With the passage of the $2 trillion CARES act, it seems most people in Washington and the press have already moved on to whatever Congress is cooking up next to aid the country as it slouches through the coronavirus crisis.
But CEOs we’ve been talking to this week remain focused on actually getting money from the relief package. Applications for the Payroll Protection Program, aimed at flowing loans to businesses with less than 500 employees, were circulating among small business CEOs throughout the week in hopes that they could secure a good spot in line when the program theoretically kicks off on Friday, April 2.
There are guides aplenty about how the whole thing is supposed to work, but on the ground, there are even more questions. Among the big ones we’re hearing:
What about mid-sized businesses?
Details of how the promised Treasury-Fed lending facility for medium businesses, designated as having 500-10,000 employees, will actually work remain non-existent.
How long will this actually take?
Bankers and large-firm accountants we’ve talked to in the Northeast are bracing for an onslaught—and a bottleneck—as tens of thousands of businesses attempt to secure aid. One CEO we talked to said their bank had told him it would be at least two weeks before they’d be able to process requests.
Will banks be fair?
As the primary point of contact for the aid, CEOs worry that banks are being put in a position to pick winners and losers and are cuing for aid based on their relationship with existing customers.
How will any of this work?
CARES could be an administrative nightmare. The TARP program initiated during the financial crisis a decade ago involved the government engaging with thousands of banks, all well-regulated and well-known to authorities. By contrast, CARES will have to engage with potentially hundreds of thousands of companies in virtually every industry.
No one has answers yet, but for perspective, we talked to Joseph Minarik, Senior Vice President and Director of Research, Committee for Economic Development for the Conference Board.
Minarik is a longtime Washington hand—he was the chief economist of the Office of Management and Budget for the eight years of the Clinton Administration and worked closely with Senator Bill Bradley on his efforts to reform the federal income tax which culminated in the Tax Reform Act of 1986.
Here’s some of what he had to say, edited for length and clarity:
On the Fed-Treasury lending facility for mid-sized businesses, “That remains a kind of an empty box at this point,” he said. “I’m sure that everybody would love to see exactly how that is going to be implemented. But as of yet, I haven’t seen anything on that.”
The Fed’s promise to backstop the short-term paper market as part of what he called “QE4” would help, though—in theory. “In theory the federal reserve buying that paper will make those markets liquid.”
When it comes to the administration of PPP, Minarik says he’s hearing that there is already “been a lot of feverish activity going on.” He says that there may very well be “electronic paper flowing tomorrow in terms of individual borrowers and financial institutions.”
But… “what that does in terms of actual commitments and delivery of cash is another question,” he said. “I can’t answer that one. I think everybody is wondering about that. The image that comes to my mind, is the theater door when people start to smell smoke. It’s quite possibly going to be chaotic. There are different degrees of sophistication among potential borrowers, different degrees of sophistication among potential lenders. That’s clearly going to make a difference in terms of how those potential transactions flow. When you get to the purely admin side of it that’s very much uncertain.”
As for the comparison to TARP, “In the financial crisis, we were worried about financial institutions. Today we’re worried about everything. in the financial crisis we were dealing with, and this is a gross generalization, but we were dealing with a relatively small number of relatively large entities and today we’re dealing with all kinds of entities and the fact that there are so many of these small entities and so much of the work that has to be done is almost hand to hand.”
His take on the downturn: V, U, W or L? “I’m afraid of the L,” he said. “I hope that the leg of the base of the L has an upward slope to it. I’m concerned about the damage that is going to be done on the way down. That depends heavily on public health.”
Phase Four? “If we stick to task and we do not wind up with people pulling out hobby horses in a Phase Four bill—you know, all the ideas that had been on the shelf for years and years, and now’s the opportunity because, we’re willing to spend money ‘So I’m going to do what I wanted to do and I’ll scratch your back and you can do what you wanted to do.’ We need to be focused on the recovery components of the CARES Act. The better we do at that and the better the Federal Reserve does at creating these lending facilities and making sure that lending keeps going, uh, the better off we’re going to be.”