knowledge of the internal deliberations said.
“The Senate package includes a $17 billion federal loan program for businesses deemed ‘critical to maintaining national security.’ The provision does not mention Boeing by name but was crafted largely for the company’s benefit, two of the people said.”
It’s one of many companies now lining up for taxpayer help that “behaved in ways before the current economic crisis that are making a bailout tough to swallow, labor advocates and some economists say,” The Post’s Jonathan O’Connell writes.
“The hotel giant Hilton, for instance, announced a $2 billion stock buyback on March 3, weeks after coronavirus cases began affecting the industry. Cruise lines for years have avoided taxes and U.S. safety regulations by registering their vessels abroad. Coal companies put some of their workers in harms way and are now asking to get out of a tax that generates money to compensate former miners who have black lung disease… The choice is between two options unsavory to many: bail out some of the country’s largest corporations or watch as they put more people out of work.”
Here’s a breakdown of the bill’s spending:
— Dow climbs 2.4 percent: “Investors celebrated the biggest government intervention in the U.S. economy with the first back-to-back days of stock gains in more than a month. But with the coronavirus outbreak unquantified and untamed, many analysts say it’s too soon to declare an end to the weeks-long market slump,” my colleagues Rachel Siegel and Thomas Heath report.
“The stock rally follows trillions of dollars in commitments this week from the Federal Reserve and Capitol Hill designed to prevent the economy from descending into prolonged stagnation. Big, rapid swings in market indexes, however, indicate Wall Street is looking for more than just federal dollars… Though the Dow has climbed 14 percent in two days, it is 26 percent in the hole for 2020 and still on track for its worst month since the October 1987 crash.”
Investors brace for staggering jobless claims: “About 1 million to 4 million people may have filed for unemployment benefits last week, the largest number ever in such a short time,” CNBC’s Patti Domm reports. “The filings figure, which will be released [this morning] before U.S. markets open, will be the first indication of how hard the labor force is being hit by the abrupt shutdown of a large part of the U.S. economy by the coronavirus pandemic.”
U.S. stock futures are pointing to losses of about 1 percent at the open.
Here’s what some Wall Street banks expect the jobless claims number to look like, via Business Insider’s Rebecca Ungarino:
— Rebecca Ungarino (@ungarino) March 25, 2020
— Coronavirus shows cash is king: “The fast-spreading coronavirus has prompted even the biggest U.S. companies to cut their spending and bolster their balance sheets, proving once again how cash is king, especially in times of crisis,” WSJ’s Theo Francis and Thomas Gryta report.
“After a decadelong U.S. economic expansion, not every company has entered this crisis with the same cash cushion. Apple Inc. ended the year with $247 billion in cash, securities and account receivables, enough to run its operations for more than a year even if it didn’t cut costs or sell a single iPhone. Discount retailer Dollar General Corp. DG had $240 million, enough for about four days, in the unlikely event it had to shut its doors and didn’t cut any costs.”
— Companies are resorting to old tactics to ward off takeovers: “More U.S. companies are rushing to adopt so-called poison pills, dusting off a nearly 40-year-old takeover defense tool to ward off hostile bidders and activist shareholders eager to exploit the coronavirus-induced market sell-off. Ten U.S. companies have announced poison pills in March, setting a record, according to FactSet Research Systems Inc and Deal Point Data LLC,” Reuters’s Svea Herbst-Bayliss reports.
“Poison pills prevent other companies and investors from amassing ownership stakes above a certain threshold, by authorizing the targeted company to sell new stock to its shareholders at a discount.”
In the United States:
- U.S. cases top 69,000 after more than 13,000 cases were reported Wednesday. More than 900 people have died.
- Hospitals weigh universal do-not-resuscitate orders for coronavirus patients: “The conversations are driven by the realization that the risk to staff amid dwindling stores of protective equipment — such as masks, gowns and gloves — may be too great to justify the conventional response when a patient ‘codes,’ and their heart or breathing stops,” my colleague Ariana Eunjung Cha reports.
