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(Photo Ricky Harris/The White House/Flickr
Photo White House/D. Myles Cullen/Flickr.)

BUSINESS

The Senate’s Plan To Save Small Businesses Is Already Failing, And Mnuchin Just Made It Worse

The details are out of Treasury now, and it looks like it isn’t going to work for a large number of small business owners after all.
Christopher Bedford
https://thefederalist.com/2020/04/08/the-senates-plan-to-save-small-businesses-is-already-failing-and-mnuchin-just-made-it-worse/

By Christopher Bedford
APRIL 8, 2020

Remember the deal the president signed to save America’s small businesses from ruin during the government’s coronavirus shutdown? The one hammered out by the Senate and Secretary of the Treasury Steven Mnuchin over weeks of tense negotiation while Americans worriedly watched, hoping good news might come before a depression does? The details are out of Treasury now, and it looks like it isn’t going to work for a large number of small business owners after all.

It isn’t going to work because the Senate’s formula allows far too little money to make up for a lost month and get through the following two or more while meeting the Senate’s demands. The Senate made these demands to protect workers, but did not provide the money a lot of businesses will need to protect workers and themselves. It’s just common sense, Washington will say, to protect workers and the taxpayer in these hard times.

Then, even if there was enough money, it isn’t going to work because Mnuchin crafted loan parameters that make it untenable for nearly all small businesses should the Senate’s demands not be met, which would mean the loan doesn’t qualify for forgiveness. Treasury did this last bit to protect the banks while pushing them to make loans they aren’t otherwise making. It’s just common sense, he’ll say, because local and regional banks couldn’t make a more generous deal work — a problem Mnuchin knew was coming the entire time the Senate negotiated, of course.

Here’s how it all plays out in real life. Imagine you own a restaurant with a gross revenue of $1.2 million a year, or $100,000 a month. This business employs eight people and has gross expenses of $1 million a year, or $85,000 a month. So in a normal year for your restaurant, you get to take home $200,000, minus taxes. A 20 percent profit, by the way, puts you above and beyond a lot of America’s small businesses, which will be dealing with tighter margins than the ones below.

Your monthly expenses don’t include buying goods anymore, because the government shut you down for the pandemic, but they still include rent or interest on your mortgage, the real estate tax, building insurance, maintenance and utilities, coming to $15,000 a month in your case. Then you have, say, $30,000 a month in payroll before taxes, and none of this includes your own pay. Now you need a loan.

The Senate’s loan amount is generated by multiplying a business’s monthly payroll by 2.5. The loan is meant to cover two months and can go toward your costs and utilities, but to qualify for grant forgiveness you need to retain your entire workforce and put at least 75 percent of the loan toward them.

At 2.5 times your monthly payroll, which is $30,000, you’re looking at a $75,000 loan. If this seems less than your needs, it’s because it is. You’re already in the hole because you saw a steep decline in business in March as the pandemic spread, but you didn’t know what was coming so you kept your full staff without earning near full revenue. Now you’ve got $75,000 for the next two months, but two months of payroll, rent and utilities swings in at $90,000 — $15,000 more than the loan that already doesn’t take last month into account. The city closed your restaurant the next two months too, by the way, so you won’t be earning a dime of revenue in that time.

By June, you’ve earned no income and you’re halfway through your year. If you could get roaring again right away you might make up some of that, but you’re a restaurant and unless a cure is suddenly widely available, occupancy will be severely limited by the state and revenue won’t be what it once was. It might not be profitable to open at all, given new distancing requirements and their impact on sales.

If you don’t make the Senate’s requirements, you have to pay that loan back, and thanks to Mnuchin, you’re not going to be able to do that either. In the bill, Congress set a window of a maximum interest of 4 percent and loan repayment within 10 years. This was just a window, so it was up to Treasury to set the final costs and they put them at 1 percent interest and two years to pay the bank.

In real life, that means you’re looking at beginning your third quarter in debt, limping on into the winter, losing an entire year’s profits getting your business running again, and owing nearly half of next year’s profits to the bank, all before any other loans you had to take out to keep from bankruptcy. You might have been able to spread that pain out, but two years is too little time.

And then there’s all the dictates Nancy Pelosi put into the bill in exchange for the Democrat vote. You might support the speaker and think that paid leave and health insurance requirements on small businesses are a noble policy, but you’ve got a lot on your mind and in addition to keeping everything afloat, taking this loan means you expose yourself to a lot of business costs very quickly at the onset of what might be an economic depression. Republicans gave you a tax credit to pay for it all, which is nice, but that’s at the end of the year — if you’re broke and out of business by then, it won’t mean anything.

Additionally, as your neighbors’ restaurants go under, the cost of the goods you need have increased. It’s a disaster. There’s no chance you’re making $200,000 in profits this year. Instead, with the private loans you finally pried out of the near-frozen banks, you’re in debt and left wondering what you’re doing here. The business you’ve worked for all these years just went down in a sea of shutdowns and disease, and there are jobs that pay well without all the risk and danger of being an entrepreneur and employing people in your community.

Like most other small business owners, you never wanted to own a giant company or a big house on the hill — just earn a good living working hard. It’s a sad thing, but the reality is most Americans prefer stability and assurances to risk and exposure, even with the chance of reward. That’s what makes our entrepreneurs different and what makes them special: They take the risk, and because they do, a whole lot of the rest of us have jobs, favorite places to go, sponsors for our children’s sports teams, and all the other things that make a town our town.

The above scenario is just one, and some folks might have lower or higher costs than your restaurant did, but you’re united with them in that risk you took to make America a better place for yourselves and your neighbors. Now that might be over, ended by a foreign disease, politicians who don’t get what it takes to run a business, and a Treasury secretary who only cares about Wall Street and the banks. It’s a terrible thing to see. Let’s pray Washington wises up — and hold them accountable if they don’t.

Christopher Bedford is a senior editor at The Federalist, the vice chairman of Young Americans for Freedom, a board member at the National Journalism Center, and the author of The Art of the Donald. Follow him on Twitter.
Photo Ricky Harris/The White House/Flickr
Photo White House/D. Myles Cullen/Flickr.

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From Deadly Clear Blog

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Elizabeth Warren Blasts Regulators For Protecting Banks
Posted on April 16, 2013
“The Fed messed with the wrong senator…” posted David Dayen on Salon. Sen. Elizabeth Warren (D-MA) grilled federal officials about illegal bank foreclosures at a Senate Banking Committee hearing on Thursday. She wanted to know if they would give information to victims of illegal foreclosures–or if they just want to protect the banks. Warren asked, “You now know individual cases where the banks violated the law, and you’re not going to tell the homeowners, or at least it’s not clear yet whether you’re going to do that?”

ELIZABETH WARREN: “So do you plan to give the families this information? That is, those families that have been victims of illegal foreclosures, will you be giving them the information that’s in your possession about how the banks illegally foreclosed against them?”

RICHARD ASHTON, DEPUTY GENERAL COUNSEL, FEDERAL RESERVE: “I think that’s a decision that we’re still considering making. We haven’t made a final decision yet.”

ELIZABETH WARREN: “So you have made a decision to protect the banks, but not a decision to tell the families who were illegally foreclosed against?”

“Elizabeth Warren vs. Captured Banking Regulators. Guess who wins.

Brand new clip from Senate hearing Thursday on illegal foreclosures. Warren blasts the Federal Reserve lawyer for shielding big banks and hiding fraud.

WATCH: Elizabeth Warren Kicks Bank Regulator’s Ass” writes the DailyBail.

“You work for the people not the banks!”

ELIZABETH WARREN:”You have made a decision to protect the banks but not to help the families who were illegally foreclosed on. Families get pennies on the dollar for being the victims of illegal activities. And you know of cases where the banks broke the laws, but you are not going to tell the homeowners. People want to know that their regulators are watching out for the American public, not the banks.”

Now we’re getting to the real nitty gritty! The Senate realizes these bank settlements are not equitable. Senator Warren states it very clear – “pennies on the dollar for being victims of illegal activities” – you can’t get much clearer than that! Then let’s change how these settlements are calculated.

It’s a fact that many, if not nearly all of these loans from 2003-2008 (over 84 million mortgages) had inflated appraisals. It’s a fact that the banks patented nearly every aspect of these defective mortgage loans from birth to death as if to legitimize the process. The loans were based primarily on the borrowers credit score and willingness to pay – rather than on the a legitimate appraisal (which was really only a sales tool to fool the borrowers into over-mortgaging their home). And this is why so many homes are underwater.

Most homeowners would prefer a reduction in principal as opposed to a meaningless financial settlement. Why not reduce the principal by 20% for each modification violation, another 30% for dual tracking and fraud, another 20% for filing false documents?

And for wrongful foreclosures – why not a 50% reduction in principal in addition to attorneys fees and costs? Percentage Principal Reductions. This would seem like a more equitable approach.

Reducing the principal would help the economy and get the courts over the “free house” crutch they keep leaning on. It would also keep the cash in the banks and given the recent draft of the Brown-Vitter bill – the banks are going to need to keep the cash.

“Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) have been working on a bill to block the largest banks and financial firms from receiving federal subsidies for being deemed Too Big to Fail. On Friday, a draft version of that bill was leaked to Tim Fernholz of Quartz, much to Vitter’s chagrin,” wrote the Washington Post.

Seeking Alpha says: ”The Brown/Vitter bill being rolled out in Congress is essentially Armageddon to the TBTF banks, says Goldman, seeing it as mandating another $1.1T in equity for the banking system. Banks would need 12 years of earnings to build this amount organically, though the bill would give just 5 – say goodbye to lending. Break up the banks? BAC, C, JPM, and WFC all have multiple divisions with more than $400M in assets – the level at which the bill gets tough on lenders.”

REDUCING THE PRINCIPAL AND INTEREST MAKES MORE SENSE

It is clear that there have been illegal activities in the mortgage securitization scheme and lame attempts at modification by the banks. Certainly, there were investors whose pension and retirement funds were lost as a result of the banks’ bad acts. It all boils down to the fact that banks screwed everybody – only the investors had more warnings. The investors probably bought the bonds because they were told they would be AAA+ and liquid and that foreclosures would be covered by insurance. Of course, nobody has ever grilled a pension fund financial director for public record, but you really have to wonder why anyone would have been buying these securities after January 2007 when credit had stopped rolling for the banks, especially, if they were doing their due diligence.

Actually, after the RTC v. Key Financial [appeal] decision in 2002 – don’t you think you’d do some research into what and where you were investing Billion$ of other people’s pension fund dollars? Yeah, this has been going on for quite a while.

We’re only addressing the modification abuses here, although we all know there are many more claims and fraudulent paperwork. Not to mention the rigged LIBOR interest rates which should be stripped out of each and every defective ARM loan and the homeowners allowed to apply all of their payments (past, present and future) toward the principal.

Want to get tough on banks?

If you’re not going to send the banksters to jail consider an equitable alternative: Settlement penalties for the banks due to their modification abuses and violations, fraud and other bad acts that are intended to benefit the homeowner should be factored in percentages that reduce the principal and interest. Reduce the principal accordingly on the mortgage notes and cut the interest rates to 2%; and 0% on LIBOR ARMS. Only then will we start to see some stability on the home front.

We can push for “percentage principal reductions” (PPR) in lieu of cash penalties if we don’t like the $300 pittance checks. Even the U.S. Senate realizes how lame these bank settlements are for homeowners.

There are still those, however, it appears – that fail to understand homeowner frustration such as one assistant AG who remarked to his constituent when the small size of the settlement check was brought to his attention,

“[O]f course, you are always free to return the check to them or throw it away and not cash it.”

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