- Cuomo says stimulus bill doesn’t have enough aid for New York: “About half of the country’s cases are in New York, and the health care system around New York City is completely overwhelmed. Many hospitals are still rushing to find health masks and other protective equipment. Cuomo said the bill would be ‘terrible’ for his state and added that ‘We need the House to make adjustments,’ ” my colleagues Erica Werner, Mike DeBonis and Paul Kane report.
- Pandemic leaves poorest workers in lurch: “The city’s rapid decline underscores the magnified fallout from the pandemic in economically fragile communities where most families live one or two missed paychecks away from desperation,” Reuters’s Brad Heath and Veronica G. Cardenas report.
- Bernanke sees “very sharp” recession and then quick rebound: “Former Federal Reserve Chairman Ben Bernanke sounded an optimistic tone on the longer-term state of the economy, predicting in a CNBC interview Wednesday that while the U.S. is facing an acute recession, it shouldn’t last,” CNBC’s Jeff Cox reports.
- Conservatives learn to love the social safety net: “With businesses shuttered, workers laid off, and scores more worrying about buying groceries, being evicted and getting sick, the swelling need for federal assistance has forced even conservative lawmakers to embrace government protections in sweeping stimulus bills,” my colleague Tracy Jan reports.
- Workers at 10 Amazon sites test positive: “In the past few days, workers tested positive for covid-19 at Amazon warehouses and shipping facilities across the country, from New York to California and Michigan to Texas,” my colleague Jay Greene reports from Seattle. In some cases, Amazon has shut down the warehouses, but workers complain they aren’t being provided with enough information about the virus spreading. (Amazon CEO Jeff Bezos owns The Washington Post)
- 3M has doubled production of N95 masks. It expects to produce 1 billion of them by the end of the year, using “surge capacity” the company has been developing for almost two decades, Bryan Gruley and Rick Clough write in a new Bloomberg Businessweek cover story.
- Uber and Lyft drivers lack safety net: “Many Uber and Lyft drivers depend on the companies, but under U.S. labor law they do not have the protections granted to regular employees,” Reuters’s Tina Bellon and Nivedita Balu report.
- Countries are relying on their militaries to enforce orders: “Countries as varied as China, Jordan, El Salvador and Italy have sent service members into the streets. Guatemala has detained more than 1,000 people. In Peru, those who flout government restrictions can be jailed for up to three years. In Saudi Arabia, it’s five,” my colleague Kevin Sieff reports.
- Bolsonaro continues to dismiss the virus: “Jair Bolsonaro, leader of Latin America’s largest country, is calling on Brazilians to return to jobs, public spaces and commerce amid the coronavirus pandemic, contradicting not only his own health officials, but also the global consensus on how to see countries through the pandemic without a crippling loss of life,” my colleagues Terrence McCoy and Heloísa Traiano report from Rio de Janeiro.
— Occidental and Icahn reach truce: “Occidental Petroleum Corp., the largest oil producer in the giant Permian Basin, has ceded to activist investor Carl Icahn’s demands and announced deep spending cuts in a bid to survive the steepest crude-price plunge in decades,” the Wall Street Journal’s Rebecca Elliott and Ryan Dezember report.
“The truce with Mr. Icahn, unveiled Wednesday, is the culmination of a monthslong battle that began last year after Occidental outbid Chevron Corp. for Anadarko Petroleum Corp. Two of Mr. Icahn’s deputies, Andrew Langham and Nicholas Graziano, will receive Occidental board seats under the agreement. Herbalife Nutrition Ltd. board member Margarita Paláu-Hernández will join as an independent director.”
I am all for economic growth, cost benefit analyses, trade agreements, more flexible markets and prudent deregulation. Yet I am appalled by President Trump’s invocation of economic arguments as a basis for overriding the judgments of public health experts.
A pair of charts flagged by AEI’s Jim Pethokoukis demonstrates how sharply economic activity has seized. Here’s a look at hotel occupancy rates:
US hotel occupancy rates have collapsed pic.twitter.com/iojX8rkSpC
— James Pethokoukis (@JimPethokoukis) March 25, 2020
And U.S. airliner passenger traffic:
— James Pethokoukis (@JimPethokoukis) March 25, 2020
From The Post’s Tom Toles: